Operational risk management (ORM) is the systematic approach organizations use to identify, assess, manage, and mitigate risks arising from internal processes, people, systems, and external events. If not effectively managed, operational risks can lead to financial losses, reputational damage, and operational disruptions.
As organizations navigate complexities such as globalization and digital transformation, risk management becomes a crucial component of a comprehensive risk management strategy. Integrating operational perspectives into the broader enterprise risk management (ERM) framework using governance, risk and compliance (GRC) software supports sustainability and growth while strengthening decision-making and compliance efforts.
For a deeper understanding of the principles of operational risk, download David Tattam’s book A Short Guide to Operational Risk today:
How do ORM, ERM, GRC and OpRes fit together?
It’s easy to get confused between the multiple acronyms used in the risk and resilience space, but it’s important to understand the similarities and differences between operational risk management, enterprise risk management, governance, risk and compliance, and operational resilience in order to build effective programs to support your business.
The relationship between ORM, ERM, and GRC
Operational risk management, enterprise risk management, and governance, risk, and compliance (GRC) are often used interchangeably, but they are fundamentally interconnected rather than distinct disciplines.
ORM focuses specifically on risks arising from internal processes, people, and systems, while ERM provides an inclusive approach that encompasses all types of risk, including operational, financial, strategic, and compliance risk. GRC, on the other hand, serves as the overarching framework that integrates governance policies, risk management processes, and compliance requirements into a unified system.
In practice, effective ORM is a component of both ERM and GRC. Organizations that successfully manage operational risk do so within the broader ERM framework, ensuring that operational risks align with strategic objectives and regulatory requirements. GRC systems provide the structure to enforce ORM and ERM policies, monitor compliance, and enhance risk visibility across the organization.
Operational risk and operational resilience
Operational risk and operational resilience are closely interconnected, yet distinct concepts. While ORM focuses on identifying, assessing, and mitigating risks that arise from internal processes, people, systems, and external events, operational resilience extends beyond risk mitigation. It emphasizes an organization's ability to prevent, withstand, recover from, and adapt to disruptive events.
Operational resilience is about ensuring that critical functions continue with minimal disruption, protecting both internal operations and external stakeholders, such as customers and partners. Unlike traditional ORM and business continuity planning, operational resilience takes a broader approach by integrating preparedness, adaptability, and long-term sustainability into risk management.
The ORM process: steps to effective risk management
In his book A Short Guide to Operational Risk, Protecht’s Chief Research & Content Officer David Tattam defines ORM as “the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events”. This definition underscores the need for structured risk management practices to ensure business resilience.
The operational risk management process is a structured and continuous approach that involves the following key steps:
- Risk identification: Recognizing potential risks that could disrupt operations, including process inefficiencies, technology failures, or external disruptions such as regulatory changes
- Risk assessment: Evaluating the likelihood and impact of identified risks through qualitative and quantitative measures
- Mitigation strategies: Developing plans to minimize or eliminate risks through process improvements, technology investments, and staff training
- Monitoring: Continuously observing the risk environment and the effectiveness of mitigation efforts using data-driven analytics and automated tracking systems
- Reporting: Communicating risk findings and management strategies to stakeholders to ensure transparency and informed decision-making
Employing effective methods for risk identification is vital. Two of the most commonly used approaches include:
- Scenario analysis: Forecasting potential future events that could adversely impact the organization
- Loss data analysis: Reviewing historical incidents to identify patterns and improve risk mitigation strategies
Challenges and best practices in operational risk management
Despite its importance, ORM implementation is often hindered by resource constraints and cultural resistance. Organizations may struggle with limited risk management expertise, siloed data, and ineffective risk governance structures. These challenges can be mitigated through best practices and strategic approaches:
- Data silos and fragmentation: Many organizations struggle with risk data being scattered across departments, leading to inefficiencies and a lack of visibility into emerging risks.
