After the credit crisis of 2008, the business world changed dramatically. Senior leadership in most organizations faced more risk than ever and needed an effective way to manage it. In Risk-Based Performance Management, Andrew Smart and James Creelman have created a framework that helps senior management understand, manage, and control the risks facing their organizations while still gaining a competitive advantage. This guide gives executive teams the specific framework needed to align their risk-taking to strategy, enabling them to achieve success while still operating within their established risk appetites. The risk-based performance management (RBPM) approach and methodology serve as a modern and effective alternative to the past risk management strategies that proved to be less than ideal.
RBPM encompasses the following:
- Appetite: Organizations that deploy the RBPM approach develop a deep understanding and appreciation of the risk associated with the strategic choices that they decide to take. They also are able to continue operating within their risk appetites while working toward their strategic goals.
- Indicators: RBPM is designed to work with key performance indicators (KPIs), key risk indicators (KRIs), and key control indicators (KCIs). Indicators can be deployed as effective decision-support tools through the RBPM framework.
- Performance management: Objectives and their KPIs are continually monitored, root causes of underperformance are identified, and necessary adjustments are made.
- Risk management: RBPM describes this as understanding and exploiting opportunities and threats.
- Strategy and risk alignment: Through appetite, an organization can align risk-taking with strategy.
- Governance, culture, and communication: If an organization fails in these “soft” disciplines, it will disregard risk appetite and cause the risk management strategy to fail.
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