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Operational Risks: Definition & Examples

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  • 0:04 What Are Operational Risks?
  • 0:36 People
  • 1:52 Systems & Processes
  • 2:37 External Processes
  • 3:22 Lesson Summary
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Lesson Transcript
Instructor: Artem Cheprasov

Artem has a doctor of veterinary medicine degree.

In this lesson, we'll define operational risk in more than one way. Then, we'll go over the subcategories of operational risks and provide numerous examples of each.

What Are Operational Risks?

If you're running a business, you naturally would like to mitigate risk. You'll have to understand that risk first though.

Operational risk refers to the chance of loss stemming from an issue with people, systems, procedures, and external events. This is the broad definition, more narrow definitions limit the risk solely to events arising from within an organization, or even more specifically, to those caused solely by human error.

In this lesson, we go over the subcategories of operational risk from a broader perspective and provide examples of each.

People

Operational risk can result in significant loss for a company due to accidental or purposeful human error. There are numerous potential scenarios where this might be the case.

For instance, a company might hire poorly trained or inexperienced personnel in lieu of more appropriate individuals as a cost-saving measure. These inexperienced employees may make innocent mistakes that result in loss. Say a manufacturing plant hires inexperienced contractors who end up fumbling their duties, leading to mechanical breakdowns and production delays.

In other cases, the operational risk and loss stems from pre-planned detrimental activity. Generally, this refers to examples where people commit criminal offenses that harm the company and, potentially, those involved with the company. Think of Bernie Madoff, who went unchecked in creating a Ponzi scheme that not only doomed his own organization and its staff but also the finances of countless others around the world.

The sum takeaway is that operational risk can be caused by negligent or criminal activity by an organization's employees that end up affecting the company and its partners in a negative manner. These people-based operational risks also include inappropriate supervision of employees and the loss of important personnel exposing an entity to operational risk.

Systems & Processes

Other operational risks are more in line with failures in systems, processes, and procedures. A good example is some sort of technological breakdown that impacts the business' bottom line. Imagine McDonald's all of a sudden experiencing a software failure whereupon none of its restaurants are able to take orders even though its staff are perfectly capable of doing so when all the systems work. Or, another example would be something we've all heard of before in the news, where a faulty process ends up transferring millions of dollars to a bank's customers completely inadvertently.

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