I am often asked, “How do you use a balanced scorecard to manage risk?”, or “How to balance scorecards and risk work together?” In this series of articles, I warn of the dangers of simplistic risk indicators. I describe a more holistic approach that looks at specific classes of risk that various types of balanced scorecard might help mitigate and manage. Just as importantly, being clear what risks balanced scorecard do not or should not try to manage. In this series or articles I cover:
- A warning about using KRIs and simplistic approaches to balanced scorecards and risk
- Balanced scorecards and classes of risk
- Balanced scorecards and risk from the external environment
I am not a fan of simply adding Key Risk Indicators (KRIs) in each perspective. I think it is a simplistic approach that does not respect the variety of risks, nor the subtlety of ways in which risks are anticipated, mitigated and managed. For instance, which class of risk are you looking at? Are you looking for predictors of risk or whether a risk has actually occurred? Where is the risk in the cause and effect model? There are lots of questions about risk, that need exploring before you simplistically choose some key risk indicators.
Sure you can do it. however it is a superficial approach that fails to recognise either the variety of classes of risk, or that a proper strategic Balanced Scorecard, properly implemented in in itself a risk mitigation tool.
You cannot have a serious conversation about risk management unless you are looking at a set of various classes of risk. In fact, a strategic balanced scorecard is a way to mitigate some classes of risk, that an operational balanced scorecard would not cover. So, it is important to understand the class of risk you are talking about and how you might want that balanced scorecard to manage the risk, or not.
I think this topic is so important that I devoted a whole chapter of my book, Strategy Mapping for Learning Organisations to the subject of balanced scorecards, the Balanced Scorecard approach, and risk. Here are two overview articles on this topic:
- Balanced Scorecard and risk management.
- Balanced Scorecards do manage risk and which class of risk they manage.
There are specific ways to manage some risks. For instance, using the approach to monitor uncertainties in the wider environment. This is to do with risks to the strategy, rather than, say an operational risk. Here are a series of articles about managing risk in an uncertain environment.
- How to use a balanced scorecard in an uncertain environment (part 1)
- How to use a balanced scorecard in an uncertain environment (part 2)
- What planning horizon for my Balanced Scorecard and my strategy?
We have built a variety of risk management approaches into in our fourth generation Strategic Balanced Scorecard approach. Which ones are appropriate depends on the client.