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.

Outlines

00:00

👨‍🏫 Understanding Operational Risk Management

Harry Howell, a project risk coach, introduces operational risk management, emphasizing the importance for project managers to comprehend their organization's operations. Operational risk, as defined by Basel 2, is the risk of loss due to inadequate processes, people, systems, or external events. The paragraph delves into the four categories of operational risk: people risk, process risk, system risk, and external event risk. People risk involves employees and external parties and can include issues like discrimination, theft, and errors. Strategies to mitigate people risk include recruitment, selection, training, performance management, incentives, and succession planning.

05:02

🛠️ Addressing Process and System Risks

The second paragraph focuses on process and system risks. Process risk involves the procedures and practices used in business activities and should adhere to industry best practices for quality and safety. Common issues include poorly designed processes, lack of employee training, and non-adherence to processes. System risk pertains to technology and equipment, including hardware and software, and can result from intentional acts, accidental failures, or security breaches like cyber attacks. The paragraph concludes by highlighting external event risk, which includes natural disasters, supplier loss, utility failure, and systemic changes, and encourages project managers to use their skills to transform organizations and manage these risks.

Keywords

💡Operational Risk

Operational risk refers to the risk of loss resulting from inadequate or failed processes, people, and systems, or from external events. It is a core concept in the video, as it is the main type of risk that operational managers deal with daily. The script mentions four categories of operational risks, emphasizing the need for project managers to understand these risks to effectively transform operations through project management.

💡Basel 2

Basel 2 is a framework used by financial institutions to manage operational risk. It is mentioned in the script as the source defining operational risk. The reference to Basel 2 sets a standard for understanding operational risk and highlights the importance of compliance and risk management in the financial industry.

💡People Risk

People risk involves the potential for loss due to issues related to employees, contractors, vendors, or clients. The video discusses how people risk can include discrimination, harassment, theft, dishonesty, and errors. It is a significant part of operational risk management, as it directly impacts the human resources of an organization.

💡Process Risk

Process risk pertains to the risk associated with the procedures and practices used by organizations to conduct their business. The script points out that processes should reflect best practices and be designed for quality and safety. Issues such as poorly designed processes, lack of training, and non-compliance are highlighted as common problems leading to process risk.

💡System Risk

System risk is the risk associated with technology and equipment, including both hardware and software. The video mentions that system risk can result from intentional acts of damage, accidental failures, or security breaches like cyber attacks. This keyword is crucial as it underscores the reliance on technology in modern operations and the potential vulnerabilities it introduces.

💡External Event Risk

External event risk covers risks that are external to the organization, such as natural disasters, loss of key suppliers, utility failure, and changes in systems. The video uses these examples to illustrate how operations can be affected by factors beyond the control of the organization, emphasizing the need for contingency planning and risk mitigation strategies.

💡Recruitment

Recruitment is the process of attracting, shortlisting, and interviewing job candidates. In the context of the video, recruitment is a strategy to mitigate people risk by ensuring that the organization hires qualified and suitable candidates. The script mentions using college campuses or recruitment consultants to find and screen potential employees.

💡Selection

Selection is the process of choosing the best candidate from a pool of applicants. The video discusses how organizations perform background checks and pre-employment tests as part of the selection process to mitigate people risk, ensuring that new hires are a good fit for the organization.

💡Training and Development

Training and development refer to activities that organizations undertake to enhance the skills and knowledge of their employees. The video highlights the importance of training for new employees to reduce people risk, as it helps them understand their roles and responsibilities within the organization.

💡Performance Management

Performance management is a strategic approach to measuring and improving the performance of employees. The script mentions performance reviews as part of performance management, which helps in identifying areas for improvement and ensuring that employees meet the organization's goals.

💡Incentives

Incentives are rewards or motivations offered to employees to encourage them to perform better. The video discusses incentives such as recognition, rewards, and financial compensation as a strategy to mitigate people risk by keeping employees motivated and focused on delivering quality work.

💡Succession Planning

Succession planning is the process of identifying and developing potential replacements for key positions in an organization. The video emphasizes the importance of succession planning as a strategy to mitigate people risk, ensuring that there are capable individuals ready to step into key roles when needed.

Highlights

Operational risk management is important for project managers to understand as projects transform operations.

