Gauging Your Risk Exposure Using the Balanced Scorecard

There are three steps companies can take to begin to get a clearer sense of their risk exposure in today's uncertain environment, according to Harvard Business School professor Robert Kaplan, who created the concept of the Business Scorecard with co-author David Norton.

Writing on Harvard Business Publishing, Kaplan says that concepts detailed in a BSC, especially those dealing with keeping the company aligned on strategy, could have warned financial institutions and automakers that trouble was on the horizon. Kaplan recommends BSC users follow these three steps to begin assessing the riskiness of their own portfolios.

"Start by attempting to identify the macro-economic variables that have the greatest potential to put your strategy at risk
"Estimate the impact on profitability from potential changes in these macro-economic variables
"Aggregate the risk exposure onto the company's BSC to stimulate discussion at monthly strategy review meetings about the risks of the current strategy

The best thing company leaders can do beyond these measurement challenges, Kaplan says, is to "reduce the exuberance of highly-incented managers to increase short-term profits by taking on more risky asset positions, especially highly-leveraged bets."

Sean Silverthorne

Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.

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