1. Operational Risk Management
A GATEWAY TO MANAGING THE RISK PROFILE OF YOUR
ORGANIZATION
Eneni Oduwole, July 2015

2. Content
1. Definitions of Operational Risk & Operational Risk Management
2. Elements of ORM
3. ORM Procedures
4. ORM Tools
5. Benefits of ORM
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3. DEFINITIONS
BRIEF INTRODUCTION TO THE SUBJECT, ITS CORE
PRINCIPLES AND FRAMEWORK
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4. What is Operational Risk?
Commonly defined as the ‘risk of loss resulting from failed or inadequate processes, people,
systems or from external events’.
It is not a control function
It involves interfacing with all departments and business units within an organization to ensure
that primary risks regarding people, process, systems and external issues
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5. What is Operational Risk Management (ORM)?
Commonly defined as the ‘continual cyclic process which includes risk assessment, risk decision
making, and implementation of risk controls, which results in acceptance, mitigation, or
avoidance of risk’ (see Wikipedia)
Operational risk management had been defined in the past as all risk that is not captured in
market and credit risk management programs. Early operational risk programs, therefore, took
the view that if it was not market risk, and it was not credit risk, then it was operational risk
(GARP)
ORM is the discipline in an organization that manages the loss or risk of loss resulting from
improper or non-management of people, process, system and externally triggered issues
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6. Core Principles of ORM
Accept risk only when benefits are greater than risk of loss or cost of control
Do not accept unnecessary risk; transfer or share where necessary
Anticipate and manage risk by effectively planning and monitoring
Ensure that risk decisions are made at the right level and executed organization-wide
Transparency of Risk is critical
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7. The ORM Framework
As depicted by The Risk Mgt Association (RMA)
i. Management driven
ii. Provides consistent policies and procedures
to be applied firm-wide
iii. Must have a consistent and comprehensive
capture of data elements
iv. Must reflect the scope and complexity of all
business activities
v. Be ‘fit-for-purpose’, unique and require a
tailored approach that is appropriate for the
scale and materiality of the size and risks
prevalent in the institution
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8. Governance Structure
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• Risk appetite and toleranceBoard
• Ownership and accountabilityProcess Owners (All Staff)
• Business requirement
Mgt Staff / Dept Heads /
Line Managers
• OR Risk standards and benchmarksERM / ORM
• Independent reviewInternal Audit

