Saturday, March 19, 2011

Privacy Policy for

Privacy Policy for

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Tuesday, January 25, 2011

Top 10 Management Problems in the 20th Century

The 20th century enterprise does not manage business reality! Business reality is defined by two entities:

- Results: The specific economic outputs from the totality of the business

- Performance Solutions: The invested capital specifically utilized to produce specific results

The enterprise must organize and manage results and performance solutions in order to organize and manage business reality.

The failure of the 20th century enterprise to organize and manage business reality creates unsolvable management, business, and performance problems. The 20th century enterprise defines both the performance solutions utilized and the results produced as performance. This flawed definition prevents management of business reality. So, instead, we contrive various other methods as overlays on the business and manage entities like departments, jobs, positions, functions, and processes.

We continue to overlay new methods and write thousands of books, but we have never solved the top 10 management problems in the 20th century enterprise.

1. Reorganizations: We have never organized the business. Instead, we organize people, positions, power, and politics and overlay rigid contrived organization structures on the business. The business must adjust to the organization. Business change makes it more difficult to adjust, until there is a major upheaval called the reorganization. We then contrive another arbitrary organization and repeat the cycle.

2. Accounting and Financial Management: Historically, the enterprise needed to protect cash and so set up cash and accrual accounting and financial management. Accounting and financial management retain this legacy and, consequently, prevent modern records management and comprehensive capital management. Accounting prevents financial records on costs, value created, and comprehensive capital worth. Financial management concentrates on easy-to-manage cash and financial investments and prevents management of high-worth capital that is "administered" or is labeled as "intangible assets".

3. Investment Analysis and Capital Development: The enterprise is unable to itemize and plan the benefits of capital development investments, and is unable to manage development of benefits and return on investments. Investment benefits are contrived estimates that cannot be managed. There is no management responsibility for the utilization of developed performance solutions, to ensure the return.

4. Administration: Administration performs functions, rather than producing results, and prevents proper capital management. The enterprise invests in capital that ends up being administered, rather than managed for beneficial utilization, continuing improvement, and a high return on the investment.

5. Performance Management: Performance is defined to include not only the actions of performing, but also the results produced. This means that performance and the results produced are mixed together as key performance indicators and in the various performance management methods employed. This definition of performance prevents the 20th century enterprise from managing business reality.

6. Business Complexity: Every new method, re-engineered process, implemented system, chart of accounts, etc. is an overlay on the business and adds to business complexity. Contrived entities are managed preventing understanding of business reality. New results and performance are added but are not managed as an enterprise whole, for improvement or removal when not needed.

7. Information Technology: Information systems and solutions are managed as technology. IT covers strategy, planning, business application, technology, and architecture management. This prevents one integrated enterprise strategy and integrated business capital and support. The diverse capital requires many capabilities to manage, creating the CIO problem. Applications are managed as technology rather than as business solutions, and business change ends up in the technical backlog.

8. Change Management: We need change management because we mismanage change. We do not manage the business, human, and management capital to be changed and utilized for benefit. Change is through disruptive projects, rather than as part of the routine. Change management services address symptoms and do not solve fundamental problems.

9. Corporate Governance: We try to solve corporate governance problems from the governance side by strengthening the problems in accounting, auditing, and compliance reporting. This is futile. The problem can only be eliminated from the corporate side, by organizing and managing business reality.

10. Alignment: Many methods have been developed and many books have been written on aligning strategy with the business, information systems with the business process, outsourced processes and internal processes, tangible assets and intangible assets, etc. This also is futile. We cannot align solutions with solutions. We can only align solutions with their input and output results.

These and other unsolvable management problems are discussed in detail at These problems can never be solved by overlaying more contrived 20th century methods, or by reading books on improving the 20th century enterprise. All 20th century methods are now obsolete.

The enterprise must be redefined as a 21st century enterprise that is organized to utilize capital in performance to produce value in results. Result-performance Management (R-pM) provides the means to build the 21st century enterprise, and leave all 20th century management problems behind.

Revenue Management Is A Sign Of Success

Nitty-gritty of Revenue Management

Revenue management first noticed and accepted by the airline industry. Many travel and hospitality companies have been focused to the "adapt or perish" hymn while moving towards revenue management. Today, revenue management processes and systems are implemented in number of industries, including manufacturing, advertising, energy, hi-tech, telecommunications, car rental, cruise line, railroad and retail. In the future, companies that ignore revenue management will be at a serious disadvantage.

Actually, revenue management is the concept of adopting the number of implementation of emerging and changing business strategy to revenue management, where you can generate additional revenue from 3% to 8 % and it resulting in possible profit increment of 50% to 100%.

Revenue Management is the application of exercised strategy that estimates consumer behavior at the micromarket level and make the most of product availability and price to maximize revenue growth. Revenue Management is about optimizes revenue from offered business.

