Risk-Based Performance Management: Integrating Strategy and Risk Management PDF
Preview Risk-Based Performance Management: Integrating Strategy and Risk Management
RISK-BASED PERFORMANCE MANAGEMENT This page intentionally left blank Risk-Based Performance Management Integrating Strategy and Risk Management Andrew Smart ChiefExecutiveOfficer,Manigent and James Creelman ©AndrewSmartandJamesCreelman2013 Foreword©JonathanChocqueel-Mangan2013 Allrightsreserved.Noreproduction,copyortransmissionofthis publicationmaybemadewithoutwrittenpermission. Noportionofthispublicationmaybereproduced,copiedortransmitted savewithwrittenpermissionorinaccordancewiththeprovisionsofthe Copyright,DesignsandPatentsAct1988,orunderthetermsofanylicence permittinglimitedcopyingissuedbytheCopyrightLicensingAgency, SaffronHouse,6–10KirbyStreet,LondonEC1N8TS. Anypersonwhodoesanyunauthorizedactinrelationtothispublication maybeliabletocriminalprosecutionandcivilclaimsfordamages. Theauthorshaveassertedtheirrightstobeidentifiedastheauthorsofthis workinaccordancewiththeCopyright,DesignsandPatentsAct1988. Firstpublished2013by PALGRAVEMACMILLAN PalgraveMacmillanintheUKisanimprintofMacmillanPublishersLimited, registeredinEngland,companynumber785998,ofHoundmills,Basingstoke, HampshireRG216XS. PalgraveMacmillanintheUSisadivisionofStMartin’sPressLLC, 175FifthAvenue,NewYork,NY10010. PalgraveMacmillanistheglobalacademicimprintoftheabovecompanies andhascompaniesandrepresentativesthroughouttheworld. Palgrave®andMacmillan®areregisteredtrademarksintheUnitedStates, theUnitedKingdom,Europeandothercountries. ISBN 978-1-349-33697-5 ISBN 978-1-137-36730-3 (eBook) DOI 10.1057/9781137367303 Thisbookisprintedonpapersuitableforrecyclingandmadefromfully managedandsustainedforestsources.Logging,pulpingandmanufacturing processesareexpectedtoconformtotheenvironmentalregulationsofthe countryoforigin. AcataloguerecordforthisbookisavailablefromtheBritishLibrary. AcatalogrecordforthisbookisavailablefromtheLibraryofCongress. To all the risk-takers Andrew Smart To the memory of three close friends who left us too soon. The world is a poorer place without them. John Harvey (1962–1993), Lynne Brookfield (1960–2007), Peader Lawless (1958–2010) James Creelman This page intentionally left blank vii Contents ListofFigures,TablesandBoxes xi Foreword xv Acknowledgements xviii 1 ContinuousTurbulentTimes:TheCasefor Risk-BasedPerformanceManagement 1 Theearly21st-centuryrevolution 1 Newmodelsformanagingorganizations:Introducing Risk-BasedPerformanceManagement 3 Learningfromthepast:Theindustrialrevolution 5 TheimpactofTaylorism 6 Totalqualitymanagement 7 Theknowledgeordigitalage 11 Globalization 11 TheCreditCrunch 14 Theimpactofsub-primelending 15 Avoidingagreatdepression 17 The“psychologyofdenial” 17 Thefailureofriskmanagement 18 Poorunderstandingofriskappetiteandriskprofiles 20 Riskandbusinessstrategy 20 Conclusion:Integratingstrategyandrisk 21 2 Risk-BasedPerformanceManagement:An ExplanationofThisNewStrategicParadigm 23 Shiftingparadigms 23 TheemergenceoftheRiskMaster 26 Criticalcapabilities–Theexperts’consensus 30 viii CONTENTS RBPM:Anintegratedapproach 30 Setstrategy 32 Managingperformance 33 Managingrisk 37 Aligningrisk-takingwithstrategy 38 Conclusion 44 3 RBPM:IntegratingRiskFrameworksand StandardswiththeBalancedScorecard 53 Introduction 53 TheBalancedScorecardframeworkexplained 54 RiskManagementframeworks 70 Integrationmodels 80 Conclusion 83 4 DefiningStrategy:TheQuestionofAppetite 85 Introduction 85 Definingstrategy 85 RBPM:Fromformulationtoexecution 92 Thestrategicimportanceofappetite 94 Definingriskappetite 100 Creatingariskappetitestatement 104 Measuringriskappetite 116 Cascadingriskappetite 118 Thestatementisnottheend-goal 119 Conclusion 119 5 UnderstandingtheRelationshipbetweenthe ThreeTypesofIndicators:KPIs,KRIs andKCIs 120 Theobsessionwithmetrics 121 Measurementasan“endinitself” 121 Keyindicatorsandaperformanceconversation 123 Anintegratedsetofindicators 124 KPIs 126 KRIs 126 KCIs 127 Threeindicatorscorecards 127 Howindicatorsworktogether 130 (cid:2) CONTENTS ix Leadingandlaggingindicators 130 Leadingandlaggingacrossindicatortypes 132 Indicatorsandbehaviour 133 RAGARcolourcoding 134 Conclusion 136 6 ManagingPerformance 137 Introduction 137 ManagingPerformancesub-components 137 Strategicobjectives 138 Understandingkeyterms 144 PerformanceScorecard 148 SelectingKPIs 148 Selectingtargets 154 Strategicinitiatives 157 Manigentapproach 163 Processes 164 Conclusion 166 7 ManagingRisk 167 Introduction 167 TheRiskManagementdisciplineandfunction 168 Thebirthofenterpriseriskmanagement 173 Definingrisk 176 Identifyinganddefiningkeyrisks 177 Riskassessment 182 KRIs 187 Risktolerance 188 ARiskScorecard 192 Keycontrols 193 Initiatives 199 Conclusion 200 8 AligningRisk-TakingtoStrategy 201 Bindingtogetherstrategyandrisk 201 Appetiteandsetstrategy 202 Appetiteandmanagingperformance 202 Appetiteandmanagingrisk 203 Threemapsthatalignrisk-takingwithstrategy 203 ExplainingtheAppetiteAlignmentMatrix 204
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