Built on widely accepted methodologies and frameworks, such as the Balanced Scorecard and COSO, risk-based performance management is an answer to the current challenges facing companies today related to risks and performance. But what is risk-based performance management?
Risk-based performance management is a strategic execution methodology designed to enable companies to sustain the execution of their strategy by integrating business strategy with performance management and risk management. A central element in this methodology is the understanding of the term “risk appetite” and how the company can operate according to its “risk appetite.”
To simplify this understanding, the website riskbasedperformance.com, which compiles global studies related to the topic, offers a diagram, which can be seen below:
This diagram describes a process that ranges from capturing core business elements that are fundamental to a segment or organization to delivering value to shareholders. Between these two points are listed seven fundamental disciplines:
- Strategy definition
- Performance management
- Risk management
- Alignment between risks and strategy
- Governance
- Culture
- Communication
In the diagram, the element “appetite” also appears. It is not considered a discipline, but it is an important element. It serves as a glue that holds the disciplines together, as it influences, and is influenced, by each of them.
As we can see below, we can divide the process into two large circles. The one on the left focuses on the definition and execution of the strategy, while the one on the right focuses on maintaining the results obtained and on incorporating this practice into the culture of the organization.
Gary Cokins, in his article “ The perils and promises of integrated Enterprise Risk and Performance Management“, comments that both risk management and performance management share two common premises:
- The less uncertainty about the future, the better
- If you can’t measure it, you can’t manage it
With these premises, this methodology is developed, taking care to identify the risks applied in the strategic planning, in order to minimize the uncertainties and, at the same time, define and monitor performance indicators to maximize control, aimed at having all the information possible for correct decision making.
Would you like to know more about this methodology? Read the full article by Gary Cokins. You can download it using the button below.
