Risk-based performance

As the world economy starts to show the first signs of recovering from one of the worst economic crises in living memory businesses are taking  an increasing interest in linking risk and performance management and taking a strategic approach to these two disciplines.

Outlined below are three key tools that our clients have found to be extremely powerful and beneficial as they have moved to an aligned risk and performance environment.

1. The Strategy Map

Perhaps one of the most powerful tools that has found its way into the manager’s toolbox over the last 10 -15 years has been the strategy map.  It is designed to provide a relatively simple way of distilling organisational strategy into a collection of objectives and showing the causal relationships between objectives.

The strategy map provides a tool for demonstrating how intangible assets, such as people, information systems, culture, processes etc, create customer outcomes and ultimately deliver tangible financial benefits for shareholders.

A well constructed strategy map provides a summary of an organisation’s 'strategic story' - a narrative which clearly explains what the organisation is seeking to achieve and how they will go about achieving it.
Developing a clear strategy map ensures those directly involved with strategy development will have a deep understanding of, and buy-in to, the strategy. It also means that communicating to, and engaging with, those not directly involved will be a more straight forward task.
Typically, the strategy map groups strategic objectives into perspectives - Financial, Customer, Internal Process and Learning & Growth. Some organisations also group their objectives by strategic themes, which may be within a single perspective or cut across multiple perspectives.
The strategy map has a key role to play when attempting to align risk and performance by ensuring that the organisational strategy and strategic context is clear and well understood. This ensures that only the ‘vital few’ objectives, risks, controls, indicators etc are incorporated into the overall risk and performance framework enabling the management discussion to remain focused on the right things.
Starting with objectives and remaining very focused on them ensures that the often seen and very costly ‘measure everything’ approach is avoided thus significantly increasing  information quality  which leads to better, more informed decision-making. 
 
2. The Risk Map

The risk map is a well established tool in the risk management toolbox.  Based on the results of a risk assessment, the risk map plots the impact and likelihood of key risks enabling them to be visualised in relation to each other and enabling clusters of risks to be identified. Based on this information, mitigation plans, priorities, risk treatments and potential scenarios can be debated and agreed upon.

While the risk map is a well known ‘tool’, perhaps what is not so well known is the four perspectives risk map that is typically used by our clients.  This type of risk map is designed to work with the strategy map and has the added benefit of providing an ‘organisational-wide’ view and a ‘perspective’ view of risk.

This is very valuable as it enables organisations to focus on risks in specific perspectives and explore the relationship between risks, across perspectives.  For example, one organisation that uses the four perspective risk map focuses attention on the risks within the leading perspectives as a starting point for their monthly risk review; they explore the causal relationship between objectives, using both strategy map and risk map. They believe that taking this approach enables them to manage and monitor the delivery of their strategy, while ensuring they operate within their risk appetite. 

3. The Risk Appetite/Exposure Matrix

On a recent project, the Risk Appetite/Exposure Matrix  proved to be one of the most powerful tools for creating change and driving the development of a risk aware culture.

The Risk Appetite/Exposure matrix shows the level of risk appetite running along the horizontal axis and exposure to risk along the vertical axis. The coloured cells that run diagonally show the intersection of appetite and exposure, thus the risks that appear in these coloured zones can be regarded as ‘aligned’ – i.e our exposure level matches our appetite.

The risks that are below and to the left of the coloured cells show where the level of risk exposure is greater than appetite, therefore showing that the organisation’s exposure is greater than deemed acceptable, thus this should prompt immediate action to reduce risk exposure for these risks.
The risks that are above and to the right of the coloured cells show where the level of risk exposure is less than appetite, showing that the organisation is not taking enough risk to achieve its objectives. Again this should prompt action to rectify this situation.

When using this matrix and looking at alignment of appetite and exposure, those involved in the risk initiatives typically understand the first situation outlined, where exposure exceeds appetite and generally know how to respond. However, the most interesting and more powerful, aspect of this simple matrix has been its ability to demonstrate the second situation, outlining where the exposure is less than appetite, i.e showing areas where the organisation was not taking enough risk and therefore risking the delivery of their strategy.

On a recent project the risk appetite/risk exposure matrix was the single most powerful tool deployed, generating a very high level of senior management engagement and buy-in as the results generally match the collective ‘gut feel’ of the senior team who felt certain areas of the business were not moving fast enough or had not been aggressive enough in seizing opportunities in this changing market.

The risk appetite/risk exposure matrix provided the tool which enabled them to hold informed and meaningful discussions about where more or less risk needed to be taken, and over time they have been able to monitor changes in alignment, and ultimately, the expectation is that this will translate into enhanced strategic execution.