4 Steps to Develop an Operational Risk Management Framework

This blog outlines a four-step approach to optimizing risk management through reporting, effective monitoring, measurement, and accountability to reduce losses.

Operational Risk Management–Prevention is Key

Focusing on prevention is the best way to address risk in your operations – including approaches to monitor and measure critical risks. An operational risk management framework driven by metrics and dashboards can help you achieve company-wide accountability.

A Quick Health Check

Ask yourself these questions to assess your risk measurement effectiveness:

• Do you have an overall sense of how operations is monitoring?
• Do you get robust aggregate measures that give you and your board an enterprise view of risks?
• Are your stakeholders clearly accountable for specific key risk indicators (KRIs)?
• Does the program stand up to regulatory scrutiny?
• Are emerging risks well understood and addressed?
• Are your operational risk metrics:
  • Reliable – developed from solid, verifiable and accurate data
  • Relevant – work for your business and measure risk well?
  • Quantitative – assess the state of risk in a calculable manner
  • Straightforward – easy to understand and explain, both internally and externally?

Results Mediocre? Best Practices Can Get You to Excellent

Based on years of experience working through clients’ risk management challenges, here’s a four-step best practice methodology to help you get started. It all starts with reporting. Our structured, efficient and effective approach builds consensus and accountability, with appropriately scaled impact on existing resources.

Four-Step Approach to Optimize Operational Risk Reporting

Step 1:  Identify overall organizational goals and eliminate unwanted, costly missteps and false starts

Actions:  Gather information from key stakeholders on risk priorities based on loss profiles, and the effectiveness of risk measurement. What is the current state?  What is the target future state? What tangible and material accountabilities currently exist?

Step 2:  Assess inventory of current metrics to identify those that don’t add value, so the focus remains on what’s important

Actions:  Review your existing inventory of risk metrics and evaluate the benefits and challenges of each metric.  Identify gaps or duplication (or high correlation) within the existing risk metric infrastructure. This involves a rigorous assessment, detailing each metric, its definition, benefits and challenges to assess suitability

Step 3:  Evaluate assessment findings for comprehension and socialize for input and consensus building

Actions: Put assessment findings and critical metrics into priority order. Ask operational risk SMEs to evaluate the metrics, and confirm that they successfully measure performance and identify issues.  Share assessment results and data prioritization with risk leaders and board of directors.

Step 4:  Implement new reporting to identify and address previous deficiencies in managing and monitoring your operational risk health

Actions: Successfully sunset old metrics that do not support established operational risk priorities.  Design and test new metrics, including quality of the data feeding the metric, and the formats of how they are shown.  Modify risk health dashboard design and leadership scorecards with corresponding risk tolerances to reflect all changes and evaluate its effectiveness. Roll out organizationally using change management processes.

Implement Our Four-Step Plan for a Stronger Risk Management Framework

Following the four-step plan and acting on findings will result in rapidly simplified and enhanced performance measures against key priorities within your risk framework. You will ensure that risk is well-measured and managed at all organizational levels. Ultimately, these steps will drive reduced losses associated with operational risk.

A solid risk measurement program includes:

• Board Reporting that informs the board about the state of operational risk, actions needed and solutions to minimize risk
• Reporting that includes an assessment of overall operational risk for the enterprise, both quantitatively and qualitatively
• Understanding of operational risk loss drivers and sources, and associated mitigating actions

Go Beyond the Checkup to Improve Your Risk Health

Bridgeforce partners with financial institutions of all sizes to help them identify and attain precise metrics for reporting and monitoring the business environment. This helps build understanding, enforces controls and reduces operational risk losses. Contact us to see how we will support your health check, preventative measures or mitigation.