DMB Risk Solutions, LLC

Risk Management Performance Through Leading Indicators

Introduction

When discussing risk performance within an organization, safety professionals or risk managers, in many cases, will use one number such as an incidence rate to measure the effectiveness of their safety program.   While considered a good overall measurement tool in the risk management field for many years, an incidence rate is considered a downstream measurement.  While these types of indicators can confirm the existence of a trend or condition, they are not the most effective means of prediction.

Leading Indicators

A leading indicator is an indicator whose value changes  prior to change  in the large system of which it is a component of.  Trailing indicators are an indicator or value that changes after the underlying conditions it measures have begun to exhibit a trend. 

Many proactive organizations have begun to focus on the quality of their risk management program, their culture, their people, and their processes (upstream areas).  By focusing on one or more leading indicators, these organizations are trying to impact downstream results such as claim frequency and severity.

Using more than one indicator or metric that measures both leading and trailing indicators related to risk management and correlating these indicators together, will provide an organization with a better understanding of their management program and overall performance. 

For example, when measuring productivity within a manufacturing facility, does the management team only measure the number or widgets produced (a trailing indicator), or do they also measure how many widgets were returned due to poor quality (return rate), how much material was wasted or scraped in the process (costs), how long it takes to make a widget (production rates), or many other indicator that can measure the effectiveness of the production process?  Why does the management team measure so many things at a high frequency (at least weekly if not daily)?  Because they use this information to make informed decisions. 

Balanced ScoreCard Approach

DMB Risk Solutions, LLC believes that this same approach should be applied to an organization’s risk management performance.  This same manufacturing facility could develop a “balanced scorecard” that measures not only incidence rate, but the number of lost workdays, number of safety committee meetings conducted, number of training meetings conducted including the comprehension level of the safety topics reviewed, the promptness of reporting (report lag), as well as the thoroughness of the accident investigation process after an injury or incident occurs. 

This type of data can be collected weekly or at the very least, monthly, allowing the management team to monitor the overall risk management process (similar to the production process) and make more informed decisions going forward.

In general, the two dimensions included in this type of approach is Risk Management Quality and Performance (as measured by total incurred, overall frequency or indemnity frequency per unit of exposure such as man-hours, payroll, revenue or units processed). 

Analysis is one of the key stages within our consulting model and without it, recommended solutions, management action plans or subsequent initiatives could be misguided. The goal of the analysis stage is to listen carefully to our clients in an effort to identify those key “management levers” that can be identified and then “pulled” to effect positive organizational-wide change.  

These “levers” become our guide to measure risk management quality (leading indicators) and the progress of our recommended risk improvement initiatives (trailing indicators). 

Our analysis will include, but is not limited to, an analysis of the organizational structure, key operations, current risk management strategies/ programs and loss causes trends.   The conclusions drawn as a result of the analysis stage are used to develop management action plans and set priorities which are vital when charting a course for a risk improvement process.

Conclusions

A variety of different metrics are emerging in the safety field, with many organizations using a balanced scorecard approach to measure both leading and trailing indicators, thus allowing safety to be a contributor to an organizations profitability and productivity.