Revenue Management is a solid management science that utilizes statistical and mathematical concepts, based on operations research and management science methodology and tools in changing marketing environment to provide information to:

. Precisely review prospecting consumer behavior under dynamically changing market environment
. Establish the most effective way to price and assign inventory to reach and every prospecting consumer, each and every day, formulate real-time modification as market conditions change, with the consumer in real-time
. Convey this information immediately to distribution and sale outlets which deal with the consumer in real-time
. Work as a decision-support reserve for marketing and operational purpose, containing but not restricted to: pricing, product development, advertising, sales, scheduling, distribution, human resource utilization and capacity planning.

Businesses worldwide are going under remarkable pressure by having giant capital investments occupied to their capacity/resources up to bottom line and to optimizing and recovered revenues from their fragile capacity, products and/or services. So, what can be done to execute RM effectively is very important.

How to reduce the execution pains and optimize the benefits?

In fast changing supply and demand circumstances, how do you handle your resources and price your products and services? The challenges are find out the following:

. How do you predict requirement for distinct products and services?

. How do you assign and set aside the capacity/resources for high revenue/profit customers and products?

. How do you optimize capacity employing as well as revenue realization?

. How do you rework capacity/resource allocations set up on demand on a customary basis to optimize revenues?

. How do you maximize overbooking to lessen service failures costs?

. How do you distinguish product arrangement to maximize revenues?

. How do you chase surplus capacity and propose discounts at the right time to speed up demand without mitigate revenues.

. At what time you change capacity/resources to compete long-term supply and demand?

Adopting the right method of revenue management

From a CEO's point of view, revenue management is serious as it allows companies to successfully direct the challenges of supply, demand and other issues. Revenue management is a course of action and method brings in to order a company, provides it a strategic benefit over the competition by allows the company to sell the "right product to the right customer, at the right price, at the right time." Revenue management strategies stable the tradeoffs amid revenues, capacity utilization and service failures. Revenue management has been shown in many purposes to offer strategic, competitive and financial rewards.

Revenue management systems and processes can provide marvelous strategic return. By implementing revenue management systems and processes, American Airlines observed more than a billion dollars in incremental annual revenues after airline deregulation.

Though RM concept is very simple but execution of revenue management systems has kept very difficult. The availability of current RM system are either in-house or vendor-related and are very costly and time intensive to put into practice and very complex to use in which they upset the processes and people during and after execution.

Unluckily, revenue management execution and applicability have not been focused appropriately and stay behind with two of the biggest obstruction for companies to entirely assign to and profit from such systems. Many users of current systems have objection about the "black box" method used in applying compound revenue management prediction and maximization models. There are many revenue management models available like hybrid class of revenue management, advanced pros revenue management system, Navitaire's Revenue Management System, Portal's Revenue Management System etc to achieve the additional revenue and are vary depending upon the industry in which it is applied. Before implementing a revenue management system any organization must study whether the methods can be useful in their business and the necessity in which, it can push further to develop.

Reducing the Execution Pain

So how do you reduce the pain related with revenue management execution and applicability? Here are some implications:

Open Systems (Internet, Intranet or LAN client/server platform): Companies should force collectively made to order Internet / Wireless application standards, protocols and platforms. By applying software and using open standards investment in IT infrastructure, it can be maintained and comprehended for long periods of time. Revenue management software should harmonize a company's accessible investment in the infrastructure. By leveraging accessible software/hardware/networking infrastructure, companies can reducing the cost of execution and prevent training or failure costs.

Framework flexibility: Components-based and completely integrated revenue management software solutions should be chosen and it should available with existing database and Web/application servers of software built on a flexible framework and can be easily integrated. To apply revenue management systems it should avoid monolithic proprietary systems that propose very little flexibility for ad-hoc decision support or future improvement and software that does not combine with the bequest systems well.

Execution of Phase: Revenue management includes composite estimation and maximization models. When executing such systems today, benefits cannot be completely grasped until all models are entirely incorporated. This could get cost of millions of dollars and more time. Companies should evade ideas that need two to three years and multi-million dollars. A phased approach that gives entry to essential revenue management metrics should be adopted. Although optimization models will be required to maximize supply and demand or maximize resource allotment, the real emphasis in first phase should be to make out and collect the precise data, obtain users comfortable with RM metrics, and apply and make small adjustment of forecasting models until adequate historical data is pull together. This will reducing predicting fault and set up self-assurance in predicting models to lead better RM applicability. Maximizing models should be executing in second phase or soon after. Revenue management systems and processes should address business problems and give activity that generates a path for maximization twelve months after implementing first phase.

Front-End Platform (as opposed to back-end transaction processing platform): In general extremely automated and closely integrated with reservation or transaction systems of companies executes revenue management system at a large. The systems are operating in the back-end and compel extremely practiced analysts to control and manage this method. An easy to use front-end to the compound revenue
management system can develop analyst productivity and get better results. Revenue management systems should agree to users to make what-if analysis to study the influence of parameter or input changes on the prediction and maximization model yield. It should be in such a manner it create any type of ad hoc report as users reflect and analyze.

Time & Cost: Cost of revenue management systems is generally $1 million to $3 million and takes more than two years to put into practice. Companies should look at low-cost, high-value substitute and choose solutions with lessen inadequacies in designing, developing and executing revenue management software. By offering resources to high-priority matter and functionality and by claiming on reducing avoidable functionality and consulting actions, costs and execution time can be considerably lessen.

