Magazine article Risk Management

Gauging Success with Key Performance Indicators. (Enterprising Solutions)

Magazine article Risk Management

Gauging Success with Key Performance Indicators. (Enterprising Solutions)

Article excerpt

Critical to a successful enterprise risk management program is a corporate leader who can determine if it is actually working. Simply identifying risks and allocating the resources to manage them is not enough.

One way to ascertain success is by using key performance indicators (KPIs), also known as key risk indicators. These establish a touchstone that the risk manager and the chief executive officer can use to measure and monitor the effectiveness of a program across a range of risks.

Defining and Monitoring Risk

The first step is defining the risks to be measured and monitored. Although most companies have identified well-understood risk areas such as hedging, commodities and foreign exchange risk, they need to focus more on measuring and monitoring nontraditional risks. The latter task is often assigned to chief risk officers (CROs). For example, an energy company may have its CRO monitor the environmental risks inherent in such areas as recycling, emissions and industrial accidents.

Measuring Risk

Once the proper risks have been defined, companies need to ask themselves two questions: What is an appropriate measurement for these risks? Do we have the ability to provide this measurement?

Some risks, such as gains and losses on foreign currency exchange, are easy to quantify. But what if the organization is seeking to measure the right type of human capital? In that case, monetary yardsticks may not be appropriate. Instead, proxy indicators such as training and turnover rate are needed to form a composite picture of the company's effectiveness in the area of human assets.

From a practical perspective, companies need to choose measurements that will inform them if the risk management activity dovetails with corporate goals. For example, if an organizational goal is to gain market share, and the key risk related to that area is the loss of customers, measurement indicators should address factors including customer gain or loss and credit risk taken to build or retain the client list. KPIs assigned to this goal are client acquisition, increased market penetration and expansion into new markets.

Another important criterion is choosing a measurement that captures the right time frame, of which there are three types: lagging, concurrent and leading. …

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