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Balanced Scorecard for Objective Setting in ERM

Assistant Professor Dr. Nopadol RomphoDepartment of Operations Management

Faculty of Commerce and Accountancy, Thammasat University

Topics

� ERM

� Balanced Scorecard

� Integration of ERM and Balanced Scorecard

What is happening?

�Many of the failings of companies can be attributed to the acceptance of excessive risks or the poor management of those risks.

�Most companies have not formally considered what their true appetite for risk is, accordingly, they do not have effective processes to ensure they operated within the expectations of key stakeholders.

Source: Karow, J. C. (2006), Risk Appetite and Tolerance , Ernst & Young ERM Symposium, April 24, 2006

Type of Risk

Source: Miyake, D. and Jackson, T. (2009) Integrating the Balanced Scorecard and Enterprise Risk Management, Ascendant Strategy Management Group

Enterprise Risk Management



�A process effected by an entity’s board of directors, management, and other personnel, applied in strategy setting and across enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives

Source: Committee of Sponsoring Organizations of the Tradeway Commission (COSO) (2004) Enterprise Risk Management – Integrated Framework


�A core element of ERM is that risks and strategy are aligned.

�Once strategy choices are made, management identifies risk responses, assigns accountabilities, and monitors implementations in a coordinated and integrated approach to ensure the objectives are met.

Source: Beasley, M., Chen, A., Nunez, K., and Wright, L. (2006) Working Hand in Hand: Balanced Scorecards and Enterprise Risk Management, Strategic Finance, 49-55

Topics

� ERM



� Vision Barrier– Only 5% of the workforce

understands the strategy� Management Barrier

– 85% of executive teams spend less than one hour/month discussing strategy

� Resource Barrier– 60% of organization don’t link

budgets to strategy� People Barrier

– Only 25% of managers have incentive linked to strategy

Why do most companies fail to implement their strategies?

The Balanced Scorecard

50% usage in Fortune 500Harvard Business Review “Hall of Fame”

50,000+ BSC on-line members

Balanced Scorecard by 2002

21 translations

17translations

What Is a Balanced Scorecard?

At the highest level, the Balanced Scorecard is aframework that helps organizations put strategy at the center of the organization by translating strategy into operational objectives that drive both behavior and performance.

Balanced Scorecard Framework

The Balanced Scorecard Links Vision and Strategy to Employees’ Everyday Actions

BALANCED SCORECARDTranslate, Focus and Align

STRATEGIC INITIATIVESWhat are the priorities

MISSIONWhy we exist

VALUESWhat’s important to us

VISIONWhat we want to be

STRATEGYOur game plan

STRATEGIC OUTCOMES

SatisfiedSHAREHOLDERS

Delighted CUSTOMERS

Efficient and EffectivePROCESSES

Motivated & PreparedWORKFORCE

EMPOWERMENT / PERSONAL OBJECTIVESWhat I need to do

TOTAL QUALITY MANAGEMENTWhat we must improve

The Generic Strategy Map

Improve Shareholder Value

Productivity Strategy Revenue Growth Strategy

Improve Cost Structure

Increase Asset Utilization

Enhance Customer Value

Create Value from New Products & Services

Human, Information, and Organizational Capital

Shareholder ValueROCE

� Cost per Unit � Asset Turnover � Customer Profitability

� New Revenue Sources

Price

Financial Perspective: the drivers of shareholder value

Product/Service Attributes

Human Capital Information Capital

Organization Capital

(Processes that Produce and Deliver Products & Services)

(Processes that Enhance Customer Value)

Operations Theme Customer Management Theme

Innovation Theme Regulatory and Society Theme

Customer Value Proposition

Quality

Low Total Cost

Customer Solutions

Product Leader

� Customer Satisfaction� Customer Acquisition � Customer Retention

Time Function Service Relations Brand

Relationship Image

� Market and Account ShareCustomer Perspective: the differentiating value proposition

Internal Perspective: how value is created and sustained

Learning & Growth Perspective: role for intangible assets –people, systems, climate and culture

(Processes that Create New Products and Services)

(Processes that Improve the Environment and Communities)

Topics

� ERM



ERM and Balanced Scorecard share many elements

� Focus on strategy

� Holistic Perspective

� Emphasis on Interrelationships

� Top-Down Emphasis

� Desire for Consistency

� Focus on Accountabilities

� Continuous Nature


Traditional Balanced Scorecard does not address the followings

�Target setting does not typically take risks into account, so ―stretch targets could be set that could drive risky behaviors.

�External risks are often not adequately captured in the definition of measures or objectives

�There is a temptation to treat risk management as yet another objective and lose the benefit of an integrated risk and strategy view


Key Performance Indicator vs. Key Risk Indicators


Financial PerspectiveTo succeed financially, how should we appear to our shareholders?

Goals: Measures:

� To obtain higher profit margins � Profit margin

� To improve cash flows � Net cash generated

� To generate revenue growth � Increase in number of customers and sales per customer

Enterprise Risk Management Components

Risk – Related Goals: Risk – Related Measures:

� To reduce threats due to price competition

� Number of customer defections attributed to price

� To reduce cost overruns � Extents of surcharges paid, holding cost incurred, or overtime charges


Customer PerspectiveTo achieve our vision, how should we appear to our customers?

