Operational Risk – A Killer Lurks In Your Business

Stewart Clark

operational risk can break a business
The first principle is that you must not fool yourself, and you are the easiest person to fool.
- Richard P. Feynman, Nobel Prize–winning physicist -

Protecting Your Business From Dramas

Business crippling incidents do happen all too often, for a whole range of reasons. The external risk and/or the operational risk was there and the owner and Management were not prepared. Saying “But I didn’t see it coming!” may be telling the painful truth but it does not change the pain!Once the dust has settled and the worst emotions are under control, it is time to consider the real question and reflect on "WHY you didn't see it coming" and how you could have avoided the problem. The reality is that major incidents that are capable of crippling or killing a business, can in fact be predicted if we take an unbiased look at how we operate. And if they can be predicted, there is a way to prevent issues and protect your business from dramas.

Recognising Your Business Risks

Business risk events typically fall into 3 groups of events: Credit risk, Market risk or Operational risk. Most business owners are very conscious of the first 2. A major bad debt is a credit risk commonly feared by SMEs. It is external, and it is easy to blame the customer! Many business leaders have implemented some measures to protect their business, (ie. debtor insurance, product claw backs, bonds). Market risk is, as its name suggests, driven by the market. A sound business strategy recognizes these risks and address them through methods such as diversification or hedging. But that is not enough, as experience proves time and time again. You need to ask yourself these tough questions:

  • “How well have I shored up the INTERNAL foundations of my business?”
  • “Which part of my key business processes and systems could fail me?”
  • “Is my team equipped and ready to combat operational catastrophes in our business?”

Facing Your Operational Risk

Let’s agree on a broad definition of “operational risks”: They are any internal failure of the people and/or processes and/or systems in a business. That can be a very wide range of issues, think of horror stories that could easily apply to you, like

  • the crashing of a key piece of IT taking down with it your ability to do anything until the IT problem is fixed;
  • or someone’s critical error in quoting for a large sales transaction, killing any hope of a deal or of any profit;
  • or a lapsed key license or certification suddenly preventing you from selling a product.

Experience shows that these kinds of disasters have not been listed as a risk before they actually happen and the damage has been done.In many cases, you can trace back the cause in the processes, systems or people within the business – lacking or failing in some way. In some instances a simple process was not followed, leading to a chain of issues, in other cases there was no process defined for a particular situation or it was out of date or inadequate. Failures at critical foundation points typically mean that the business suffers immediately and over time.

Making Your Business Resilient

Most critical risk situations can and should be predicted. Even if they are impossible to avoid completely, the day can be saved when you have a detailed well thought-out action plan, process adjustment or change, and you have a fall-back system. Such plans mitigates the risk and reduces the impact on the business and its staff. That is how a business builds resilience.The essential point here is to proactively review how you do what you do and identify upfront what could go wrong. Take the time to define your key operational risks, consider their cost and frequency, and your options. Then you can calmly make a conscious and well thought-out decision on how to mitigate your operational risks. If you leave everything to chance, you end up having to make fast decisions under stress, potentially apply band aid solutions that may work short term but don’t prevent another disaster.With a strong foundation in place, business owners can confidently focus on growth and success, they know that they stand on solid ground that will not collapse beneath their feet. And that is a good feeling!

Stewart Clark

For more information on operational risk and the ways to mitigate it, contact Stewart Clark at StewartClark.com.au.

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