Risk Management: The Balanced Scorecard's Missing Piece

Last Updated Mar 16, 2010 1:46 PM EDT

Introduced by Harvard Business School professor Robert Kaplan and colleague David Norton, the Balanced Scorecard has remained an enduring tool used by thousands of organizations to align business activities with strategy.

But it was lacking a crucial piece, a shortcoming driven home by the economic crisis, says Kaplan. Now the Balanced Scorecard might undergo some changes or additions, Kaplan tells SearchCIO.com:

"If I had to say there was one thing missing that has been revealed in the last few years, it's that there's nothing about risk assessment and risk management. My current thinking on that is that I think companies need a parallel scorecard to their strategy scorecard -- a risk scorecard."
The risk scorecard, he continues, would prompt thinking about things that could go wrong, hurdles that could be raised, and ways the organization can get early warning signals to suggest corrective action.
"[Risk management] turned out to be an extremely important function that was not done well by many of the [financial services] companies we talked about earlier. Risk management was siloed and considered more of a compliance issue and not a strategic function. Now we see that identification, mitigation and management of risk has to be on an equal level with the strategic process."
Risk management is a hot-button topic all over the economic and political landscape. Retiring Harvard Business School Dean Jay Light has discussed at length the need for business management schools to give students the skills to identify, evaluate and manage risk.

In a recent letter to Berkshire Hathaway shareholders, Warren Buffett said business leaders must not only be better risk managers, but be held accountable:

"A board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he's incapable of handling that job, he should look for other employment. If he fails at it -- with the government thereupon required to step in with funds or guarantees -- the financial consequences for him and his board should be severe."
Are you giving a fresh look at risk in your own organization?

More Reading
Strategy Execution and the Balanced Scorecard (HBS Working Knowledge)

  • 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.