Page 133 - Performance Leadership

122 • Part II Operational and Analytical Dimensions

relevant and timely information, a lack of analysis or interpretation of strate-
gic information, or bad strategy implementation (such as M&A integration or
turning R&D into products). Strategic risk management is the link to perform-
ance management.

An organization’s risk management is usually highly institutional-
ized and regulated. For instance, you cannot just combine a general
risk management framework with a performance management frame-
work, and create a single integrated framework. Risk management
implementations are usually a very important part of an organization’s
compliance. Management can’t just “fiddle” with the framework.
The point of integration between performance management and risk
management is strategic risk. The less performance management the
organization has, the higher the organization’s strategic risk.

Case Study 1: IT Hardware Supplier

Consider the operational excellence strategy of a Web retailer of IT
hardware, such as PCs, printers, and other accessories. Margins are very
small in this business and therefore the company tries to create a con-
tinuous and predictable stream of orders from its customers, largely
medium-sized companies. The way to do that in a price-sensitive busi-
ness is to create customer preference by shipping overnight. The value
proposition of the company is perfectly simple, recognizable, and meas-
urable: “order today, deliver tomorrow.” Because holding inventory is
expensive, the company integrates its order channel (Web site and call
center) directly to the systems of its suppliers. A combination of key
performance indicators and key risk indicators in the context of a strat-
egy map could look like Figure 8.1.
In order to realize world-class speed of delivery, the company meas-
ures the percentage of deliveries completed within 24 hours. It is cur-
rently installing a real-time monitoring system to improve that number.
The risk in operating a process at this speed without holding stock is
that the company doesn’t control the complete process. Service level
management is needed to control that risk. The customer pays after
delivery; therefore, the average days-sales-outstanding (DSO) is an
important performance indicator. The choice to allow customers to pay
later also introduces credit risk, which needs to be managed.