9. ELEMENTS OF ORM
HIGHLIGHTS ON THE COMPONENTS OF ORM WITH
RELEVANT EXAMPLES
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10. Components of ORM
People Risks
• Loss of Key Staff
• Employment Laws
• Occupational Health &
Safety
• Adequate Training and
Skills Nurturing
• Employee collusion/fraud
Process Risks
• Input Errors
• Non-adherence to
policies & procedures
• Reporting errors
• Product/Process
complexity
• Project Risk
System Risks
• IT Security breaches
• System Capacity
• Data Availability
• System Suitability
• IT General Controls
• Programming errors
• Data Integrity
External Risks
• Business Continuity Mgt
• Regulatory Compliance
• Supplier Risk Mgt
• Security Risk
• Impact of macro-
economic trends
• Vendor Relationship Mgt
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11. People Risk Issues
Quality of Recruits
Sourcing and Selection strategy
Retention strategy for top-talents
Strategy for training; Acculturation of staff
Monitoring Attrition Rate and Concentrations
Managing Staff Motivation
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12. Process Issues
Effectiveness of process designs – simple or
complex; flexible or rigid
Manual vs. Automated processes; Cost
effectiveness of process controls
Performance gradient monitoring
Adequacy of embedded controls; Execution of
controls
Vendor Management
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13. System Issues
Availability of core applications or systems
Network intrusion; Virus Attack
Denial of service
Data corruption or Sabotage
Unauthorised Access to Information
System Penetration Issues
www.computerweekly.com
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14. External Events
Adherence to Regulatory Stipulations
Compliance & Legal Risk Management
Business Continuity Management
Shift in Industry trends; Global trends
Macro-economic conditions
Available Infrastructure
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15. ORM PROCEDURES
PROCESSES, PROCESS FLOW, MEASUREMENT PARAMETERS
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16. Processes of ORM
OPERATIONAL RISK GOVERNANCE &
MANAGEMENT
1. Fraud Risk Mgt
2. Information Risk Mgt
3. Business Continuity Mgt
4. Occupational Health &
Safety Mgt
5. IT Risk Assurance
1. OR Policies &
Procedures
2. Risk Assessments
3. Loss Incident Reporting
4. Key Risk Indicator
Monitoring
1. Compliance & Legal Risk
Mgt
2. Audit Non-conformance
Monitoring
3. Third Party Relationship
Mgt
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17. Conduct RCSAs; Compile
KRIs and Loss Incident
reports
RCSA Events;
KRI Trends;
Loss Data Risk
Concentrations
Suggest required controls;
Ensure cost effectiveness
and appropriateness
Report identified risks to
key stakeholders; Ensure
suggested mitigants are
fully implemented
Risk
Control
Risk
Identification
Risk
Measurement
Probability & Severity Assessments;
Overall Risk Ratings, Risk Concentration and Prioritization
OpRisk Process Flow
Risk
Assessment
Risk
Monitoring
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18. Measurement Parameters
Impact:
Also known as Severity
Refers to actual or estimated loss to the organization in terms of financial losses or
reputational damage
Probability:
Also referred to as Likelihood of occurrence
Used to measure the estimated frequency of an event
Both types can be measured in either
Qualitative or Quantitative terms
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19. Probability or Likelihood
Likelihood Rating Criteria
Almost certain 5
It is expected to happen; will certainly happen this fiscal year or
during the three year period of the Service Plan
Likely 4
We expect it to happen; it would be surprising if this did not
happen.
Possible 3
Just as likely to happen as not; we don't expect it to happen, but
there is a chance
Unlikely 2 Not anticipated; we won't worry about it happening
Rare 1
It would be surprising if this happened; there would have to be a
combination of unlikely events for it to happen
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20. Impact
Impact Rating Criteria / Examples
Catastrophic 5
No recovery of outstanding debt in full; Irreparable damage to DIL's
credibility or integrity
Major 4
Event that requires a major realignment of how service is delivered;
Significant event that has a long recovery period; Failure to deliver
major stakeholder or investors commitment
Moderate 3
Less vulnerable in the near term but faces major ongoing
uncertainties to adverse business, financial and economic conditions
Minor 2
Strong capacity to meet financial commitments but more subject to
adverse economic conditions; Can be dealt with at a department
level but requires Executive notification
Insignificant 1
Minimal financial losses; Can be dealt with internally; No escalation
of the issue required; No media attention; No or manageable
stakeholder or client interest
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21. OpRisk Loss Types
Actual losses:
Values related to losses already expensed by the organisation
Potential losses:
Values related to incidents that are yet to be determined, usually as it
relates to incidents under investigation or for which the customer is liable
Prevented losses:
Values related to incidents that were frustrated because of the
effectiveness of the organisation’s control mechanism
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22. ORM TOOLS
BRIEF INTRODUCTION ON RCSA, KRI AND LOSS
INCIDENT REPORTING
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23. Tools of ORM
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24. Risk & Control Self Assessment (RCSA):
A simple process that captures prevalent and likely risks in a business function and suggests
required controls
It is a participative process that relies on inputs from everyone involved in running the business
or managing relevant processes
It is a qualitative exercise that should be carried out at least on a quarterly basis
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25. Risk & Control Self Assessment (RCSA):
It should provide answers to the following questions:
What can go wrong? How can it go wrong?
What is the likelihood of it going wrong?
What is the potential damage?
What can be done about it?
Who will do it?
Risk Factors
Likelihood
Impact
Controls
Responsibility
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26. RCSA Sample Template
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27. Loss Incident Reporting
• Involves the Process of collating data resulting from operational risk events relating to
people, process, system and external events risks
• Assists with identifying trends
• Ensures cost-effective controls are deployed to mitigate likely risks
• Enables determination of risk concentration
Loss data includes:
– Actual losses
– Near misses (potential and prevented losses)
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28. Sample of Loss Incident Form
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29. Key Risk Indicator (KRI) Monitoring
• KRIs are quantitative parameters used to identify changes in the risk profile of business
activities and processes
• Close monitoring enables the following:
– Clear understanding of how risk profiles change
– Determination of volatility of risks across the business environment
– A forward looking perspective on current risk profile
– Understanding of early warning signals for emerging risks
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30. Sample of KRI Dashboard
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31. BENEFITS OF ORM
REASONS FOR INVESTING IN ORM
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32. Values of ORM
Improved quality
Cost savings
Stability of earnings; Reduced Volatility
Enhanced competitive position of the organization
Operational efficiency
Assured long-term survival
Compliance with best global practices
Enhanced Shareholder Value
Risk Reward
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33. ORM is Simply Good Business
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Good Operational Risk
Management
Fewer
Surprises
Increased
Shareholder Value

34. Thank you…
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