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

Four main categories of operational risk: people risk, process risk, system risk, and external event risk.

People risk includes risks associated with employees, contractors, vendors, and clients.

Mitigating people risk involves strategies such as recruitment, selection, training, development, performance management, and succession planning.

Process risk occurs when organizational procedures and practices are either poorly designed or not followed by employees.

Training employees and ensuring accountability are critical to reducing process risk.

System risk refers to risks related to technology and equipment, including hardware, software, and cybersecurity.

Common system risks include intentional damage, accidental failures, and security breaches.

External event risk encompasses risks from natural disasters, loss of key suppliers, utility failures, and changes in systems.

Examples of external event risks include tornadoes, hurricanes, and disruptions in critical utilities.

Project managers have the opportunity to use their skills to transform organizations by addressing operational risks.

Risk management strategies, especially for people risk, involve a structured approach including recruitment, training, and performance management.

Ensuring quality and safety in processes helps mitigate operational risks.

Operational risk management links project managers' work with the long-term sustainability of business operations.

Transcripts

hi this is Harry Howell the project risk

coach and want to spend just a minute

talking about operational risk

management you know most project

managers do not deal directly with

operations management but it's important

for project managers to understand the

operations of their organization

you know projects really are the vehicle

for transforming operations so what is

operational risk Basel 2 defines it as

the risk of loss resulting from

inadequate or failed processes people

and systems or from external external

events so there are those four

categories of operational risks we have

people risk we have process risk we have

system risks and external event risk so

let's look at each of those briefly so

first of all we have people risk people

risk include our employees right but it

also includes it may include contractors

of vendors or clients

and so we want to do everything that we

can to enhance the human resources of

the organization the people also present

downside risks as well and these risks

may include such things as

discrimination or harassment

how about employee theft or dishonesty

even errors and emissions would fall

into people risk so operational managers

use different strategies to mitigate

people risk number one recruitment so

organizations may go on to college

campuses or use recruitment consultants

to recruit and to screen candidates then

selection so as we're looking at

potential employees we certainly want to

do

I check the references we will do

criminal background checks will conduct

pre-employment tests then training and

development so certainly as we bring new

employees into the organization we want

to train them do some on-the-job

training as well other types of training

and then we have a performance

management and with performance

management periodically we would do

performance reviews with the employee

then incentives and so we want to

motivate our employees to stay focused

and really deliver a great work every

day and so we can we we have rewards we

have recognition we have financial

compensation that falls into the

incentives and then the last strategy

that I would mention is succession

planning and so we have key positions

throughout the enterprise that we need

to identify and we need to think about

how we can develop other people to fill

those positions when someone leaves the

organization or they may die or you know

there's a myriad of reasons that we may

lose resources want to make sure that

we've got people that can step in and

help achieve the organization strategies

and mission so the first risk we talked

about was people risk let's turn our

attention just a moment to process risk

so process includes procedures and

practices that organizations use to

conduct their business activities

processes should represent best

practices in your industry and they

should be designed both for quality as

well as for safety now there are a

couple of different problems that occur

in our daily operation

in terms of process first of all the

process may be poorly designed just

really has not been thought through very

well

second problem is is that employees may

like training in other words you may

have a great process may be well

designed but the employees really don't

understand the process and the third

common problem is that employees may not

follow that process so you may have a

great design in the process they've had

the training but there's no

accountability and people tend not to

follow those processes if that's the

case so let's let's talk just a moment

about system risk we talked about system

risk we're talking about risk associated

with technology and equipment both

hardware and software and so there can

be intentional acts to damage or cause

harm to the hardware or software there

may be accidental failures there may be

security risks that allow for something

like a cyber attack where we may end up

with a data breach so the fourth risk

category that I would highlight for

operations is what we call external

event risk and these are risks that are

external to the organization things such

as natural disasters tornados hurricanes

those types of events loss of key

suppliers about a utility failure and

changes in systems so I hope that was

helpful I just really wanted to give you

the perspective of the operations

manager the risk that they're dealing

with on a daily basis and then we as

project managers how to have a wonderful

opportunity to step in with our skills

as project managers use our skills to

transform the organization through

project management so this is Harry Hall

the project risk coach and hope you're

having a great day