- Cultural resistance: Employees and management may resist risk management initiatives due to perceived bureaucracy or fear of increased scrutiny.
- Evolving threat landscape: New risks, such as cyber threats and supply chain disruptions, require organizations to continuously adapt their ORM frameworks.
- Regulatory complexity: Meeting diverse regulatory requirements across jurisdictions can be resource-intensive and require specialized expertise.
- Balancing risk and innovation: Organizations must find a balance between risk mitigation and fostering a culture of innovation and growth.
To overcome these challenges, organizations should:
- Leverage technology: Automation and data analytics enhance ORM by streamlining processes, improving risk assessments, and facilitating real-time monitoring.
- Build a risk-aware culture: Leadership commitment and continuous training programs ensure ORM becomes an integral part of the organizational ethos.
- Establish a robust ORM framework: A well-defined framework with clear responsibilities, standardized processes, and integrated reporting mechanisms strengthens ORM effectiveness.
Regulatory expectations and compliance
Regulatory compliance is a key driver for ORM implementation, with frameworks such as Basel III[1], Solvency II[2], and the Sarbanes-Oxley Act (SOX)[3] setting rigorous standards for operational risk controls. Financial institutions, insurers, and publicly traded companies must establish structured ORM programs to meet these regulatory demands, ensuring transparency, accountability, and resilience against operational failures.
Additionally, industry-specific regulations such as APRA’s Prudential Standard CPS 230 and the UK’s Financial Conduct Authority (FCA) guidelines reinforce the need for robust operational risk management practices. Frameworks such as Basel III outline expectations for risk management practices within financial institutions, mandating stringent measures to manage operational risks effectively.
Organizations can ensure compliance by:
- Conducting regular audits and risk assessments.
- Implementing structured ORM programs aligned with regulatory guidelines.
- Establishing clear policies and procedures to manage operational risks proactively.
A case study from the financial sector demonstrates the value of operational risk management: The TSB Bank IT failure in 2018 led to a significant disruption for customers, causing financial and reputational damage. The UK’s Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) fined TSB £48 million for its operational resilience failures, emphasizing the importance of robust risk management frameworks and directly driving UK financial services institutions to invest in greater resilience.
Benefits of effective operational risk management
Effective operational risk management enhances decision-making by providing leaders with critical insights to navigate uncertainties. By systematically identifying, assessing, and mitigating risks, organizations can improve operational stability, streamline processes, and optimize resource allocation.
A strong risk management framework also builds stakeholder trust and strengthens an organization's reputation. Customers, investors, and regulatory bodies are increasingly scrutinizing how organizations handle operational risks and resilience. Demonstrating a commitment to robust risk management fosters confidence and credibility, making the organization more attractive to clients and partners.
Organizations that excel in risk management gain a long-term competitive advantage. Effective risk management enables businesses to innovate and adapt to changing market conditions while maintaining compliance and resilience. Companies that proactively manage risks are better positioned to capitalize on opportunities, minimize losses, and sustain growth in a dynamic business environment.
Conclusions and next steps for your organization
At its core, operational risk management is a critical component of enterprise risk management (ERM). While ORM focuses on identifying and mitigating risks that arise from internal processes, people, and systems, ERM provides the broader strategic framework that integrates all types of risks into a cohesive approach.
Organizations that successfully align ORM within their ERM strategy gain a holistic view of risk, ensuring that operational risks are not managed in isolation but as part of an enterprise-wide effort to enhance resilience and value creation.
At Protecht, we provide a seamless, integrated approach to risk management and operational resilience. Protecht ERM provides single source of truth for managing risks, controls, incidents, and key risk indicators, providing real-time insights to drive informed decision-making. With powerful dashboards, automation, and structured data, organizations can elevate their risk maturity, reduce manual effort, and gain deeper visibility into enterprise-wide risks.
To see how Protecht ERM can transform your approach to operational risk and resilience, request a live demo today:
