More than three-quarters of executives feel that pressure from above forces them to accept overly ambitious objectives. So says the Economist Intelligence Unit survey summarised in "Integrating risk and performance: Collaborating for better decisions and greater buy-in," sponsored by Oracle. The main problem, suggests the study, is that most organisations lack the processes to identify properly the most risky aspects of business projections.
“People at the top of the company set objectives, but they seldom see all the risks that may jeopardise achievement of the goals,” says Economist Intelligence Unit senior editor Dan Armstrong, who directed the study. “It is difficult to create realistic performance goals without incorporating knowledge from those working in the ranks—those closest to customers and suppliers.”
However, half of the executives polled fear that if more people are involved in assessing risks, it will become too complex to set business targets.
Other findings of the survey include:
- Technology isn't everything. When asked the most important prerequisite to successfully integrating risk and performance, “the right technology” comes in last with only 9% of respondents citing it. “The right processes” ranks first with 38%, followed by “involvement by senior executives” (34%) and “involvement by line managers” (18%).
- Forewarned is forearmed. Surprisingly, only a handful of survey respondents (15%) see improved accuracy of projections as the main benefit of integrating risk and performance. Instead, the biggest benefit – cited by 48% – is a better understanding of the uncertainties that the business faces.
- More risk, less reward? Among the respondents who say that pressure from above forces them to accept overly optimistic performance targets, 82% say that senior executives fail to consider risk when setting objectives, and 73% say that in their firms the balance between risk and reward is tilted too far towards reward.
- Over-optimism breeds cynicism. Managers who accept performance targets that they do not believe in may be cynical about other aspects of their jobs as well. For instance, two participants suggest that the most important lesson that they learned from the downturn was to have a scapegoat at the ready.
- The ability to integrate risk and performance is beyond many firms. Approximately one-third of the executives feel that the business case for integrating risk and performance would be difficult to make at their organisations. These respondents say that there is little perceived need for integration and that the benefits would be difficult to quantify. “Risk is still a silo at our firm,” says one respondent.
The research is based on a survey conducted by the Economist Intelligence Unit in December 2009 of 177 executives worldwide to discover how they integrate risk and performance management into their planning processes. Of the respondents to the survey, 48% were senior executives (board-level or C-level) and 52% were directors, business unit heads and other managers, most frequently from the strategic planning, finance, operations or marketing and sales functions. The key industries were financial services, technology, manufacturing and professional services. Worldwide, 36% of respondents were based in North America, 28% in the Asia-Pacific region, and 28% from Europe. Almost half (49%) worked at organisations with global assets of more than US$500m.