Managing Operational Risk

Dean Beaumont

This chapter seeks to provide guidance to practitioners on the principles of preventing and mitigating operational risk. It outlines the challenges of the operating environment and defines the boundaries of operational risk within the framework of the finance industry sector, so that practitioners can plan effectively and reasonably in the organisation in which they operate.

Operational risk differs from strategic risk in that front-line businesses are dealing with operational risk issues on a day-to-day basis as a normal part of doing business. In simple terms, the difference between operational and strategic risk can be explained by a hypothetical example. Say somebody needs to build themselves a new house. They find a suitable plot, but it is next to a busy road. They take the decision to build the house there anyway (strategic risk decision). However, every day they must then cross the busy road to go to work. The crossing of that road is potentially dangerous (operational risk decision). They may choose to mitigate the operational risk by building a footbridge or pedestrian tunnel (risk mitigation) at a cost of time, money and resources (project). If they are unable or