Business Risk Management questions

Simon’s Levers of Control and Risk Exposure Calculator

Simon’s Levers of Control

Robert Simons (1995) through his Levers of Control Framework describes four ways of exercising

control and simultaneously promoting innovation by management to maintain or alter patterns in

organisational activities and behaviour. These levers are:

 Diagnostic Control Systems

 Interactive Control Systems

 Boundary Systems

 Belief Systems.

The Four Levers of Control

The four levers of control are supposed to complement each other. Diagnostic Controls and Boundary

Systems are constraining, whilst Interactive Controls and Belief Systems should be designed to guide

development and growth. Managers must find a good balance between the four levers to manage the

tensions between profit, growth, risk and control in their organisation. In addition, the hard part is

keeping them up to date so that they continue to be relevant and to reflect the strategic direction of the

business.

Diagnostic Control

Diagnostic control is the standard use of performance measures and is primary focused on feedback

control. Performance is measured against a target and management acts on the variance. Diagnostic

control also means that performance is regularly reviewed in formal meetings such as board,

executive, departmental and team meetings on a regular basis.

Interactive Control

Interactive control is completely different. This is an approach that executives use to create

meaningful and purposeful conversations right across the company and to interact at all levels of the

organisation. Typically, companies take just one issue which they subject to interactive control. One

of the examples used by Simons was Pepsi's focus on market share against Coca-Cola in the US.

Pepsi's objective was to overtake Coca-Cola's market share, so this was the measure used in every

review meeting and every conversation. Senior managers could ask at any level in the organisation,

what was happening about the market share, how that compared to Coca-Cola and why the changes

(good or bad) were happening?

The benefit of using interactive control in this way is that it creates real focus on a single issue. That

doesn't mean other issues are ignored (there are diagnostic controls to look after those) but one issue

is singled out for special attention. It also means the senior executives speak with a single voice,

meaning they can't all have their own pet issue. Further, it is a conduit for feedback and learning,

through the continuous questioning around why performance is or is not improving on this measure.

The four key elements that make control interactive are:

 A recurring theme on the agenda at the highest level of management

 that requires regular attention from middle management, which is

 interpreted and discussed in face to face meetings and conversations, and

 subject to continuous challenge and debate of the data, assumptions and action plans.

Simon’s Levers of Control and Risk Exposure Calculator Boundary Systems

Boundary systems are a statement of what the company is not going to do. This may seem counter

intuitive, but it is a mechanism for focusing the organisation and ensuring people don't spend time

investigating and developing new opportunities that the company is never going to pursue.

One example given was Bill Gates statement of what Microsoft was not going to be. They weren't

going into hardware and computers, they weren't going to go into telephone networks or consulting

and software integration.

There is also the story of IBM and EDS. IBM was developing their world wide consulting offering.

Ross Perot was a top salesman but wanted IBM to create a facilities division. Facilities management

was not a consulting offering in IBMs view of the world and through this boundary condition he was

prevented from pursuing his idea. Ross Perot eventually left IBM to start Electronic Data Services

(EDS), which went from strength to strength.

Boundary Controls are a two edge sword. They do stop people wasting time by constraining the

opportunities they explore, but if they are badly drafted or nor reviewed, they can prevent the creation

of new growth areas for the business.

Consequently, an organisation needs to take time to think through its boundary controls before the

organisation communicates them as this will guide strategy and corresponding actions taking by the

organisation.

Belief Systems

Belief systems are there to communicate the vision, mission and values of the business. In so doing,

they are communicating what the organisation is trying to achieve and how individuals are to behave,

to each other, to customers and suppliers and to society at large.

Belief systems can be very powerful in directing people and giving them purpose. A large number of

companies have their values prominently displayed, but getting these values into everyday

conversations is much harder to do.

Simon’s Levers of Control and Risk Exposure Calculator

Simon’s Risk Exposure Calculator

Simon’s the risk exposure calculator shows the pressure points present in every organisation that can

lead to increased risk, such as the speed of operational expansion and the level of internal

competition. Depending on a company’s circumstances and management style, the amount of pressure

on each point can be low or high.

The risk exposure calculator is not a precise tool, but rather allows executives to determine if a

company’s risk level is in the safety, caution, or danger zone. Once executives calibrate and

understand a company’s risk level, they can align it with the organisation’s strategy.

The maximum risk score is 45.

Score levels:

9-20 – safety zone

21-34 – caution zone

35-45 – danger zone

Applying Simon’s Risk Exposure Calculator across the three key risks areas of Growth, Culture

and Information Management:

Growth

1. How much pressure is there on the business to meet performance targets? (1 = little or none, 5 = a lot)

2. How quickly is the business growing? (1 = fairly slowly, 5 = very fast) 3. How inexperienced are people at what they do? (1= very experienced, 5 = very

inexperienced).

Culture

1. How much of the total potential rewards given to people in the business come from entrepreneurial risk taking? (1 = very little, 5 = high proportion)

2. Does senior management try to avoid hearing bad news? (1 = not at all, 5 = all the time) 3. How much competition is there between managers, between departments and between

divisions? (1 = very little, 5 = a lot).

Information management

1. How much fast changing and complicated information is needed to run the business? (1 = very little, 5 = a great deal)

2. How big are the gaps between the information needed, and the information actually available? (1 = no gaps, 5 = big gaps)

3. How many decisions are taken by people who are not part of the central team? (1 = a small proportion, 5 = a high proportion).