What Is Operational Risk?

Why It Matters

Operational risk is often described as the risk of things going wrong in the ordinary course of running a business — not because of a bad market or a lawsuit, but because a process broke down, a system failed, or a person made a mistake.

Because operational risk touches the everyday mechanics of a business, it can be easy to overlook until something actually goes wrong. A supplier that suddenly can't deliver, a software outage that halts sales, or a data entry error that leads to a shipment mistake are all examples of operational risk materializing.

Businesses that rely heavily on complex processes, technology systems, or third-party vendors often face a wider range of operational risk simply because there are more points where something could fail.

How It Works

Managing operational risk typically starts with mapping out a business's core processes and identifying where failures are most likely — or would be most damaging — if they occurred. This might include reviewing supply chains, IT systems, staffing levels, and internal workflows.

From there, businesses often build in redundancy, backup plans, or process improvements aimed at reducing the likelihood or impact of a failure. This can range from having backup suppliers to maintaining data backups to cross-training employees so a single absence doesn't halt operations.

Ongoing monitoring is also common, since operational risk can shift as a business grows, adds new technology, or changes how it operates — a process that worked well at a smaller scale might introduce new risk once volume increases.

Key Elements

Common sources of operational risk include the following.

• Technology failures or system outages
• Human error in day-to-day processes
• Supply chain or vendor disruptions
• Inadequate staffing or training
• Breakdowns in internal communication or workflow

A Business Example

As a hypothetical example, consider a business that relies on a single supplier for a key raw material. If that supplier experiences a disruption, the business could face delays or an inability to fulfill orders — a clear illustration of operational risk tied to a business's own supply chain design.

In this scenario, the business might address the risk by identifying a backup supplier or building extra inventory buffers, reducing its dependence on any single point of failure.