Operational risk is the risk of losses caused by flawed or failed processes, policies, systems, or events that disrupt business operations. It is a type of business risk that can result from breakdowns in internal procedures, people, and systems, as opposed to problems incurred from external forces such as political or economic events. Operational risk can also be classified as a variety of unsystematic risk, which is unique to a specific company or industry.
Operational risk is heavily dependent on the human factor, such as mistakes or failures due to actions or decisions made by a companys employees. Companies assess operational risk by identifying key risk indicators (KRIs) and implementing operational risk management processes. The process to manage operational risk is known as operational risk management.
Operational risk potentially exists in all business activities and encompasses a wide range of events and actions or inactions, such as fraud. If left unaddressed, the incurrence of operational risk can cause monetary loss, competitive disadvantage, employee- or customer-related problems, and business failure.
