Risk-Based Performance Scoring Methodology

Within Risk-based performance we have adopted a scoring methodology designed to be simple and to effectively communicate exceptions. The scoring methodology uses a ‘closest to target’ or RAGAR approach, with a scoring range of 0–3. We have selected this method because it communicates indicator status and exceptions more effectively than traditional RAG with a range of 0–10. In the traditional RAG 0-10 scoring we have found managers often find it difficult to relate the score to the underlying value. What does 8.4 really mean? How much better is 8.3 compared to 7.8? Often this type of question distracts from monitoring and analysing underlying trends. 

The Risk-based performance scoring approach is simple but effective. A baseline is established for each indicator. Upper and lower thresholds are established based on a percentage of baseline.

For example, Indicator A has a baseline of 10. Threshold 1 is set at 25% and Threshold 2 is set at 50%. Therefore an actual between 7.5 – 12.5 will be Green, an actual between 5-7.5 and 12.5 – 15 would be Amber and anything less than 5 or greater than 15 would be Red. See chart below.

This approach is designed to move thinking beyond the traditional Red is bad and Green is good thinking and encourage a more intelligent discussion around indicators. The Risk-based performance scores have the following meaning;
3 – The indicator is within tolerance – no action required.
2 – The indicator has moved out of tolerance – monitor trends, action may be required.
1 – The indicator is out of control – take action.

To demonstrate the value of the Risk-based performance scoring methodology, consider a revenue indicator. A traditional performance-only mind-set would generally see higher revenue growth as always positive. Whilst this is often the case, the Risk-based performance scoring challenges management to think through the consequences of excessive growth and consider the risks introduced to the business due to this growth. For example, if you are growing much faster than expected, will your customer services objectives be met? Do you have the right capacity in your call centres? Are you taking on high- risk clients? What is the root cause of this excessive growth? Is your sales team mis-selling? Are they meeting their TCF objectives? Are you taking on excessively risky business?

The Risk-based performance scoring methodology is designed to be simple to understand whilst communicating a powerful message, highlighting exceptions and challenging management to work through these and determine the right set of actions.

With the credit crunch gripping the financial services industry, now is the time to consider whether the traditional performance-only approach to measurement is helping or hindering performance and risk management in the industry. It naturally leads to the question “Did performance-only thinking contribute to the current credit crunch?”