Types of Operational Risks
There are diverse threats facing businesses, and some of them have nothing to do with market forces. Operational risks interfere with a business’s ability to function and are largely out of your control. However, that doesn’t mean a business can’t take steps to prepare itself for the unexpected. Operational risks take many forms, including:
- Fire, Theft, and Vandalism: Fires destroy inventory, equipment, and structures. Criminals can do the same. In addition to the loss of property, businesses often miss out on expected earnings.
- Weather: Hurricanes, tornadoes, and floods damage offices, warehouses, and equipment. It’s not just your own business that’s a concern; disasters that affect far-flung customers or vendors can have a ripple effect. The loss of infrastructure, including roads, ports, or runways may bring suppliers to a halt.
- Technology: Hardware and software make business more efficient, but system failures can slow things down. Technology also exposes businesses to cybersecurity threats. Viruses or malware may target company or customer data, and the failure to protect private information can wreak havoc on a business’s reputation and finances.
- Labor: Employees are a business’s greatest asset, but they can also become a liability. Labor disputes have the potential to slow or stop work. Theft and embezzlement may cause significant financial pain, and it’s not unheard of for businesses to fail due to losses suffered at the hands of dishonest employees.
Don’t Ignore Operational Risks
It may be tempting to play the odds when it comes to operational risks. What are the chances that a fire will destroy your store or that hackers will infiltrate a network? Unfortunately, many businesses have taken that bet and lost. Risk managers adopt best practices to protect companies from these low likelihood, high-cost events.
One of the ways companies deal with operational risks is by purchasing business interruption insurance. These policies are designed to reimburse the business for losses due to covered events like fires, floods, and prolonged power outages. The coverage varies, so it’s important to consult with an insurance professional to find the best policy for you.
Other Ways to Manage Operational Risks
There are some easy, common-sense steps a business can take to try and protect itself from major operational risks. Smoke detectors and sprinkler systems have saved countless warehouses and offices, while security cameras can deter burglars and vandals. More complex risks, such as third-party interruptions, require a bit of work. Building a diverse supplier base and keeping an eye on the financial stability of vendors can shore-up a business against disruption.
Everyone has a part to play in operational risk management. Employees should be provided with clear rules and guidelines that spell-out their responsibilities when it comes to safeguarding company property and digital assets. Operational risks are always lurking in the background; the best risk managers take concrete steps to prepare for the worst in the hope that it never comes.
Learn more about operational risk management in the articles above.