Integrating Performance and Risk Management

Integrating Performance and Risk Management

POWERFUL INSIGHTS

At the present time, most companies are restructuring to address new realities in the operating environment. Whether a company intends to grow rapidly, focus on establishing sustainable competitive advantage or both, as it emerges from the current recession it should integrate performance and risk management to improve the probability of achieving its strategic objectives.

Issue

As suggested by research, companies on average deliver only 63 percent of the financial performance their strategies promise (Harvard Business Review: “Turning Great Strategy into Great Performance”). The scale, pace and impact of globalization, new competitive threats, recessionary pressures, and toughening regulatory demands are unprecedented and are making the simultaneous execution of strategy and management of risk extremely challenging.

Challenges and Opportunities

In those organizations where risk is a mere afterthought to strategy-setting and risk management is an appendage to performance management, the results can be disastrous. To avoid misinformed, uncoordinated and ineffective strategic objective setting and execution in today’s complex and ever-changing business environment, companies must evaluate their strategic options as well as the inherent risks in pursuing those options. In doing so, they should consider alternative views of future trends in order to position themselves as more flexible and resilient organizations. The objective is a robust and realistic strategy that defines the enterprise’s differentiating capabilities and the roadmap for the infrastructure needed to deliver that strategy.

A realistic strategy must also be supported by a balanced family of measures and targets. A number of studies show that companies using a comprehensive set of measures to track execution of strategy perform in the top third of their peer group as industry leaders in delivering financial results and in adapting to cultural or operational change.

Also of note, the ratings process of S&P is emphasizing enterprise risk management for all industries, including non-financial companies. S&P is asking whether discussions about risk management have taken place at the board level or among senior executives when making strategic decisions.

Our Point of View

We believe that balancing appropriate protection measures with aggressive value creation strategies can make a difference over the longer term from both an enterprise value and reputation perspective. It has never been more important to fully align and integrate risk into strategy-setting and risk management with performance management. A company cannot manage risk apart from how it manages the business – risk management must be an integrated activity.

PROVEN DELIVERY 

How We Help Companies Succeed

Our Performance/Risk Integration Management Model (PRIM2) framework is focused on creating a differentiating capability that establishes and maintains alignment of strategy, risk management capabilities and performance management processes in a changing operating environment by:

  • Articulating the strategic objectives and their interrelationship with those activities most likely to influence the desired outcome
  • Proactively identifying, sourcing and mitigating the risks inherent in the strategy
  • Communicating and deploying strategy effectively in a consistent manner across the enterprise
  • Creating real-time transparency into the enterprise’s operations to measure current performance, predict future trends and evaluate the assumptions underlying the strategy
  • Ensuring the seamless integration of strategic plans, risk management and performance management in the execution of the strategy

Example

Protiviti helped an international company with more than $50 billion in annual revenues integrate its risk management with strategy-setting and performance management.

Since beginning implementation efforts two years ago, the company has realized the following benefits:

  • Improved allocation of resources – Once the strategic objectives had been established, the high-priority risks that could threaten the realization of these goals were considered and integrated into the plans. Through this process, executive management organized risk mitigation efforts to address several risks that previously were not considered high priority. The clearer communications of organization priorities facilitated improved business plans and a reduction in extraneous expenditures.
  • Integration of strategic planning and risk management process – One of the key concepts outlined in the organization’s implementation roadmap was the integration of risk with the existing strategy-setting process. The executive team now conducts proactive discussions with the board regarding risks and opportunities the company is, and is not, willing to take on in its value creation pursuits. These conversations resulted in the board’s review and approval of a conservative debt structure that has buffered the company against the recent credit crisis and economic downturn.
  • Reduction in operating surprises through monitoring of critical risks – A specific supply chain risk was identified as a significant threat to their strategic objective, resulting in tasking a cross-functional team of operational and risk management resources to develop a robust and scaleable supplier due diligence process that provides risk-based information for decision-making. This allows the company to proactively manage the risks of supply chain interruption in the current operating environment.

Ready to work with us?

Jay Thompson
Jay Thompson
Managing Director
+1.713.314.4923
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