TECHNOLOGY

7 Advantages of Operational Risk Management

December 13, 2022

Operational risk managers have a daunting task – they must assure their bosses that all operational risks in an organization are managed. However, this becomes even more challenging when the organization’s existing risk strategies are ineffective or outdated.

An ineffective operational risk management system can affect a business’s output. This can lead to lost profits, a damaged reputation, customer dissatisfaction, and missed opportunities. Furthermore, a company that fails in mitigating and managing operational risk is more likely to encounter huge problems when something goes wrong due to human or process failure.

This is where an effective operational risk management (ORM) system comes in.

Read on for seven advantages of a solid ORM system.

1. Reduce Operational Costs and Enhance Compliance

Simply put, companies that don’t have an ORM system to track risks lose profits. ORM tools are designed to identify and manage risks before they happen. Eliminating or reducing potential risk events is essential – especially for companies that prioritize smoother day-to-day operations.

In addition to identifying and managing risk events, ORM tools also play a role in regulatory compliance, which is critical for any organization. Compliant ORM systems also give organizations a competitive edge.

2. Minimize Volatility

Significant operational risk events result in an organization failing to meet its profit expectations. Operational risk events lead to loss – directly affecting a company’s profit-and-loss account.

These risk events can be highly detrimental and even decrease an organization’s market value. A robust ORM system can reduce volatility and help a business reach its profit and revenue targets.

3. Free Up Capital

The earning potential of a business correlates directly with its capital. If a company has a large amount of capital, its earning potential will reflect it.

Putting more capital into an organization means you can afford to take more operational risks. With a well-organized ORM system in place, you can free up more capital to invest in higher-value activities like revenue generation.

4. Improve Insurance Coverage

Because ORM identifies and manages risk, a company with a robust ORM system in place can better evaluate its business insurance coverage needs.

The v aluable information from an ORM report can also help a business negotiate its premiums with insurance providers.

5. Increase Customer Satisfaction

It goes without saying that consumers would rather patronize reputable organizations. A company with a poor reputation loses customers, leading to more money spent on finding new ones. Finding new customers incurs more cost than retaining existing ones.

A robust ORM system minimizes or eliminates risk events by identifying and managing them – which results in higher customer satisfaction.

7. A Stronger Decision-Making Process

ORM is an integral part of informed decision-making, so it makes sense that a strong ORM system supports better decisions in a company.

For instance, business models can evaluate the likelihood of an organization breaking into a new market, while an ORM system evaluates the effectiveness of a business’s internal controls.