Demand forecasting and pricing: Demand forecasting is the key tool from which all other revenue management subject goes around. While implementing revenue management systems some times an Achilles heel appears so CEOs should look to demand forecasting and consider that point too. Without precise demand forecasting there will be no optimization of resource provision to products/customers completed. It also include the question, what prices should be specified to which customers through which channels for all products? (Including group, corporate, incentive, Internet.). For example, various demand forecasting methods are used in revenue management in cargo industry are, booking profiles, moving average models, exponential smoothing models (with seasonality and/or trend effects), causal (regression) models, auto-regressive time series models, kalman filters, neural nets, adaptive forecasting models etc.

Automation of Revenue Management:

Automating the method to take out, transform and load data into revenue management data warehouse, run statistical and mathematical models on a periodic basis, and provide easy interfaces to execute the operation are necessary for considerably improve analyst productivity and business performance.

Inventory Control and Sales Management:

The sales strength is also a user of information from a revenue management system. Whether it is computerize inventory control or relationship-based sales, companies recognize noteworthy progress in revenues if appropriate RM ideology is incorporated at all sales levels. The buy-in from sales management and cooperation in set up procedure to pursue RM techniques and in generating corresponding incentives plan is serious for long-term success.

Apart from the above the following points and analytical procedures are also to be considered.

The Revenue Management Lifecycle

Revenue management is a lifecycle of course of action to create, confine, and accumulate revenue for each customer. It has become a significant element of the enterprise. The Revenue management lifecycle also covers a continuing process of examines, appraise, and maximize each phase of the lifecycle.

Revenue Capture

Revenue capture optimizes market share by means of rival pricing models and flexible balance and credit control to allow any service for any subscriber.

Revenue Analysis

On the total revenue management lifecycle revenue analysis is considered and to recognize the revenue relationships with customers and partners it builds up satisfaction. Revenue analysis guarantees all transactions are carrying out with the fullest viable control, integrity, and completeness. It gives real-time verification, reporting, analysis, and control of all procedures and actions which assist optimize revenue and minimize loss linked with fraud and revenue leakage.

Profits of implementing Revenue Management and its future

Companies that want to accomplish something, not just to survive, must put into practice strategic technologies that permit them to constantly alter to vibrant and real-time supply and demand circumstances. Although airlines initiate and exhibit revenue management, it is showing to be a very efficient cutthroat tool in many industries. Unlike other technology vogue, revenue management is extremely rooted in management science and information technology and above all, brings discipline to an organization.

Today, many manufacturers and service providers are facing the problems of revenue generation due to intense competition, margins are shrinking more and more, customer loyalty is spoiling gradually and segregation is critical. More than ever before, industry toppers require reacting rapidly to varying market conditions and shifting customer necessities. To meet these threats, global leaders are heavily shifting

towards revenue management solutions that facilitate them to increase an in depth understanding of the services that customer's value and how they can be brought for maximum profit.

Because creating revenue and optimizing profit are greatest in mind for service providers, they should depend on revenue management solutions to allow them to react to new market opportunities and squeeze the competition by attracting the customer, introducing new services, and in the end driving value to the bottom line. End-to-end management of customer revenue across offerings, channels and geographies are achieved only through revenue management.

The future of revenue management was aptly explained in The Wall Street Journal as follows: "Re-engineering has run its course. You manage your quality totally. Where do you turn for future gains? Perhaps to the marketplace, with 'revenue management.'... Now with computing costs plunging, revenue management is poised to explode."

The Evolution of Project Management

Importance of Project Management is an important topic because all organisations, be they small or large, at one time or other, are involved in implementing new undertakings. These undertakings may be diverse, such as, the development of a new product or service; the establishment of a new production line in a manufacturing enterprise; a public relations promotion campaign; or a major building programme. Whilst the 1980's were about quality and the 1990's were all about globalisation, the 2000's are about velocity. That is, to keep ahead of their competitors, organisations are continually faced with the development of complex products, services and processes with very short time-to-market windows combined with the need for cross-functional expertise. In this scenario, project management becomes a very important and powerful tool in the hands of organisations that understand its use and have the competencies to apply it.

The development of project management capabilities in organisations, simultaneously with the application of information management systems, allow enterprise teams to work in partnership in defining plans and managing take-to-market projects by synchronising team-oriented tasks, schedules, and resource allocations. This allows cross-functional teams to create and share project information. However, this is not sufficient, information management systems have the potential to allow project management practices to take place in a real-time environment. As a consequence of this potential project management proficiency, locally, nationally or globally dispersed users are able to concurrently view and interact with the same updated project information immediately, including project schedules, threaded discussions, and other relevant documentation. In this scenario the term dispersed user takes on a wider meaning. It not only includes the cross-functional management teams but also experts drawn from the organisation's supply chain, and business partners.

