Today, more than ever, companies are facing numerous risks.
This is why operational risk management (ORM for short) is crucial to maintaining company stability. It is also a great factor in healthy business growth and development.
The key phases in operational risk management when it comes to providing services to clients are:
- Identifying risk factors
- Identifying operational risks
- Measuring
- Action related to the risks
Facing a smaller operational risk is not the same compared to a larger one. Also, potential negative occurrences causing great damage is different from causing smaller one.
Hence, the time and resources should be rationally directed towards significant risks.
Firstly, let’s observe the usual operational risk significance matrix.
Operational Risk Assessment Matrix
Low Operational Risk
Low operational risk means there is a low probability of a potentially negative occurrence.
Additionally, the financial damage is also low, even with a negative outcome.
However, it’s important to be careful when making sure the risk is indeed low.
Here are some suggestions on what to do when facing low risk.
- Assess the potential fines or detriments accurately
- Low priority of focus and less time spent managing these types of risks
- Request assurance that the client won’t react poorly if a small detriment occurs. For example, the detriment we create for the client may seem small to us. This doesn’t mean the client will see it as such.
- Additional caution – can these cases go to court
High Client Risk
High client risk means the total potential detriment is small, but the client may react severely.
This is especially important if the detriment comes from your company’s mistake or oversight. This risk can also cause reputational liability.
The assessed detriment to the client could be small. However, damaging the relationship with the client can reflect very negatively on your business.
High client risk characteristics
- A situation where the client can take a small mistake very badly
- You may not be suffering great damage. Yet, you can still lose the client
- When assessing the risk it’s important to know the characteristics of the person who decides on compensation claims
High Financial Risk
This risk refers to the occurrences that can cause high financial damages to the client. Yet, more importantly, there is still a slim chance for the client to submit a compensation claim.
- Demands constant improvements in the relationship with the client
- High priority for focus and time spent on risk management
- Needs additional assurance that the client won’t react badly in the case of small damages
- Assess the person making the decisions on compensation claims
Alarming Risk
Alarming operational risk is the risk of occurrences that can cause the client high financial damage.
Additionally, there is a high probability for them to make a compensational claim.
Alarming operational risk suggestions:
- Determine the risk before signing the contract. Consider whether you should accept the job at all
- Do you have the resources to cover a high maximum exposure amount? Does a couple of thousands you can make mean more than the 100.000 you could lose?
- Do you have the resources to provide the service that undoubtedly eliminates all client and legislator dilemmas?
- Consider terminating contracts for current engagements if necessary
Examples – Think What You Would Do in These Situations
Consulting firm X has a yearly income of 1m EUR and an annual salary of 380.000, coming from 120 clients.
Situation 1:
One of the clients has revenue participation of 25k and a 25% margin. The client sends a new inquiry for an assessment on the previous VAT of 190.000. There are opposing opinions of tax experts on this question.
Due to the fact that your opinion when providing the service isn’t based on practice, and the total loss can be half of your income if the client is sensitive, we suggest avoiding jobs like this.
Situation 2:
The company does VAT returns to a client similar in size and share in the revenue. Due to the increased volume of transactions, the client’s previous VAT amounts to 750.000 per month.
You have a high financial risk in this case. Namely, we need to process a monthly VAT of 750.000, which is double the profit of our company. There could be problems if we make a mistake.
Communicate identified risks timely
Communicate operational risk to your manager
These are the events that should be communicated within your team immediately upon their occurrence or discovery:
- All business risks – changes in client’s liquidity or profitability indicators
- Unpleasant or unusual behavior of the client’s staff
- Disputed transactions and law non-compliances
- Announcements of changes in management and persons our engagement depends on
- Service competition appearance
- Client requests for ’’risky’’ advice or risky services the competition provides
- Extremely urgent customer inquiries can be especially risky
Communicate the risks to the client
- Assess whether the client is aware of the risks
- Inform them about the potential negative effects
- Transfer the responsibility to the client (draft a disclaimer)
Examples of operational risks and indicators of their causes
Performance of Services
- Accepting a larger or non-contracted scope of work you are not sure you can execute in the required time and at the desired quality
- Taking on a job for which there are no resources
- Oversight of deadlines for service delivery. In other words, poor deadline management
- Report delay
- You understand the regulation less than the job requires
- The client doesn’t submit data on time or fails to provide information important for providing the service
- The client operates with an offshore zone
- Finding undocumented services provided to clients
- Lack of time to fully commit to the client and engagement
- Errors in reports given to clients
- Errors in the interpretation of tax regulations
- Tax control’s negative report regarding risky transactions (fuel, daily wages, representations, benefits, VAT)
- The risk of the client being surprised by the result of our service
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