Operational Risks

Understanding Operational Risks

Operational risks are the potential losses or damages that a business could face due to failed internal processes, systems, or people.
These risks usually arise from unexpected or unplanned events, such as system failures, fraud, or employee errors.
They can be particularly damaging to online businesses because they often rely heavily on automated systems and digital proficiency.

System failures: These can occur when a business’s IT systems breakdown, which can prevent online transactions or communication with customers.
Employee errors: Difficulty navigating online tools, mismanagement of digital systems, or unethical behaviour by staff can all present risks.
Third-party risks: Online businesses often rely on external providers for services like website hosting or payment systems and these third-parties might fail to deliver services as promised.
Security breaches: These involve hackers or malicious software that may infiltrate the business’s digital systems and damage or steal sensitive business or customer information.

The first step in operational risk management is identification of risks. Once the potential risks have been identified, they can be analysed and prioritised.
Businesses can then use a variety of tactics to manage these risks, including risk avoidance, risk sharing, risk reduction, and risk acceptance.
For instance, companies might invest in cybersecurity to mitigate the risk of security breaches.

Operational risks can have a serious impact on a business’s financial stability, reputation and customer trust.
When a company’s operations are disrupted, profits can be compromised.
Security breaches can lead to customer data being compromised, which can damage a business’s reputation and lead to legal issues.

Please refer to further reading materials for more detailed information on each topic.