Posted on August 1, 2008 by

Linking Performance and Risk – So What is the Problem?

It is important to clarify the need for the Risk-based performance methodology. So what are the problems it addresses? We see five critical needs:

 

  1. Drive strategic execution – It is estimated approximately 70% of companies fail to execute their strategy. Many would argue this is a performance management issue, however we believe this is only one dimension of the problem with risk the other critical dimension. This is being painfully demonstrated with the eye-watering write-downs and losses suffered by banks during the last 12 months.
  2. Eliminate silo process – Industry and our own research shows that too often performance and risk management are implemented as silo processes, when in fact they are fundamentally linked. Implementing these processes separately when the data captured, technologies deployed and audience served is the same, or very similar, increases the complexity and cost of performance and risk information whilst reducing its quality, leading to poor quality management discussions, decision-making and action-taking. Ultimately this leads to poor execution of strategy.
  3. Reduce risk-related losses – Again industry and our own research shows that risk-related losses have a significant impact on the bottom-line of many organisations. Every month OpRisk & Compliance publish the top 5 operational risk losses recorded. This makes interesting reading!
  4. Encourage the right culture – Ultimately strategic execution, performance and risk management come down to developing and sustaining the right culture. However shaping the right culture, even knowing what the right culture should be, continues to be a challenge. Risk-based performance provides a framework that enables organisations to shape the culture by setting the right tone. It embeds performance and risk considerations into daily decision-making at multiple levels within the organisation thus encouraging the ‘right’ culture to emerge.
  5. Developing a single, enterprise-wide view of all risks (and performance) – This is challenging for many organisations. All the different categories of risk, including credit, market and operational risk, must be brought together in a way that enables management to make the right decisions and take the right actions. Risk-based performance provides the framework to achieve this, bringing together all categories of risk to create a single view of the enterprise risk landscape. Most importantly, Risk-based performance aligns the different categories of risk to the organisations strategy. Whilst developing stand-alone credit, market or operational risk dashboards and/or reporting processes is important, we believe aligning these different risks to strategy is critical to strategic execution.

Like many management methodologies, Risk-based performance provides an array of benefits, generated both during and post implementation. The above points are the stand-out benefits identified by our research and from feedback from clients. The subject of culture, is one we will surely return to many times on this site.

 

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