On a macro level organisations are motivated to implement project management techniques to ensure that their undertakings (small or major) are delivered on time, within the cost budget and to the stipulated quality. On a micro level, project management combined
with an appropriate information management system has the objectives of: (a) reducing project overhead costs; (b) customising the project workplace to fit the operational style of the project teams and respective team members; (c) proactively informing the executive management strata of the strategic projects on a real-time basis; (d) ensuring that project team members share accurate, meaningful and timely project documents; and (e) ensuring that critical task deadlines are met. Whilst the motivation and objectives to apply project management in organisations is commendable, they do not assure project success.

However, before discussing the meaning and achievement of project success it is appropriate at this stage to provide a brief history of project management.

Brief History of Project Management
Project management has been practiced for thousands of years dating back to the Egyptian epoch, but it was in the mid-1950's that organisations commenced applying formal project management tools and techniques to complex projects. Modern project management methods had their origins in two parallel but different problems of planning and control in projects in the United States. The first case involved the U.S Navy which at that time was concerned with the control of contracts for its Polaris Missile project. These contracts consisted of research, development work and manufacturing of parts that were unique and had never been previously undertaken.

This particular project was characterised by high uncertainty, since neither cost nor time could be accurately estimated. Hence, completion times were based on probabilities. Time estimates were based on optimistic, pessimistic and most likely. These three time scenarios were mathematically assessed to determine the probable completion date. This procedure was called program evaluation review technique (PERT). Initially, the PERT technique did not take into consideration cost. However, the cost feature was later included using the same estimating approach as with time. Due to the three estimation scenarios, PERT was found (and still is) to be best suited for projects with a high degree of uncertainty reflecting their level of uniqueness. The second case, involved the private sector, namely, E.I du Pont de Nemours Company, which had undertaken to construct major chemical plants in U.S. Unlike the Navy Polaris project, these construction undertakings required accurate time and cost estimates. The methodology developed by this company was originally referred to as project planning and scheduling (PPS). PPS required realistic estimates of cost and time, and is thus a more definitive approach than PERT. The PPS technique was later developed into the critical path method (CPM) that became very popular with the construction industry. During the 1960s and 1970s, both PERT and CPM increased their popularity within the private and public sectors. Defence Departments of various countries, NASA, and large engineering and construction companies world wide applied project management principles and tools to manage large budget, schedule-driven projects. The popularity in the use of these project management tools during this period coincided with the development of computers and the associated packages that specialised in project management. However, initially these computer packages were very costly and were executed only on mainframe or mini computers. The use of project management techniques in the 1980s was facilitated with the advent of the personal computer and associated low cost project management software. Hence, during this period, the manufacturing and software development sectors commenced to adopt and implement sophisticated project management practices as well. By the 1990s, project management theories, tools, and techniques were widely received by different industries and organisations.

Four periods in the development of modern project management.

[1] Prior to 1958: Craft system to human relations. During this time, the evolution of technology, such as, automobiles and telecommunications shortened the project schedule. For instance, automobiles allowed effective resource allocation and mobility, whilst the telecommunication system increased the speed of communication. Furthermore, the job specification which later became the basis of developing the Work Breakdown Structure (WBS) was widely used and Henry Gantt invented the Gantt chart. Examples of projects undertaken during this period as supported by documented evidence include: (a) Building the Pacific Railroad in 1850's; (b) Construction of the Hoover Dam in 1931-1936, that employed approximately 5,200 workers and is still one of the highest gravity dams in the U.S. generating about four billion kilowatt hours a year; and (c) The Manhattan Project in 1942-1945 that was the pioneer research and development project for producing the atomic bomb, involving 125,000 workers and costing nearly $2 billion.

[2] 1958-1979: Application of Management Science. Significant technology advancement took place between 1958 and 1979, such as, the first automatic plain-paper copier by Xerox in 1959. Between 1956 and 1958 several core project management tools including CPM and PERT were introduced. However, this period was characterised by the rapid development of computer technology. The progression from the mainframe to the mini-computer in the 1970's made computers affordable to medium size companies. In 1975, Bill Gates and Paul Allen founded Microsoft. Furthermore, the evolution of computer technology facilitated the emergence of several project management software companies, including, Artemis (1977), Oracle (1977), and Scitor Corporation (1979). In the 1970's other project management tools such as Material Requirements Planning (MRP) were also introduced.

Examples of projects undertaken during this period and which influenced the development of modem project management as we know it today include: (a)Polaris missile project initiated in 1956 that had the objective of delivering nuclear missiles carried by submarines, known as Fleet Ballistic Missile for the U.S Navy. The project successfully launched its first Polaris missile in 1961; (b) Apollo project initiated in 1960 with the objective of sending man to the moon; and (c) E.I du Pont de Nemours chemical plant project commencing in 1958, that had the objective of building major chemical production plants across the U.S.

[3] 1980-1994: Production Centre Human Resources. The 1980s and 1990's are characterised by the revolutionary development in the information management sector with the introduction of the personal computer (PC) and associated computer communications networking facilities. This development resulted in having low cost multitasking PCs that had high efficiency in managing and controlling complex project schedules. During this period low cost project management software for PCs became widely available that made project management techniques more easily accessible.

