Operational risk matters because it sits at the intersection of people, processes and technology and can trigger losses that ripple through markets, communities and supply chains. Evidence from the Basel Committee on Banking Supervision at the Bank for International Settlements shows that operational failures can amplify systemic stress when controls break down across multiple institutions. Paul Glasserman at Columbia Business School has examined limits of pure statistical modeling and argues that firms must combine quantitative loss histories with qualitative judgment to capture rare but severe events. The relevance touches everyday lives when service outages disrupt payrolls, when fraud harms vulnerable customers, or when a natural disaster severs a regional operations hub.
Measuring operational risk
Robust measurement blends internal loss data, external incident data, scenario analysis and assessments of business environment and internal control factors as laid out by international regulatory guidance. Internal loss data provide concrete signals about recurring failures while external data widen the view to industry patterns. Scenario analysis injects expert judgment about low-frequency high-impact events, a method supported by academic and practitioner literature including work by Paul Glasserman at Columbia Business School. Key risk indicators translate process performance into leading signals, and combining these elements produces an evidence-based risk profile that respects local operational realities, from labor practices in a factory to cyber resilience in a metropolitan data center.
Managing operational risk
Management requires governance, control design, resilient processes and clear escalation paths. James Lam at James Lam & Associates emphasizes that tone from the top and risk culture determine whether controls are followed in practice. Operational risk transfer through insurance, contractual allocation across suppliers and capital buffer planning are complementary tools, while business continuity and crisis playbooks preserve essential services for customers and communities. Regulators expect board-level accountability and periodic testing of recovery plans, reflecting the territorial patchwork of rules that firms operating across borders must navigate.
Consequences of poor management include financial loss, legal penalties, erosion of customer trust and local economic harm when a firm is a major regional employer. A credible program marries measurement with management, embeds cultural incentives for reporting and learning, and adapts to environmental factors such as infrastructure vulnerability in coastal regions or the prevalence of cash economies in certain territories, making operational risk a uniquely human and contextual challenge that demands continuous attention.
