Process-based operational risk identification with value-focused process engineering

Operational risk is the risk that will be incurred by organisations through damage to reputation and/or financial loss as a result of failure or inadequacy of processes, people and technology. The direct negative impact of operational losses upon the value generation mechanisms of organisations and their indirect impact on the reputation and market value of organisations make proactive identification of the full spectrum of potential operational risks a matter of survivability for modern organisations. The ability to represent the goal-sensitive nature of operational risks as well as their relationship to the components of operational business processes (regarded as complex systems) contributes to greater risk sensitivity and proactiveness of Operational Risk Identification (ORI). Until now there is no ORI methodology that adopts these properties in an integrated manner. This leaves space for increasing effectiveness of ORI. The objective of this research is to design a methodology for effective operational risk identification in process systems. This methodology should enable: a) effective representation of the concept of operational risk in process systems; and b) effective process of operational risk identification in process systems. This objective is achieved by conceptualising and formalising the process of incorporating risk into goal-oriented business process models through the principles of Value-Focused Process Engineering (VFPE). The resultant new modelling methodology, called Risk-aware Value-Focused Process Engineering (RaVFPE), extends the grammatical constructs and modelling rules of VFPE to explicitly incorporate the concept of operational risk and to enable systematic identification of operational risk in process systems. The RaVFPE modelling methodology presents an original contribution to knowledge as it provides a new approach to ORI in process systems. The process of developing this new modelling methodology is firmly grounded in the Critical Realist philosophy of science and is guided by the principles of the Design Science and Systems Thinking research paradigms. In addressing the objective of this research, RaVFPE facilitates conceptual and formal representation of operational risk as an emergent property at the level of elementary process activity. This representation of operational risk is the result of the systemic interrelationship between the process elements assigned to an activity and as a natural component of the value creation mechanism of an elementary activity, which impacts the achievement of specific activity-related objectives. Further, the RaVFPE modelling methodology provides a new hierarchical view of process-based risk by formalising the procedure of decomposing risks according to organisational values. Clearly formulated rules within the RaVFPE modelling methodology to hierarchically decompose risks in process models according to organisational values, combine naturally with the emergent properties of risk at the elementary process activity level. This enables a reduction in epistemological uncertainty related to the process systems under study and assures the identification of the full spectrum of process-based operational risks. To illustrate the risk identification abilities of the RaVFPE model, Supply Chain Risk Management was selected as the operational context. This application demonstrates how RaVFPE can facilitate better risk identification as an integrated component of the industry “gold standard” Supply-Chain Operations Reference (SCOR) model.