Goals: Measures:

� To improve product/service quality � Number of customer contact points

� To improve timeliness of product/service delivery

� Length of time from customer order to customer delivery

� To improve customer perception of value

� Customer scores about product/service value



� To reduce customer defections � Number of customer retained

� To monitor threat to product/service reputation

� Extent of negative coverage in business press about product and service quality


Internal Business Processes PerspectiveTo satisfy our stakeholders and customers, where must we excel in our

business processes?

Goals: Measures:

�To reduce waste generated � Pounds of scrap sent for disposal

� To shorten the time from start to finish across the supply chain

� Length of time from purchase of raw material to delivery of product/service to customer

� To achieve unit cost reduction � Unit costs per product/service



� To reduce high probabilities and impact threat to processes

� Number of employees attending risk management training

� To identify specific tolerances for risk for key processes

� Number of process variances that exceed specified acceptable risk tolerance range


Learning and Growth PerspectiveTo achieve our vision, how will we sustain our ability to change and

improve?

Goals: Measures:

� To increase employee “ownership” of the process

� Employee survey scores related to ownership and responsibility for processes

� To improve information flows across stages of the supply chain

� Changes in information reports and frequency of reports



� To increase employee awareness of risks

� Number of employees attending risk management training

� To increase suppliers accountabilities for disruptions in the supply chain

� Provisions in contracts with suppliers addressing risk management accountabilities and penalties


Example of Risk Management Balanced Scorecard

Financial Risk Perspective

Risk Measure

Financial Market WACC

Solvency Debt-to-Equity

Cost of Debt

Tax Expected-to-actual effective tax rate

Customer Risk Perspective

Risk Measure

Portfolio % customer satisfied

Competition # of new entrant

% share lost

Marketing Actual-to-Expected RevenueSource: Calandro, J and Lane, L. (2006) Insights from the Balanced Scorecard An Introduction to the

Enterprise Risk Scorecard, Measuring Business Excellence, 31-40

Example of Risk Management Balanced Scorecard

Internal Process Risk Perspective

Risk Measure

Technological # of security breaches

Human Resource Employee turnover

Process # of unsatisfactory internal audit findings

Organizational # of regulatory complaints

Learning and Growth Risk Perspective

Risk Measure

Learning Productivity of trained employees

% of suggestions implemented

Growth Expected-to-Actual Growth

Expected-to-Actual process improvement benefits

Source: Calandro, J and Lane, L. (2006) Insights from the Balanced Scorecard An Introduction to the Enterprise Risk Scorecard, Measuring Business Excellence, 31-40

Balanced Scorecard and ERM

Balanced Scorecard: Cascading and Feedback

ERM: Information and Communication

Source: Nagumo, T. and Donlon, B. (2006) Integrating the Balanced Scorecard and COSO ERM Framework, Cost Management, 20-30.

Integrate Risk into Your Strategy Map

Source: Karow, J. C. (2006), Risk Appetite and Tolerance�, Ernst & Young ERM Symposium, April 24, 2006

Benefit of Integration

• Risks are events that impact the achievement of your objectives.

• Balanced Scorecard is the driver of your objectives.• There is a natural link between the Balanced Scorecard

and ERM objective setting.

ReferencesBallou, B., Brewer, P., and Heitger, D. (2006) Integrating the Balanced

Scorecard and Enterprise Risk Management, Internal Auditing, 21 (3): 34-38

Beasley, M., Chen, A., Nunez, K., and Wright, L. (2006) Working Hand in Hand: Balanced Scorecards and Enterprise Risk Management, Strategic Finance, 49-55

BRC Resolver Inc. (2011) White Paper: Integrating of Balanced Scorecards with Enterprise Risk Management.

Calandro, J and Lane, L. (2006) Insights from the Balanced Scorecard An Introduction to the Enterprise Risk Scorecard, Measuring Business Excellence, 31-40

ReferencesCommittee of Sponsoring Organizations of the Tradeway Commission

(COSO) (2004) Enterprise Risk Management – Integrated Framework

Karow, J. C. (2006), Risk Appetite and Tolerance, Ernst & Young ERM Symposium, April 24, 2006

Killackey, H. (2009) Integrating Enterprise Risk Management withOrganizational Strategy, The RMA Journal, 91 (8).

Miyake, D. and Jackson, T. (2009) Integrating the Balanced Scorecard and Enterprise Risk Management, Ascendant Strategy Management Group.

Nagumo, T. and Donlon, B. (2006) Integrating the Balanced Scorecard and COSO ERM Framework, Cost Management, 20-30.

ReferencesPaladino, B., Cuy, L., and Frigo, M. (2009) Missed Opportunities in

Performance and Enterprise Risk Management, Journal of Corporate Accounting & Finance, 43-51.

Shenkir, W.G. and Walker, P. L. (2006) Enterprise Risk Management and the Strategy-Risk-Focused Organization, Cost Management, 20 (3): 32-38.

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