Frank Buytendijk Blog

So we need to have better metrics in place and clean up our management processes in order to fix the crisis that, as I argued, was caused by performance management.

But performance management alone is not enough. In fact, treating performance management as a single discipline is dangerous. Rewarding bankers with huge bonuses without weighing in the risks, was actually part of causing the crisis, according to many commentators.

Risk management is proactive performance management. Why wait until performance indicators show business is not going well? Performance management is proactive risk management: the best defense is a good offense.
There are different types of risk: financial risk, operational risk, reputation risk, and strategic risk. Interestingly enough, this is very close to the perspectives of the balanced scorecard. Financial risk and financial performance are related; operational risk matches the process perspective; reputation risk is related to the customer perspective; and strategic risk can be linked to the growth and learning perspective.
Most performance management methodologies are “closed systems.” They either ignore risk management as a related discipline or try to fit it into one area of performance management. Another way to look at risk management is to combine key performance indicators (KPIs) with the results of a risk management exercise, spanning all areas of performance. In this way every performance indicator has a counterpart, or a key risk indicator (KRI).

The exercise of establishing both performance and risk indicators leads to insightful discussions. Do high rewards always have high risks? Do low risk initiatives contribute enough to the objectives? Are there options that are low risk and high reward?
The structure of strategy maps, linking performance indicators with single lines displaying what-leads-to-what, tend not to recognize these dilemmas between risk and reward. They help us “optimize objectives,” but easily lead to new problems in other areas. For instance, cost cutting, leads to use of inferior materials. Inferior material leads to a heavier burden on the environment and customer complaints of quality problems. Or, think of laying-off people, which negatively affects the knowledge base of the organization and the motivation of the people still left. It is good business to manage these risks when putting together performance management improvements.

Source: Buytendijk, F.A., Performance Leadership, McGraw-Hill, 2008