Examples of major projects undertaken during this period that illustrate the application of high technology, and project management tools and practices include: (a) England France Channel project, 1989 to1991. This project was an international project that involved two governments, several financial institutions, engineering construction companies, and other various organisations from the two countries. The language, use of standard metrics, and other communication differences needed to be closely coordinated; (b) Space Shuttle Challenger project, 1983 to 1986. The disaster of the Challenger space shuttle focused attention on risk management, group dynamics, and quality management; and (c) xv Calgary Winter Olympic of 1988 which successfully applied project management practices to event management.

[4] 1995-Present: Creating a New Environment. This period is dominated by the developments related to the internet that changed dramatically business practices in the mid 1990's. The internet has provided fast, interactive, and customised new medium that allows people to browse, purchase, and track products and services online instantly. This has resulted in making firms more productive, more efficient, and more client oriented. Furthermore, many of today's project management software have an internet connectivity feature. This allows automatic uploading of data so that anyone around the globe with a standard browser can: (a) input the most recent status of their assigned tasks; (b) find out how the overall project is doing; (c) be informed of any delays or advances in the schedule; and (d) stay "in the loop" for their project role, while working independently at a remote site.

An example of a major project undertaken during this period is the Year 2000 (Y2K) project. The Y2K Project, known as the millennium bug referred to the problem that computers may not function correctly on January lst, 2000 at 12 AM. This was a global phenomenon and was highly problematic because resolving the problem at one's organisation did not guarantee immunity, since a breakdown in the organisation's supply chain could affect the organisation's operating capability. Many organisations set up a project office to control and comply with their stakeholders regarding the Y2K issue. Furthermore, use of the Internet was common practice that led to the establishment of the virtual project office. The goal of this virtual project office was: (a) to deliver uninterrupted turn-of-the-century; (b) monitor Y2K project efforts; (c) provide coordination; (d) develop a risk management plan; and (e) communicate Y2K compliance efforts with various stakeholders. Thus, the virtual project office was a focal point for all the project works, and it increased the awareness and importance of risk management practices to numerous organisations.

Why Project Management?

There is no doubt that organisations today face more aggressive competition than in the past and the business environment they operate in is a highly turbulent one. This scenario has increased the need for organisational accountability for the private and public sectors, leading to a greater focus and demand for operational effectiveness and efficiency.

Effectiveness and efficiency may be facilitated through the introduction of best practices that are able to optimise the management of organisational resources. It has been shown that operations and projects are dissimilar with each requiring different management techniques. Hence, in a project environment, project management can: (a) support the achievement of project and organisational goals; and (b) provide a greater assurance to stakeholders that resources are being managed effectively.

Research by Roberts and Furlonger [2] in a study of information systems projects show that using a reasonably detailed project management methodology, as compared to a loose methodology, improves productivity by 20 to 30 percent. Furthermore, the use of a formalised project management structure to projects can facilitate: (a) the clarification of project scope; (b) agreement of objectives and goals; (c) identifying resources needed; (d) ensuring accountability for results and performance; (e) and encouraging the project team to focus on the final benefits to be achieved. Moreover, the research indicates that 85-90% of projects fail to deliver on time, on budget and to the quality of performance expected. The major causes identified for this situation include:

(a) Lack of a valid business case justifying the project;

(b) Objectives not properly defined and agreed;

(c) Lack of communication and stakeholder management;

(d) Outcomes and/or benefits not properly defined in measurable terms;

(e) Lack of quality control;

(f) Poor estimation of duration and cost;

(g) Inadequate definition and acceptance of roles (governance);

(h) Insufficient planning and coordination of resources.

It should be emphasised that the causes for the failure to deliver on time, on budget and to the quality of performance expected could be addressed by the application of project management practices. Furthermore, the failure to deliver on time, on budget and to the quality of performance expected does not necessarily mean that the project was itself a failure. At this stage what is being discussed is the effectiveness and efficiency of project execution and not whether a project is a success or failure.


Project management should be viewed as a tool that helps organisations to execute designated projects effectively and efficiently. The use of this tool does not automatically guarantee project success. (project success will be discussed in a subsequent issue). However, in preparation for the next issue, I would like you to think about the distinction between project success and project management success. This distinction will provide further insight to the questions: Why are some projects perceived as failures when they have met all the traditional standards of success, namely, completed on time, completed within budget, and meeting all the technical specifications? Why are some projects perceived to be successful when they have failed to meet two important criteria that are traditionally associated with success, namely, not completed on time and not completed within budget?

Helping Supervisors become Performance Managers

How does your organization prepare supervisors to manage employee performance?

What tools does your organization provide to make performance management part of a supervisor's daily routine?

How much emphasis does your organization place on performance management?

If you were able to quickly and easily answer these questions, it's likely that you have made a priority of helping supervisors understand and embrace the importance of being performance managers. If you had to think twice about your answers or if your answers were immediately on the negative side, it's likely that the day-to-day management of employee performance has not been made a priority in your organization.

