How do you assess the root causes and impacts of operational risk events on your processes and performance?

When you understand the root cause of risk, you can more effectively plan for prevention. The nature of risk is that you can't eliminate risks from surfacing, but you can mitigate the impact if they become a reality.

A structured and rational approach should be adopted in order to assess the root causes and their impacts. 1. Understand the root cause of operational risk. 2. Evaluate the financial consequences of the operational risk. 3. Develop strategies of risk mitigation and preventive action plans.

It's been proven that there is a lag in the identification of events from when they happen. Sometimes up to a few years. Therefore it is imperative to have horizon scanning and forward looking measures in place where possible. Monitoring of KRIs, audit issues for themes, risk assessments, macro indicators and industry lessons learnt are critical.

This includes ongoing monitoring of processes, analyzing historical data for patterns, and conducting scenario analyses to anticipate potential risks. Collaborative efforts involving key stakeholders, rigorous documentation, and leveraging technology for real-time tracking enhance risk detection. Continuous learning from industry trends and past incidents aids in refining risk identification strategies.

Also, in my experience, it is imperative to identify the suite of controls (preventative or detective), that are intended mitigate any known operational risk.

There are various ways to analyse root cause including those mentioned. I am fond of the bowtie. However to simplify, the main principle should be to ask the so what or why question until you no longer can.

Employ methodologies like the "5 Whys" to delve deep into incident origins. Examine processes, human factors, and external influences contributing to failures. Utilize data analytics to discern patterns and identify precursors. Collaborate with cross-functional teams to gain diverse perspectives. Document findings comprehensively for future reference. Prioritize addressing fundamental issues over superficial symptoms. Implement preventive measures based on insights gained, fostering a culture of continuous improvement.

Analyse root causes of operational risk events using tools like fishbone diagrams, 5 whys, fault tree analysis, or root cause analysis (RCA). Aim to identify causes at various levels without blame. Understand gaps and weaknesses in processes, systems, and behaviours. This analysis prevents event recurrence and enhances operational resilience.

Conduct a thorough analysis to determine the underlying reasons for each risk event. Techniques such as the 5 Whys, fishbone diagrams, and fault tree analysis can help uncover the root causes, distinguishing between symptoms and actual problems.

Once the Root cause is established, the Operational Risk Events can also result in the Reassessment of Controls and Risks. This is a chance to address weak or failed controls and strengthen the Control environment

Evaluating impacts of operational risk events requires a multifaceted approach. Quantify financial, reputational, and operational repercussions to gauge severity. Collaborate with stakeholders to capture diverse perspectives on consequences. Establish clear metrics for impact assessment, considering both short-term and long-term effects. Leverage scenario analyses to simulate potential outcomes. Prioritize critical functions and assets for a targeted evaluation. Utilize historical data and benchmarking to contextualize impact severity. Continuous refinement of impact assessment methodologies ensures adaptability.

The third step involves evaluating the impacts of operational risk events on business objectives, performance, and stakeholders. Employ methods like impact analysis, cost-benefit analysis, KPIs, or risk appetite to quantify and qualify impacts across financial, operational, reputational, or strategic dimensions. Consider direct and indirect, short-term and long-term, and positive and negative impacts. Assess severity, urgency, and the necessity for action through impact evaluation.

Assess the effects of these risk events on your processes and overall performance. Consider factors like financial losses, operational delays, reputational damage, and compliance issues. Quantify impacts where possible to prioritize actions.

Develop a response plan based on thorough risk assessments, clearly defining roles and responsibilities. Establish robust communication channels to ensure swift information flow during incidents. Regularly update and rehearse the response plan to enhance organizational readiness. Invest in technology for real-time monitoring and automated alerts. Foster a culture of risk awareness through training and awareness programs. Conduct post-incident reviews to refine and improve response strategies continuously.

I am reminded of the SWOT and PESTLE methodologies to be able to analyse the potential impact of organisational risks. Using both tools in risk management processes are very helpful.

In the fourth step, implement actions to address root causes and impacts of operational risk events. Utilise frameworks like action plans, risk registers, control matrices, or risk treatment options. Define actions, assign responsibilities, allocate resources, set deadlines, and monitor progress. Implementation enhances processes, performance, resilience, and compliance, mitigating risks effectively.

Develop and implement corrective and preventive actions based on the root cause analysis. This may include revising processes, enhancing controls, providing additional training, or upgrading systems. Ensure actions are specific, measurable, achievable, relevant, and time-bound (SMART).

Outcomes and impact usually take time to observe and allow for cycles in business output and productivity. The assessment requires a combination of KRIs, event data and ops losses etc. and other tools that provide info on an ongoing basis along with reviews and assessments. There is also a need to have awareness and information flow from across the business lines and functions.

Assess the effectiveness of response strategies, examining what worked well and areas for improvement. Scrutinize the overall impact on financial, reputational, and operational aspects. Utilize key performance indicators and benchmarks to measure success. Foster a culture of learning from experiences, encouraging open communication and feedback. Regularly update risk assessments based on insights gained. Implement changes to policies, procedures, and training programs accordingly. This iterative review process enhances organizational resilience by refining risk identification and response mechanisms, ensuring a dynamic and adaptive approach to managing operational risks.

In the fifth step, review the outcomes of actions taken to address operational risk events. Employ methods like feedback, audits, tests, reviews, or risk indicators. Measure and evaluate outcomes for effectiveness, efficiency, satisfaction, and improvement. Verify achievement of objectives, identify lessons learned, and recognise best practices through outcome review.

After implementing actions, review the outcomes to ensure they have effectively addressed the root causes and mitigated the impacts. Use key performance indicators (KPIs) and regular audits to measure improvements and identify any residual or emerging risks.

Compile comprehensive reports detailing the nature, causes, and impact of incidents. Tailor communication to diverse stakeholders, emphasizing relevant aspects such as financial implications, operational disruptions, and preventive measures. Utilize visual aids for clarity. Foster transparent and open dialogue, encouraging input from teams. Implement a structured communication plan to disseminate findings swiftly. Emphasize lessons learned and actions taken to mitigate future risks. Establish feedback mechanisms for continuous improvement.

In the final step, communicate the findings of the assessment regarding root causes and impacts of operational risk events. Use formats like reports, presentations, dashboards, or meetings. Inform and engage stakeholders including management, employees, customers, regulators, or partners. Sharing findings enhances knowledge, awareness, commitment, and fosters a culture of operational risk management and learning.

Share the results of your assessments and the effectiveness of the implemented actions with relevant stakeholders. This transparency promotes a risk-aware culture and supports continuous improvement across the organization.

Identification of causal factors can present the biggest challenge in operational risk management. Individuals can have difficulty accepting accountability when people, processes, and technology are not functioning as designed. It is vital to remember to avoid the "blame game" in root cause analysis. Be fact-based and data-driven in root cause analysis. It is considerably better to champion a solution than seeking to assign blame. Have a risk culture where mistakes can be turned around to success.

Maintain detailed records of risk events, analyses, actions taken, and outcomes. This documentation helps in tracking progress and provides valuable insights for future risk management efforts.