Operational Risk Management

Summary

Harry Howell, a project risk coach, discusses operational risk management, emphasizing its importance for project managers. He outlines four key risk categories: people risk, process risk, system risk, and external event risk. Howell explains strategies to mitigate these risks, such as recruitment, training, performance management, and succession planning for people risk, and highlights the project manager's role in transforming organizations through effective risk management.

Takeaways

•  Operational risk management is crucial for project managers to understand, even if they don't deal directly with operations management.
•  Projects serve as vehicles for transforming operations, which is why operational risk is significant.
•  Basel 2 defines operational risk as the risk of loss due to inadequate or failed processes, people, and systems, or from external events.
•  There are four main categories of operational risks: people risk, process risk, system risk, and external event risk.
•  People risk involves potential issues with employees, contractors, vendors, or clients, including discrimination, theft, and errors.
•  Operational managers use strategies like recruitment, selection, training, performance management, incentives, and succession planning to mitigate people risk.
•  Process risk pertains to the procedures and practices used by organizations, which should represent best practices and be designed for quality and safety.
•  Common process issues include poorly designed processes, lack of employee training, and non-adherence to processes due to lack of accountability.
•  System risk involves risks associated with technology and equipment, including intentional acts, accidental failures, and security risks like cyber attacks.
•  External event risk includes risks external to the organization, such as natural disasters, loss of key suppliers, utility failures, and changes in systems.
•  Project managers have the opportunity to use their skills to transform organizations by managing these operational risks effectively.

Q & A

What is operational risk according to Basel 2?

Operational risk is defined by Basel 2 as the risk of loss resulting from inadequate or failed processes, people, and systems, or from external events.

What are the four categories of operational risk mentioned in the script?

The four categories of operational risk mentioned are people risk, process risk, system risk, and external event risk.

What is meant by people risk in the context of operational risk?

People risk includes risks associated with employees, contractors, vendors, or clients. It can involve issues such as discrimination, harassment, theft, dishonesty, and errors.

How can organizations mitigate people risk?

Organizations can mitigate people risk through recruitment, selection, training and development, performance management, incentives, and succession planning.

What strategies are suggested to enhance human resources and mitigate people risk?

Strategies include recruitment and screening of candidates, selection with background checks and pre-employment tests, training and development, performance reviews, incentives like rewards and financial compensation, and succession planning.

What is process risk and what are some common problems associated with it?

Process risk involves risks associated with the procedures and practices used in conducting business activities. Common problems include poorly designed processes, lack of employee training, and non-adherence to processes due to lack of accountability.

How should processes be designed to minimize process risk?

Processes should be designed to represent best practices in the industry, ensuring both quality and safety.

What is system risk and what are some potential issues related to it?

System risk is associated with technology and equipment, including hardware and software. Potential issues include intentional acts of damage, accidental failures, and security risks like cyber attacks leading to data breaches.

What is external event risk in operational risk management?

External event risk refers to risks that originate outside the organization, such as natural disasters, loss of key suppliers, utility failures, and changes in systems.

How can project managers help in transforming an organization's operations?

Project managers can use their skills to manage and execute projects that improve processes, implement new systems, and prepare for external events, thereby transforming the organization's operations.

What is the role of project managers in dealing with operational risks?

Project managers play a crucial role in identifying, assessing, and managing operational risks through project management practices, which can help in transforming the organization and mitigating these risks.