Performance management, the process of providing direction, feedback, and recognition to employees, contributes to workplace culture. It defines what is important to employees and communicates day-to-day expectations. However, many organizations, public and private sector alike, have become distracted by the crisis of the day and overlook this important managerial function.

When the management of employee performance is not a priority, employers are likely to see reduced levels of employee engagement and commitment. A recent study by Watson Wyatt, 2005/2006 Communications ROI Study, found that clear communication leads to greater levels of engagement and higher levels of retention. The study found that most organizations expect supervisors to take on a greater share of the communication responsibilities, but few organizations are providing the tools that supervisors need to communicate more effectively with employees. This study, and probably your own experience, leads us to the conclusion that supervisors need help in managing the performance of their employees. Supervisory training and development programs play a critical role in helping supervisors become performance managers. The purpose of this article is to provide five tools that will lead supervisors to become better managers of employee performance.

Tool #1: Help supervisors see the cyclical, constant nature of performance management, using the performance management cycle.

In many organizations, performance management is thought about once a year--at performance evaluation time. We know it shouldn't be a once a year activity although many Human Resources departments foster that approach. The performance management cycle, illustrated below, is a sound model to communicate the cyclical, on-going nature of managing employee performance.

If messages about employee performance management are issued only once a year, the result will likely be surprised, angry employees and/or unmet expectations. If the Human Resources department "talks up" performance management on a regular basis by reminding supervisors to address performance concerns immediately, maintain complete and frequent documentation, and have regular, informal conversations with employees about performance, these important activities will remain a point of focus for everyone. If the topic is brought up just once a year, employees will only focus on it once a year.

The performance management cycle can also be used as an outline around which to structure performance management training sessions. Each of the stages in the cycle calls for at least one learning objective and warrants discussion and practice.

Likewise, the cycle provides a roadmap for organizations looking to reinforce effective performance management behaviors throughout the year. One approach is to send monthly or quarterly emails or newsletters to supervisors to remind them of individual steps in the cycle. For example, one month a performance management note may be sent that gives a few tips related to effective documentation techniques. The next month the performance management note might share the importance of having regular and frequent conversations with employees about performance.

The performance management cycle provides a sound structure around which to organize communications about performance management.

Tool #2: Help supervisors clarify their performance expectations.

When asked, "What do you expect of employees?" many supervisors return a blank stare. Though employees are asking this question daily in a million different ways, supervisors often struggle with articulating the answer. Performance management training should help supervisors identify and describe performance expectations so that the expectations can be clearly understood by employees. Here is an exercise you can use to help supervisors articulate their expectations.

First, ask supervisors to write down the behaviors of an ideal employee. These can be general behaviors or specific job tasks. Using the "ideal" as a template, ask supervisors to write a list of their "must have" behaviors on the job. Even though the job description defines the essential functions of the job, each supervisor has his/her own expectations and visions for performance. These expectations often separate the good from the great performers. For example, a common behavior that a supervisor might expect is timeliness. One supervisor said he expected that everyone on the team would be on time and prepared for meetings. When a new employee joined the work unit, the supervisor gave the employee a copy of his written expectations, which included the need to be on time and prepared for meetings. Rarely did this supervisor have a problem with late-starting meetings or unprepared employees.

These kinds of expectations may seem obvious, but when stated clearly by the supervisor, in writing, they become easier to address and reward. Performance management training should provide supervisors with practical tools for articulating expectations clearly.

Tool #3: Help supervisors create documentation easily.

Written expectations, as described under Tool #2, can help supervisors articulate their goals and visions for employees. Likewise, written expectations can serve as the first form of documentation the supervisor creates in the performance management process. Helping supervisors continue the documentation process is the next step.

Most Human Resources professionals have faced a supervisor who wants to address a performance problem with an employee in the performance evaluation or with discipline, and the supervisor lacks adequate documentation to support the concerns. When developing supervisors to become performance managers, the training curriculum should include guidance on how to prepare fair and legal documentation in a practical way that will get implemented when the supervisor returns to the workplace. Here are two recommended training tools that can make the documentation process easier for supervisors:

A. Demonstrate the use of a consistent format for maintaining documentation. Often referred to as a performance log, a standardized form helps supervisors know where to put their notes about performance and can provide a format for writing specific and clear comments. The log can be maintained on paper or in an electronic format. Most online performance management systems include an electronic performance log system. When training supervisors in the basics of performance management, it is important to encourage supervisors to use a log of some form to ensure consistency with documentation.

B. Provide real life examples of what effective documentation looks like. One effective approach is to compile a mock "supervisor's file" that contains 10-15 examples of effective and ineffective documentation. In a training workshop, supervisors can review each piece of documentation in the mock file and critique each item on its effectiveness. The conversation that follows the exercise provides ample opportunity to reinforce the importance of keeping fair and legal performance notes. It also illustrates what should be kept in a supervisor's working file and what should be left out.

Tool#4: Help supervisors have frequent and specific performance conversations.

