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RIMS Risk Maturity Model: Performance Management

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In the study measuring effects of enterprise risk management (ERM) maturity—as  defined by the RIMS Risk Maturity Model (RMM) assessment—no attribute had a more meaningful impact on bottom line corporate value than Performance Management. The correlation is not an accident. While many organizations say they have an effective handle on risk, their ability to execute the policies and procedures they’ve put into place are severely lacking.

The sixth RMM attribute of ERM Maturity, Performance Management, measures the ability for an organization to execute vision and strategy through the effective use of a balanced scorecard.

Balanced Scorecard

The root of the balanced scorecard concept lies in the desire to turn complex but passive strategic plans into marching orders and commitment that can be executed on a daily basis. The methods of accomplishing this result are familiar to risk managers: developing standardized criteria, prioritizing activities, and monitoring results.

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To execute the Balanced Scorecard concept, corporations typically have a whole host of measures for monitoring control activity effectiveness, but what is consistently lacking is a means to measure the effectiveness of how the control activity is addressing performance goals. Risk bridges this gap.

The Role of Risk

Every business faces the challenge of cutting costs and making changes. After all, all activities are critically important to someone. So how do you assure that the greater good of the organization gets prioritized?

Linking risk to performance for a risk adjusted decision addresses this challenge.

Examples of performance management in the absence of a risk-based Balanced Scorecard are widespread. BP knew back in 2002 that a lack of pipeline maintenance could result in “catastrophe,” but management instead prioritized the short term operational budget in the interests of cutting maintenance costs. More recently, the U.S. government has dealt with criminal investigations into the Veterans Health Administration’s inability to deliver care to U.S. veterans, due to “significant and chronic system failures.” In the case of the VA scandal, monitoring metrics were improperly controlled and focused on the wrong measures of success.

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The result was falsified reports created in the interest of demonstrating compliance with policy, rather than execution of strategy.

A Seat at the Table

Involving risk in strategic decision making is the essence of performance management. In every failure we’ve documented, the risks were known, but rarely given a seat at the table. Organizations with mature enterprise risk management (ERM) programs have empowered their risk managers to take action and use ERM tools to support and provide transparency to the organization’s strategic plan.

To learn how Enterprise Risk Management adds transparency and discipline to an organizations strategic planning and performance management process, watch our webinar, “What is Strategic ERM.”

The Many Paths to a Career in Risk

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Over the years, I’ve had no shortage of people ask me how they can get my job as a senior risk leader. They see the possibilities and get a strong sense that risk management just might be a pretty interesting career track. Oftentimes these folks are sitting in some insurance related sub-function within the broader industry, anything from claims to loss control to underwriting and brokerage. Interestingly, many people who have had this experience (who are essentially developing specialists in these sub-functions) have frequently found that skill transferability from these specialized areas, to their “profession,” was often fraught with hurdles.

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I have seen a parallel mind-set throughout much of my career in various industries in which I sought alternate employment. Most commonly it was in the manufacturing or health care sectors that insisted that any leader in their ranks, most especially a risk manager, needed to come from within their industry. They were the true believers and were typically inflexible about this minimum requirement.  They believed their industries were just too specialized and unique for a risk manager from another industry to succeed. They would argue that they didn’t want to invest in allowing the development of the full skill-sets or that their world could or should be learned by those coming from other industries, especially for a mid- to senior-level manager.

Needless to say, I disagreed vehemently with this view and with others in the insurance industry holding these inflexible positions, often to their detriment. Happily, in the last five years, some more progressive leaders in certain industries like health care are beginning to revise these positions in favor of seeing the value in having the new eyes, ears and perspectives that can only come from those experienced in industries other than their own. A good trend indeed.

As a practical matter, I have to mention that my most recent career move into a more strategic, brand enhancing role with a third party administrator has flummoxed a few peers and friends. These folks saw me as moving in the wrong direction, when in fact I was taking a substantive leap forward into long term strategic contributions that have, in fact, been the perfect segue to where I’d wanted to move at this point in my risk career. Coincidentally, my forte since 2001 and the future of the discipline, enterprise risk management, calls for a very specific move in a strategic direction that aligns with the long term interests of enterprises and their commitment to mission accomplishment.

So is there a preferred best strategy to preparing for a career in risk management? The truth is that while many of us developed the skills and experience that have been most valuable by rotating through the various insurance industry disciplines, there are now myriad ways to find your path into risk management and make it a career. From finance to legal to audit and especially spending time in operations, all these experiences pave part of the way toward success. They are a portion of what risk leaders need most to succeed in this era of a broader more diverse practice of risk management, call it enterprise risk management, strategic risk management, international risk management or just plain risk management, as I prefer.

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In fact, a successful risk manager is one who needs a broad exposure to most core functions common to almost all entities of any complexity. At the end of the day, it’s hard to go wrong in preparing for a risk career, no matter where you spend time getting knowledge about the many sources of exposure that must be “risk managed.”

RIMS Risk Maturity Model: Root Cause Discipline

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After the last article, which discussed the first two attributes of the RIMS Risk Maturity Model (RMM), ERM Based Approach and ERM Process Management; our focus here is on the third attribute, Root Cause Discipline.

