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The Decision Factor offers insightful comments and observations on analytics—from views on new technology approaches and market dynamics to the latest industry trends driving demand for faster, smarter information analysis. This blog contains personal views, thoughts, and opinions from SAP employees, mentors, and friends working in the area of analytics. It’s not endorsed by SAP nor does it constitute an official communication of SAP.

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Myths in Risk Management — Exposing the Flaws of Risk Heat Maps

Recently, I ran a round table discussion on the topic of enterprise risk management (ERM). The participants were all experienced risk managers in the private and public sectors. During a break, I overheard one participant sharing her experience in presenting a heat map to her board of directors as part of her ERM report. In her mind, the presentation was a disaster, and she decided to never again include a risk heat map as part of her presentation.

So what went wrong? Heat maps, like the one below, have been a staple of the risk management profession for years. For many, they’re the primary vehicle for reporting on risk. I, myself, have frequently used them in my practice as a risk management professional. Virtually all risk management software I’m familiar with has the ability to plot heat maps, and many of the standard risk management frameworks illustrate various forms of heat maps as reporting tools.

Frequently Used—But Are They Useful?

My disenchantment with heat maps began when I was presented with one while serving as a board member. Charged with the responsibility for organization’s risk oversight, I was forced to ask myself the question “what does this tell me and what should we do about it?”

The simple answer was nothing, and nothing. Distributing a set of risks into a heat map provides little, if any, useful information to management.

Imagine a CFO presenting a heat map that showed the magnitude and frequency of financial statement account balances. I’m sure the board would react the same way to that heat map as the board did to the risk manager in my workshop.

Information about the level, category, and residual risk status of individual risks and their impact on business performance is useful and essential. But providing that information isn’t what heat maps do. Risks in a heat map usually appear without a context, and they provide little insight into any context when one does appear.

The flaw with heat maps is that risk management isn’t really about risk—it’s about how to mitigate risk and create and preserve value. Heat maps don’t provide insight or perspective to those charged with overseeing risk management and delivering value.

What the risk management profession really needs is some solid research into how risks and their impact on value should be reported. Heat maps aren’t the answer.

Please share your thoughts with me. What’ve your experiences been like when using risk heat maps for reporting? Have they been positive or negative? What reporting formats or frameworks do you use for your ERM projects?