What is the origin of the "Operational Risk Management" discipline? Was it derived from the work within the financial services industry from the Basel II initiatives? The definitions and the actual work towards creating standards of conduct and rule-based design has been evolving for the past decade.
Operational Risk and the approach to risk that is not otherwise considered to be market or credit risk is one mind set. The other mind set considers the hazards associated with the threat to valuable assets. Either point of view depends on the environment that you operate in and the risks associated with that environment.
To give a quick example, here are three views into Operational Risk:
- For the second day in a row, the telecommunications giant is suffered a service outage that has extended all across the eastern portion of the state, from Chattanooga, through Knoxville, and up to the Tri-Cites. AT&T customers in East Tennessee are again having trouble making calls on their wireless phones. For the second day in a row, the telecommunications giant is suffered a service outage that has extended all across the eastern portion of the state, from Chattanooga, through Knoxville, and up to the Tri-Cites. Cathy Lewandowski, a spokesperson for AT&T, said technicians were able to restore service Friday afternoon. On Thursday, AT&T customers started losing service shortly after 9:00 a.m. It was finally restored early in the afternoon.
- Protesters took over the Finance Ministry building in Athens Friday morning, hanging a giant banner from the roof calling for a general strike, just as Greece wraps up tough negotiations with international officials on new austerity measures. About 200 protesters from the communist party-backed PAME union blockaded the entrance to the ministry from dawn, preventing employees from entering. They hung a banner over five stories of the front of the building and took down the European flag from the top of the ministry, replacing it with their own union flag. They said they would continue the blockade for the entire day.
- Due to problems experienced in the systems of Turkey’s Central Bank, electronic funds transfer, or EFT, transactions were unable to be carried out throughout Turkey on Friday, Hürriyet website reported. Lender customers, unable to make EFT transactions all day long starting from the morning hours, have been experiencing serious problems. Studies to recover the problems occurring in the systems are still ongoing, according to an information message from the Central Bank to lenders.
These three examples encompass a U.S.-based global communications company, the country of Greece and the Central Bank of Turkey. All three are operational risk scenarios that could contribute to losses that will impact the reputation of the entity involved. That aspect alone could be the major factor in why Operational Risk Management is such a growing discipline in a global landscape.
Some of the earliest origins of the Operational Risk concerns come from the military. The U.S. Navy is one of the branches who has embraced it fully:
Purpose. To establish policy, guidelines, procedures, and responsibilities per reference (a), standardize the operational risk management (ORM) process across the Navy, and establish theORM training continuum.Scope. This instruction applies to all Navy activities, commands, personnel, and contractors under the direct supervision of government personnel.Discussion. Risk is inherent in all tasks, training, missions, operations, and in personal activities no matter how routine. The most common cause of task degradation or mission failure is human error, specifically the inability to consistently manage risk. ORM reduces or offsets risks by systematically identifying hazards and assessing and controlling the associated risks allowing decisions to be made that weigh risks against mission or task benefits. As professionals, Navy personnel are responsible for managing risk in all tasks while leaders at all levels are responsible for ensuring proper procedures are in place and that appropriate resources are available for their personnel to perform assigned tasks. The Navy vision is to develop an environment in which every officer, enlisted, or civilian person is trained and motivated to personally manage risk in everything they do.
If only major business entities would encompass the following steps with all employees then more lives would be saved, corporate assets would be protected and the enterprise would be ever more resilient:
(1) Identify the hazards;(2) Assess the hazards;(3) Make risk decisions;(4) Implement controls; and(5) Supervise.
Yet the losses and the potential for loss continues across the organizations who are well equipped to make Operational Risk Management a part of every persons daily mind set:
Whether it is on the deck of an aircraft carrier or within an Australian payments processor operational risk is pervasive. It is up to you to make a difference.