Operational Risk Management in Hazardous Industries

For most businesses, risk means a product launch that misses the mark or a marketing campaign that underdelivers. But the stakes are different in construction, manufacturing, mining, agriculture, and other industries where risk can mean far more than just loss of revenue. In hazardous industries, Operational Risk Management is essential for protecting both the overall health of the business and the individual safety of its employees.

Operational Risk Management (ORM) is the discipline of identifying and mitigating losses from failed processes, people, systems, and external events. While it shares some similarities with Enterprise Risk Management (ERM), ORM focuses specifically on the risks that can be controlled and explicitly excludes strategic, financial, and market risks.

Successful ORM streamlines operations and improves compliance rates, providing a real competitive advantage. But the gap between knowing ORM matters and building a program that actually works is wider than most organizations expect. Here’s what you need to consider in order to help your organization bridge that gap.

Understanding Operational Risk in Hazardous Environments

In hazardous industries, effective ORM is the difference between a reactive organization that manages crises after the fact and a proactive one that prevents them altogether.

What constitutes operational risk in hazardous environments?

• Employee conduct and error: Human factors are a leading cause of incidents in industries like oil and gas, mining, and manufacturing.

• Technology risks: Automation, robotics, and artificial intelligence introduce new risks, including system failures and AI bias.

• Business process breakdowns: Maintenance failures, supply chain disruptions, and inadequate training can all lead to significant operational disruptions.

• Workplace safety hazards: Physical events, equipment malfunctions, and environmental hazards pose significant risks to workers and operations.

• Third-party and vendor risks: Contractor compliance, supply chain vulnerabilities, and service outages can disrupt operations and expose organizations to liability.

• Regulatory non-compliance: Stringent regulations in hazardous industries require robust compliance tracking and reporting to avoid fines and penalties.

• Model risks from AI: Bias, drift, and unintended automated decisions are emerging as new risks associated with AI technologies.

It’s crucial for a business to think holistically when implementing an ORM strategy, as many risks share interrelated root causes. To do this, it can be helpful to think of your ORM strategy in four phases.

The Four Steps of Effective ORM in Hazardous Industries

An effective ORM program proactively identifies and addresses risks before they turn into incidents. There are four main steps to any successful ORM process:

Step 1: Identify Risks

You can’t manage a potential risk unless you know it exists. Identifying risks requires carefully considering your operation from top to bottom and looking for anything that could get in the way of achieving your business goals. Remember, ORM focuses on internal factors—factors that you can control—rather than external factors like changes in the market.

Review your internal processes, looking for vulnerabilities or potential points of failure. Consider equipment, training, and infrastructure. Go through past loss data to look for trends and conduct interviews or workshops with team members to get their perspective on day-to-day risks.

Once you have identified the potential risks to your operation, you can begin to understand how to prevent them.

Step 2: Assess Potential Risks

Not all risks are created equal. After you’ve identified your potential risks, it’s important to determine which ones pose the highest threat. A typical way to do this is with a 5×5 Risk Matrix.

This matrix measures consequence along the X axis and probability along the Y axis, each on a scale of 1 to 5. The two scores are then multiplied to create a score of total severity for any particular risk:

For likelihood, estimate the probability that the identified risk will actually occur, then score it as follows:

• Rare (under 20% probability)
• Unlikely (20% to 40% probability)
• Moderate (40% to 60% probability)
• Likely (60% to 80% probability)
• Almost Certain (over 80% probability)

For consequence, consider the potential impacts to employee safety, project goals and timelines, equipment and assets, and overall costs. Rate the risk by the highest possible consequence in any single area—for example, a risk that ranks a 3 in its potential to disrupt your timelines and a 1 in all other areas would be scored a 3 overall.

Once you’ve scored a potential risk for both likelihood and potential consequences, multiply the scores to get an overall score.

Step 3: Develop Your Risk Mitigation Strategy

Assessing your risks will give you a prioritized list of issues to tackle. Now it’s time to begin the process of risk mitigation. Prioritize your highest-scoring risks first, as they are the most likely to cause serious problems for your operation.

In hazardous industries, there will always be certain risks that cannot be fully prevented. Accidents can happen and equipment can malfunction at even the most meticulous of job sites. The goal of risk mitigation is to achieve an acceptable level of risk by minimizing the chance that something goes wrong and preventing the worst possible consequences if it does.

Step 4: Implement New Risk Controls

You’ve identified your risks, prioritized them, and created your mitigation strategy. The last step is to implement change in order to minimize risks.

Risk controls can include new processes, new technology, new training, and other strategies. These new controls should aim to prevent risks, rather than correct for events after they have occurred. However, ongoing monitoring and measuring should be part of your risk management strategy going forward.

Consider implementing a formal annual review where you look for any new risks to your operation. During this annual assessment, repeat the steps you followed for this initial ORM exercise.

Operational Risk Management Creates Competitive Advantage

Organizations that successfully implement a strong ORM program can realize significant benefits beyond reducing risks and maintaining compliance.

Minimizing Financial Losses and Preparing for the Future

Effective ORM improves your bottom line by preventing or lessening loss events. It also encourages the optimization of business practices since identifying and reducing risks often leads to improved efficiency.

Part of successful operational risk management is planning and preparing for change, whether that’s new technology, upcoming safety requirements, or other things that could introduce risk to your business. A strong ORM program can help equip your organization to adapt as conditions change.

Ensuring Employee Safety

Nothing is more important than protecting the safety of your crew. In hazardous industries, a robust ORM program fosters a risk-aware culture where employees proactively report potential risks, allowing for rapid response during crises. This approach creates a safer work environment with higher employee engagement, resulting in fewer recordable injuries and claims.

Navigating Complex Regulatory Landscapes

Oil and gas, mining, manufacturing, and other hazardous industries are heavily regulated, with strict guidelines for environmental protection, worker safety, and operational practices. Failure to implement adequate risk management processes can result in non-compliance, leading to hefty fines, legal penalties, or even the revocation of operational licenses.

Effective ORM ensures organizations adhere to relevant regulations and mitigate risks associated with non-compliance. Automating regulatory reporting can also significantly reduce compliance costs and administrative burdens.

Building a Strong Brand and Customer Loyalty

Organizations that prioritize safety and responsible operations build a strong brand reputation and increase customer loyalty. This helps position you as a leader in your space, making it easier to find both clients and employees.

Novara’s Role in Modern ORM for Hazardous Industries

Novara Flex helps organizations navigate evolving regulations while maintaining the highest levels of safety, efficiency, and accountability through training, reporting, incident management, and more.

How Novara Flex Addresses Key ORM Challenges

• Incident Management: Streamline incident reporting, automate workflows, and track corrective actions to prevent recurrence and improve safety outcomes.

• Real-Time Visibility: Gain critical insight into safety and performance with comprehensive dashboards, cross-form reporting, and project tracking.

• Mobile Accessibility: Empower field teams to access critical safety and compliance tools anywhere, reducing administrative burden and improving efficiency.

If you’re looking for ways to reduce your operational risk, Novara can help. Schedule time with one of our experts for a customized demo that addresses your unique business needs. Book your demo today.