One of the major trends in risk management is towards Integrated Risk Management (IRM). This is an opportunity to improve overall decision making and streamline reporting and business processes. I have recently been exploring the best practices for approaching risk in a more strategic manner and the integration of risk management and overall performance management systems. Specifically, I wanted to see how organizations could apply a balanced scorecard approach, which was proposed by Kaplan and Norton in the book The Balanced Scorecard. I found an excellent article on the subject by Mark Beasley et al entitled “Working Hand in Hand: Balanced Scorecards and Enterprise Risk Management Report”. Here is the link. The article outlines how to use the balanced scorecard approach to integrate risk in strategic planning. “A balanced scorecard system that is already implemented may provide a unique platform for an enterprise to leverage an existing infrastructure to reap the benefits of ERM.” The article goes on to outline how to use the balanced scorecard structure, consisting typically of 4 perspectives, to integrate ERM with strategy.
I would like to highlight several other contributions that the Balanced Scorecard approach could make in terms of strategic/integrated risk management. Firstly, Kaplan and Norton make the case that “the chain of cause and effect should pervade all four perspectives of a Balanced Scorecard”. This is of course one of the strengths of ERM. ERM requires a thorough analysis of causal relationships in developing appropriate measures, and risk mitigation strategies. Secondly, the approach also requires a balance between outcome measures (lag indicators) and performance measures (lead indicators), an issue that is highlighted in some of the ERM literature. Finally, Kaplan and Norton thoroughly discuss strategic alignment and also address the barriers to implementation. In future posts, we’ll be looking at these issues in more detail