Operational risk refers to the potential for loss that arises when internal processes, people, systems, or external events fail. Unlike market or credit risk, operational risk exists in every organization, regardless of size or industry because it comes from how day-to-day business activities are carried out.
From human error to cybersecurity breaches, understanding the different types of operational risks is essential for business continuity, regulatory compliance, and safeguarding your organization’s reputation.
In this guide, we’ll explore the main categories of operational risk, provide real-world examples, and share strategies for effective risk management.
What Is Operational Risk?
Operational risk is defined by the Basel Committee as “the risk of loss resulting from inadequate or failed internal processes, people, systems, or external events.”
Key sources include:
- People risks: mistakes, fraud, negligence.
- Process risks: inefficiencies or breakdowns in workflows.
- System risks: IT failures, software errors, cyberattacks.
- External risks: natural disasters, legal/regulatory changes, or economic shocks.
Unlike market risk, which fluctuates with external conditions, or credit risk, which ties to borrower behavior, operational risk is always present because organizations rely on people and systems to function. Even highly automated businesses face risks from flawed processes or external disruptions.
Because it cuts across functions, operational risk management is now a top priority for CFOs, auditors, and compliance leaders. Tools like audit automation and secure request list management help teams track and mitigate these risks with greater precision.
Types of Operational Risk
1. Process Risk
Definition: Failures or inefficiencies in business processes that disrupt operations or lead to financial losses.
Examples:
- Supply chain bottlenecks that delay production or deliveries.
- Inadequate quality control leading to defective products reaching customers.
- Manual errors during financial reporting, causing inconsistencies in statements.
- Delays in approval workflows that create cash flow problems.
Mitigation Strategies:
- Standardize and document workflows.
- Automate repetitive processes to reduce human error.
- Use real-time tracking systems to identify bottlenecks quickly.
- Conduct regular internal audits using checklists.
2. People Risk
Definition: Risks arising from employee actions—whether intentional or unintentional.
Examples:
- Human error, such as incorrect data entry or failing to meet deadlines.
- Employee fraud, like misappropriating assets or creating false vendor invoices.
- Negligence or lack of adherence to compliance rules.
- Poor decision-making from insufficient training or lack of experience.
Mitigation Strategies:
- Provide ongoing training and awareness programs.
- Strengthen internal controls and segregation of duties.
- Build a culture of accountability and ethical standards.
- Use secure collaboration tools that reduce reliance on email and manual tracking.
3. System Risk
Definition: Failures of IT systems, software, or data infrastructure that disrupt business operations.
Examples:
- Network outages that halt transaction processing.
- Cybersecurity threats like ransomware or phishing attacks.
- Bugs in financial software that produce errors in reconciliations.
- Integration failures between legacy systems and modern automation platforms.
Mitigation Strategies:
- Implement disaster recovery and backup systems.
- Regularly test IT general controls (ITGCs) as part of SOX compliance.
- Conduct penetration testing and vulnerability assessments.
- Use continuous monitoring for anomaly detection.
4. External Risk
Definition: Risks caused by external events outside the organization’s direct control.
Examples:
- Natural disasters (earthquakes, floods, hurricanes) damaging physical assets.
- Regulatory or legal changes that introduce new compliance obligations.
- Economic downturns or supply chain crises impacting revenue.
- Political instability or sanctions that disrupt global operations.
Mitigation Strategies:
- Build contingency and business continuity plans.
- Monitor regulatory updates and implement compliance frameworks.
- Diversify suppliers and vendors to reduce dependency on single sources.
- Purchase adequate insurance coverage for high-impact risks.
Additional Categories Often Overlooked
Beyond the classic four categories, many organizations face nuanced risks that deserve attention:
- Compliance Risk: Failure to adhere to industry-specific regulations, such as healthcare data laws or banking requirements.
- Legal Risk: Exposure to lawsuits, intellectual property disputes, or contract breaches.
- Reputational Risk: Damage from scandals, negative press, or social media incidents.
These overlap with the main categories but require specialized controls and transparent documentation to manage effectively.
Why Managing Operational Risk Matters
Unchecked operational risk can lead to:
- Financial losses from fraud, errors, or system downtime.
- Compliance penalties if regulatory obligations are not met.
- Reputational damage that erodes trust with clients and stakeholders.
- Business disruption that slows down growth or jeopardizes continuity.
For public companies, operational risk failures can also impact share price and investor confidence. For private firms, they can mean delayed audits, lost clients, or regulatory intervention.
By adopting proactive risk management practices and leveraging technology, organizations can stay resilient in the face of both internal and external threats.
Strategies for Managing Operational Risk
- Risk Identification and Assessment
- Map processes and identify vulnerabilities across people, systems, and workflows.
- Use heat maps or scoring systems to prioritize risks based on severity and likelihood.
- Implementing Controls
- Establish preventative and detective controls to mitigate key risks.
- Align controls with internal audit checklists and compliance frameworks.
- Automation and Technology
- Use tools like Suralink’s platform to centralize documentation, track audit progress, and create a secure audit trail.
- Integrate automation to reduce manual errors in reporting and workflows.
- Continuous Monitoring
- Regularly test and update risk frameworks to ensure they adapt to new threats.
- Implement continuous monitoring for fraud detection and IT security.
- Culture and Training
- Foster a culture of accountability where employees understand their role in risk management.
- Provide regular training sessions tailored to specific risk areas.
Frequently Asked Questions
What are the main types of operational risk?
People, process, system, and external risks are the four main categories.
Can operational risk be eliminated?
No, but it can be minimized and managed through effective controls, training, and technology.
How do you measure operational risk?
Organizations use risk assessments, control testing, loss event data, and scenario analysis to quantify exposure.
Who is responsible for managing operational risk?
Risk management is shared across leadership, compliance teams, auditors, and all employees.
What’s the difference between compliance risk and operational risk?
Compliance risk refers specifically to failing regulatory requirements, while operational risk is broader—covering people, process, system, and external threats.
Key Takeaways
- Operational risks come from people, processes, systems, and external events.
- Examples include fraud, cybersecurity breaches, flawed workflows, and natural disasters.
- Proactive risk management protects compliance, financial health, and organizational reputation.
- Platforms like Suralink help businesses document, monitor, and mitigate risks more effectively.
Operational risk is unavoidable—but it doesn’t have to be unmanageable. By understanding the different types of operational risk and implementing effective mitigation strategies, organizations can strengthen resilience, ensure compliance, and protect both their reputation and bottom line.
Suralink enables efficient walkthroughs and other essential audit procedures by centralizing documentation and communication, helping auditors and engagement teams identify and mitigate operational risk for their clients. Schedule a demo to see how Suralink can help your teams better execute and improve overall engagement quality today.