Typically performance evaluation and performance management training focuses on the mechanics of the performance evaluation system. Supervisors are taught how to fill out the forms, meet the organization's deadlines, and interpret the rating scales. And, while these are worthy topics for a training session, the greatest need of most supervisors is not in the mechanics of the system, but rather in the delivery of feedback to employees. A primary objective of performance management training should be to teach supervisors to have effective conversations about performance.

Performance conversations between supervisors and employees represent the quality of the entire process and yet, in many organizations, performance conversations happen without much thought or preparation and are often tacked on after the evaluation forms have been deliberated over for days.

Performance management training should present a conversation model that supervisors can follow when conducting performance feedback meetings and/or when delivering the end-of-cycle performance evaluation. In addition to providing a model in the training setting, it is critical that supervisors have an opportunity to observe the model via a live demonstration by the facilitator. Following the demonstration, each supervisor in the workshop should be expected to practice using the model in a role play format. This basic behavior modeling approach has been proven to be the most effective method for teaching supervisors to have effective performance conversations.

To help supervisors take the conversation practice to the next level, they should be encouraged to develop their own case study, based on personal experiences. Then, using that scenario, the supervisors should role play and receive feedback on the real life situation in dyads or triads. The application of a conversation model to personal situations leads to the most effective outcomes by reinforcing the learning concepts while allowing the supervisors to build confidence around issues that are personally important.

Tool #5: Help supervisors foster performance-enhancing dialogue with employees.

Performance management training typically focuses solely on the skills and behaviors of supervisors. However, much progress can be made in developing a performance management-focused culture by reaching out to employees. Supervisors must involve employees in the performance management process in order to foster increased levels of communication and trust. It makes sense that training on performance management also includes an element that teaches supervisors to ask the right questions which involve employees in the process.

Many organizations also offer training for employees to help them better understand how they can participate in the performance management process. Employee training might include information on how to appropriately maintain personal performance documentation, reinforce the need for clear expectations between employees and supervisors, and help employees ask the right questions to clarify supervisory expectations.

When we only train supervisors to manage performance, we leave out a critical element of the process. By not involving employees in the training, performance management and performance evaluations become something that is done TO employees, rather than WITH them.

Of course, effective management of employee performance doesn't happen by accident. It must be modeled by top management and actively supported by the Human Resources function. It must be clearly defined, constantly communicated, and consistently rewarded. Supervisors become strong performance managers when the organization places an emphasis on it via employee development efforts. The result can be higher levels of engagement and enhanced job satisfaction.

Confessions of a Reformed Manager: Seven Principles for Becoming a Good Manager

Another one walked out the door. With him, $25,000 in recruitment fees, $3,000 in relocation expenses and a $31,000 learning curve went down the drain. Clients became uneasy, employee morale suffered and my firm's ability to recruit top talent was negatively impacted.

My management style was costing my firm money and it was exacting an emotional toll on me. Taking each departure personally, I was beginning to feel like a failure.

Like so many young managers, I had been bumped up into management because I was a good producer. No one had considered that production and management require two different skill sets, and that those skill sets are often at odds with one another.

I wanted to be a good manager. I took management courses, read a plethora of self-help books and hired a management coach, but I still hadn't hit on the right formula for management.

Totally ill equipped for my new role, I continued to make mistake after mistake.

It wasn't until I looked at myself that I got it.

First, I had tried to control my employees. Then, I had tried to motivate them, but only when I sought to inspire them did I become a good manager. It was a principle so simple that I had missed it.

Good management is not built upon behavior modification, manipulation or
motivation; it is grounded in intention. Instead of searching for the right combination of words and actions to produce desired behaviors, I began to put my employees' needs first and truly care about them as people. Together we worked toward the company's goals while meeting our individual needs.

Good management is not linear. Like the imagination, it is fluid, flexible and creative. While I found no set rules to becoming a good manager, I did discover seven principles that helped me grow into management.

Good managers know themselves. Good managers know their strengths and weaknesses, and they understand their management styles.

A clue to identifying our management styles can be found by examining our relationships with our parents. Once I looked at my relationship with my father, I discovered why my employees were unhappy. I had adopted his impersonal, authoritarian style.

Good managers share themselves, as well as their knowledge. When I train executives in presentation skills, I encourage them to be themselves. The best presenters are those who share their souls with their audiences, and good managers are no different.

Sharing our souls does not mean becoming close intimate friends with those we manage. It does mean, however, allowing employees access to our lives. Employees want to know their managers as people, too.

Share yourself, but don't share your moods. Employees crave consistency and calm from managers, especially in crises.

At no time do managers show their true colors more than in crisis. I ran red. Adrenaline surged through my blood when faced with crisis. While I was super-productive, I put the office in a hyper-frenzy. By staying grounded, I could get as much done without electrifying the office.

Good management is servant leadership. At its simplest, servant leadership recognizes great leaders are humble servants. Servant leaders manage from the soul and not the ego.

My job was not to do the job, but to get the job done right and that meant ensuring my people had the tools, training, encouragement and trust they needed. By serving them, I met my goals.

Good managers manage the whole person. I used to look on my employees as machines, seeing them only as a means to get the job done instead of the people they were. When I began to look at the whole person, I began to become a good manager.

