Risk management gives an organisation the ability to endure, ie, sustainability. Sustainable performance is what ultimately would take the organisation to its long-term goal.
Performance for a single year is never good enough in business, and will never result in achievement of the long-term goal, and so is performance by a single individual or division. Success in an organisation is achieved through collective sustainable performance of all individuals and functions that are part of the value creation process.
Risk management and performance management are the cores of business existence, and are effectively two sides of the same coin. The essence of business existence is value creation (performance management) and value protection (risk management).
The diagram below illustrates how risk management is aligned to performance and strategy:
All too often, efforts in risk management are dispersed, isolated and unrelated to the wider company strategy. Many organisations would benefit greatly from a more comprehensive and integrated risk management approach that takes into account strategic, operational, financial and compliance risks.
Linking the key risk indicators (KRIs) to the key performance indicators (KPIs) in the balanced scorecard (BSC) is a good remedy to avoid an unbalanced analysis of a company's progress.
An effective risk management system:
* Covers all risk areas
* Is deeply embedded within existing practices in the company
* Is present throughout all the business processes
Risk management should be intimately linked to performance management. Splitting them into different and virtually separate management systems significantly reduces the effectiveness of risk management and may have dramatic consequences.
The diagram below shows performance and risk management from an organisational structure perspective:
Conclusion
Businesses today need to integrate sustainability, risk management and performance management fully into their strategy not only to minimise potential losses, but also to exploit new business opportunities arising from the sustainability agenda.
Sources:
a. Energizing Workplace Performance (Dr Harold S Resnick)
b. Patrick Leach (2006), Why Can't You Just Give Me the Number? Probabilistic Publishing.
c. Oracle White Paper (2008), Management Excellence: How Tomorrow's Leaders Get Ahead.
d. Risk Management - Protect and Maximize Shareholder Value, Oracle White Paper (2009).
Written by: C Muchaonyerwa
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