Friday, January 20, 2012

How to link risks, KPIs and objectives...

Before measuring performance, it is necessary to identify and develop KPIs that accurately reflect desired performance. Otherwise, monitoring and assessing KPIs can be more of a hindrance than a help in achieving goals. Indeed, the HB80  Benchmarking Handbook suggests a number of reasons why organizations might need to monitor and assess their performance, including to:

  • Set performance goals 
  • Develop measures of productivity
  • Improve competitive advantage
  • Improve products, processes, service, or all of these 
  • Confirm performance against strategic plans
  • Identify new business opportunities

Some equally important objectives might include to:

Ideally, the senior management team should select organizational KPIs as an aid to shaping and encouraging behaviors that support achievement of organizational objectives. One of the key challenges with performance measures, however, is to show a causal link between initiatives and performance. One way to think of KPIs is as follows:

  • Organizational objective: What results do we want to achieve?
  • Risk: What could adversely or positively impact the achievement of this objective?
  • Risk treatment: What do we propose to do to manage this risk?
  • Critical success factors (CSF): What has to occur for the risk treatment to be successful?
  • Key result area (KRA): Which areas will have the most significant impact on our risk treatment turning into organizational outcomes that we desire?
  • Key performance indicator (KPI): What data, statistics, or indicators will tell us if we are achieving or about to achieve our objective?

In practice, this might look something like this:

  • Corporate Objective #2: Maintain shareholder returns
  • Risk: Failure to protect sales margins because of an increase in raw materials prices as a result of global financial markets adversely affecting currency exchange rates
  • Treatment: Provide financial-analysis training to sales team regarding interpretation of the effect of currency fluctuations on cost of sales
  • CSF #5: Gross sales margins sustained
  • KRA #5: Profitability and margins
  • KPI #2: New contracts maintain 25 percent or greater gross margin

Different business units will inevitably have different KPIs that reflect their focus; however, KPIs at all levels should support organizational KPIs and objectives. Equally, we cannot overstate the interconnectedness of KPIs, KRAs, risks, and objectives, but applying the Pareto principle (the 80:20 rule) should allow us to track only the more significant indicators.

Figure 1: Example of linking Risks, KPIs and Objectives

As you can see from Figure 1, even the aforementioned examples are incredibly simplistic. Life is much more complex than it seems, so although we can draw a causal link between a risk, treatment, CSFs, KRAs, KPIs, and organizational performance, the elements that affect this organizational objective can be infinitely complex and interactive.


If you'd like to find out more about measuring the performance of your risk management, you might find our book on this topic helpful.

'How to Performance Benchmark Your Risk Management: A practical guide to help you tell if your risk management is effective' by Julian Talbot and Miles Jakeman PhD.

No comments:

Post a Comment