Root Cause Approach

In Washington, D.C., officials tried, but were nearly helpless in stopping the deterioration of the Lincoln Memorial. Rather than address the damage with costly repairs, they instead traced the concern back to a root cause. Deterioration was caused by the high powered hoses needed to clean the building—which were necessary because the building was an attractive home for birds.

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Birds were drawn to a very dense population of insects, which were attracted to the bright lights of the memorial.

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So how do you stop the Lincoln Memorial from deteriorating? You dim the lights.

The root cause methodology provides clarity by identifying and evaluating the origin of the risk rather than the symptoms. Unveiling the triggers behind high level risk and loss events point to the foundation of where an organization is vulnerable.
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Uncovering, identifying and linking risk back to the root causes from which they stem allows organizations to gather meaningful feedback, and move forward with accurate, targeted mitigation plans.

To illustrate an example in a business environment, consider the risk of inadequate training. Within an organization, there may be multiple departments experiencing risk regarding their training policies, procedures and documentation, yet each area is likely to be recording and recognizing this risk in its own way. The result is an extensive amount of information recorded in spreadsheets that requires time and energy to sort and sift through. By identifying the root cause, a risk manager can expose the underlying commonality between departments and their concerns, allowing more effective identification and mitigation of systemic risk.

Applying root cause to your current approach

To integrate this type of approach to an enterprise risk management (ERM) program, you must first identify the root cause foundation of your organization. The RMM is built on five root cause categories which cover all enterprise risks:

  • External – risk caused by third-party, outside entities or people that cannot be controlled by the organization
  • People – risks involving employees, executives, board members and all those who work for the organization
  • Process – risks that stem from the organizations business operations including transactions, policies and procedures
  • Relationships – risks caused by the organization’s connections and interactions with customers, vendors, stakeholders, regulators  or third parties
  • Systems – risks due to theft, piracy, failure, breakdown, or other disruption in technology, plant, equipment, facility, data or information assets

Understanding which core area of the organization a risk stems from provides the ability to effectively understand and mitigate the risk. For instance, theft from an external third party is very different than theft from an internal employee, and will thus have a very different response and mitigation strategy.

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One strategy would require an investment in IT or infrastructure, while the latter would need an HR policy change or new ethics program.

Looking for an example of root cause? Download our complimentary Risk Assessment Template.

RIMS Risk Maturity Model: ERM Approach and Process Management

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Last week, we introduced the latest findings from studies of the RIMS Risk Maturity Model. In an effort to explain the model and results of the study more fully, it’s beneficial to break the RMM into each of its attributes. Here we’ll examine the first two attributes of an effective ERM program, ERM Based Approach and ERM Process Management.

ERM Based Approach

The emphasis of this attribute is to move organizations from an old, obsolete style of governance to a more holistic, integrated approach. Old-style governance is focused on regulatory compliance and silo specific risk management. The problem with this approach is it leaves the organization exposed to risk that isn’t governed by regulatory mandates, as well as cross functional risk that may be systemic to the company.

We see examples of failures in this approach all the time. West Virginia’s water contamination crisis, for example, was caused by a series of risks with inadequate controls—the chemical tank was not adequately surveyed, the employees were not directed to immediately report the leak, even the water filtration organization wrongly estimated that it could filter the chemicals out. None of these entities were at fault from a regulatory perspective, but they were still on the hook for millions in remediation (the chemical plant filed for Chapter 11 bankruptcy in January).

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An ERM approach moves organizations past regulatory concerns, which are only a subset of the overall risk universe. This requires a number of activities that the Risk Maturity Model identifies as drivers of ERM Maturity—tone from the top, assimilation into front line activities, risk ownership—which when combined result in a more risk-aware enterprise.

RIMS Risk Maturity Model: ERM Process Management

With a new governance mindset in place, organizations can move to applying a risk-based process framework of Identify, Assess, Evaluate, Mitigate and Monitor within each business process.

The RMM assesses the degree to which these activities are pervasive inside business processes. Many executives misinterpret these processes as unique to ERM, when in fact the steps are iterative, constantly reoccurring within organizations but without any defined process or standardizations.

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The key to ERM process management is to create a common language and structure so areas can better transfer knowledge to each other where beneficial.  This is done by integrating these framework steps into the business in a way that provides accountability, repeatability, and adequate reporting. A great example is the Vendor Management Governance function. Vendor management is frequently tasked with identifying critical vendors, assessing their risk (such as “due diligence”) and then managing through mitigation (contracts, insurance certificates) and monitoring (shipping times, order completion).

The problem is that vendor management, like other functions, is operating independently with too little information exchanged between vendor management and other governance functions.

Why is this important?

Strategic imperatives are by nature cross-functional, but are rarely linked to processes and activities on the front line. When not linked, risks to corporate objectives are either not addressed or treated differently by the business processes. This alignment is a critical driver of ERM maturity. Organizations that can effectively communicate goals—not just at the corporate level, but down to the front lines—are better equipped to achieve results and elevate concerns.

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Interested in seeing how this approach differs from traditional governance? Watch our short video on Strategic Risk Management.