PPSE: back to the basics of Operational Risk
After 15 years of frameworks, lines of defence, risk and control self-assessments, aggregated dashboards and tools of every kind, risk managers in the financial services industry would benefit from going back to the fundamentals of operational risk: what it really is and how it is generated: “ the risk of loss due to inadequate or failed People, Process, Systems or External Events”, P-P-S-E. How simple?
I believe that organisations that get these fundamental drivers right, are much less prone to large operational failures than others. Firms that dedicate enough care to the performance management of PPSE components mitigate – implicitly or explicitly – the key factors of operational risk and achieve organisational superiority and competitive advantage.
The table below presents some of the main drivers of operational risk and performance using a PPSE approach. It also highlights the relevant areas of scientific research, which is still underused in the financial services sector.
A PPSE view of op risk management has different implications and benefits depending on the size of your organisation and its level of maturity.
•For young, fast growing businesses that feel the need to tackle op risk before it gets out of hand, my advice is to dedicate care and attention to the PPSE fundamentals, before spending too much time on things such as risk registers, risk assessments or other documentation. Your main task should be to mitigate your risk, rather than talk about it.
• For mature organisations with elaborate frameworks, I would suggest going back to basics and verifying whether the business fundamentals are right. That means ensuring you have good people, solid processes, robust systems and that you are actively screening your operating environment. If you’re not, then that’s where your risk management priorities should be.
Examples of PPSE drivers of operational performance
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