Risk-Based Performance Management: Integrating Strategy and Risk Management

323 Pages·2013·2.938 MB·English

by  Andrew Smart, James Creelman (auth.)

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