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 and reduce losses. Effective operational risk management depends on clear visibility into risks and timely action guided by operational risk management strategies.

Essential Concepts: 3 Ps, 4 Pillars, and ORM Foundations

The 3 Ps of operational risk are People, Processes, and Process/Technology. These elements interact continuously: people design, execute, and oversee processes; processes standardize how work and controls are performed; and technology enables, automates, and monitors those processes. Misalignment among the 3 Ps can create control gaps; tight integration strengthens prevention, detection, and response through sound operational risk management strategies.

The 4 pillars of ORM commonly include risk identification, risk management & measurement, and risk monitoring & reporting. Together, they ensure risks are discovered early, measured consistently, mitigated through controls and process design, and monitored with clear metrics and dashboards.

Foundational elements of an effective operational risk management framework include governance and accountability (clear roles from the board to front-line units), a defined risk taxonomy and appetite, reliable and relevant metrics and KRIs, robust data and technology, independent oversight and assurance, and transparent reporting. These are the main components of operational risk management and underpin the four-step approach below, ensuring operational risk management strategies translate into measurable outcomes.

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. It aligns the 3 Ps and advances the 4 pillars by improving identification, measurement, mitigation, and monitoring within your operational risk management framework.

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? Ensure roles and responsibilities are clear across People, Processes, and Technology, and confirm alignment with risk appetite and operational risk management strategies.

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. Prioritize KRIs that best reflect process performance, control effectiveness, and technology reliability to strengthen operational risk management.

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. Validate that metrics support the four pillars: identification, assessment, control/mitigation, and monitoring/reporting within the operational risk management framework.

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. Embed ownership and escalation paths so people, processes, and technology work in concert and reinforce operational risk management strategies.

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 with an operational risk management framework tailored to your needs and operational risk management strategies that deliver results.

FAQs

Q1: What are the basics of an operational risk management framework? 

An operational risk management framework provides a structured way to identify, assess, manage and monitor risks that can disrupt business operations or lead to losses. At its core, the framework should address three interconnected areas: people, processes and technology. It should also establish clear governance and accountability, define risk appetite, use reliable metrics and key risk indicators (KRIs), and provide consistent reporting so leaders can understand where risks exist and take action.

For financial institutions, an effective framework should make operational risk visible across the organization rather than treating risk management as an isolated function. Regulatory guidance also emphasizes governance, scenario analysis, resilient information systems, surveillance and reporting as important components of operational resilience.

Q2: How do I start implementing operational risk management into my business?

Start by understanding your current risk environment and determining what you need your operational risk management program to accomplish. Identify organizational risk priorities, understand historical or potential loss drivers, establish clear ownership and compare the current state of your risk management program with the desired future state.

From there, review your existing risk metrics and KRIs to determine which provide useful information and where there are gaps, duplication or highly correlated measures. Prioritize the metrics that best indicate process performance, control effectiveness and technology reliability, then validate them with subject matter experts and business leaders. Finally, incorporate the most useful measures into dashboards and leadership reporting, establish risk tolerances and escalation paths, and continually monitor whether the framework is working as intended.

Q3: What are some real-world examples of operational risk management?

Operational risk can arise from internal processes, people and systems as well as external events. Federal banking regulators cite technology failures, cyber incidents, natural disasters and third-party failures among the disruptions organizations should be prepared to withstand and recover from.

In practice, operational risk management could include monitoring KRIs for an important lending process, tracking whether controls are operating effectively, identifying technology reliability issues, or using dashboards to alert leadership when risk approaches an established tolerance. It can also include monitoring third-party, cybersecurity and business-continuity risks so the organization is better prepared to continue critical operations during a disruption. The Bridgeforce approach emphasizes using reliable, relevant, quantitative and straightforward metrics to identify issues early and give leadership a clear view of operational risk.