Being a good manager doesn't mean liking every employee. While I have not liked every person I have managed, I have cared about each one.

As managers, it is important to recognize we cannot separate our employees' work lives from their personal ones anymore than we can separate our own.

I also learned how to utilize employees' strengths and support their weaknesses. No employee has it all. Our job as managers is to create personalized environments for employees in which they can thrive.

Years ago, I hired a senior consultant who was one of the most creative people I knew and had a Rolodex as large as a car tire. Still, she could not manage traditional public relations accounts.

After trial and error, she became "a marketing matchmaker" setting up strategic meetings between companies sharing similar marketing objectives. Her division quickly became one of the agency's most profitable, and she remained a loyal employee.

Good managers thrive on feedback. Key to becoming a good manager is 360-degree feedback. Good managers put ego aside, ask for constructive feedback and act upon it. One of the worse things a manager can do is ask for feedback and not act upon it.

At my old firm, employees filled out "How Am I Doing?" surveys on their managers. To encourage candid feedback, responses were confidential and compiled by an outside source.

From the feedback, managers were encouraged to select no more than three areas for improvement, develop a plan, and share that plan with their employees.

Good managers constantly check in with their intentions. Good managers focus on intentions over outcomes.

One employee had been with the firm for close to seven years. We changed her job description several times to present new challenges and capitalize on her strengths. But as the agency matured, it became apparent we no longer had a place for her.

Over lunch, I learned she was unhappy, and although she wanted to move on, she was afraid. That afternoon, we mapped out a plan that made sense for her and for the agency, set a completion goal of three months, and agreed to meet periodically.

Today, she is the director of marketing for a large professional service firm. She is happy and challenged and looks back on her agency days fondly.

When good managers make mistakes, they correct them fast. Even with the right intentions, we all make hiring mistakes. When we do, we need to correct them fast. Again, if our intention is pure, we can make this transition humanely and with a minimum of disruption to the operation.

Managing Risk in Financial Sector

Risk Management is a hot topic in the financial sector especially in the light of the recent losses of some multinational corporations e.g. collapses of Britain's Barings Bank, WorldCom and also due to the incident of 9/11. Rapid changes in business condition, restructuring of organizations to cope with ever increasing competition, development of new products, emerging markets and increase in cross border transactions along with complexity of transactions has exposed Financial Institutions to new risks dimensions. Thus the concept of risk has captured a growing importance in modern financial society.

By facilitating transactions and making credit and other financial products available, the financial sector is a crucial building block for private as well as public sector development. In its broadest definition, it includes everything from banks, stock exchanges, and insurers, to credit unions, microfinance institutions and moneylenders. As an efficient service provider, the financial sector simultaneously fulfils an important function in the overall economy. Various types of Financial Institutions actively working in Financial Sectors include Banks, DFIs, Micro Finance Banks, Leasing Companies, Modarabas, Assets Management Company, Mutual Funds, etc.

Thus today's operating environment demands systematic and more integrated risk management approach.


Risk by default has tow components; uncertainty and exposure. If both are not present, there is no risk. Definition of Risk as per Guidelines on Risk Management issued by State Bank of Pakistan is, "Financial risk in a banking organization is possibility that the outcome of an action or event could bring up adverse impacts. Such outcomes could either result in a direct loss of earnings / capital or may result in imposition of constraints on bank's ability to meet its business objectives. Such constraints pose a risk as these could hinder a bank's ability to conduct its ongoing business or to take benefit of opportunities to enhance its business."

Types of Risks:

Risks are usually defined by the adverse impact on profitability of several distinct sources of uncertainty. More or less all financial institutions have to manage the following faces of risks:

1. Credit Risk

2. Market Risk

3. Liquidity Risk

4. Operational Risk

5. Country Risk

6. Legal Risks

7. Compliance Risk

8. Reputational Risk

Broadly speaking there are four risks as per Risk Management Guidelines which surround Financial Sector i.e. Credit Risk, Market Risk, Liquidity Risk and Operational Risk. These risk are elaborated here under:

i. Credit Risk

This is the risk incurred in case of a counter-party default. It arises from lending activities, investing activities and from buying and selling financial assets on behalf of others. This risk is associated with financing transactions i.e.:

a. Default in repayment by the borrower and

b. Default in obliging the commitment by another Financial Institution in case of syndicated arrangements.

It is the most critical risk in banking and one that must be managed carefully. It is also the risk that requires the most subjective judgment despite constant efforts to improve and quantify the credit decision process.

ii. Market Risk

Market risk is defined as the volatility of income or market value due to fluctuations in underlying market factors such as currency, interest rates, or credit spreads. For commercial banks, the market risk of the stable liquidity investment portfolio arises from mismatches between the risk profile of the assets and their funding. This risk involves interest rate risk in all of its components: equity risk, exchange risk and commodity risk.

iii. Liquidity Risk

The liquidity risk is defined as the risk of not being able to meet its commitments or not being able to unwind or offset a position by an organization in a timely fashion because it cannot liquidate assets at reasonable prices when required.

iv. Operational Risk

This risk results from inadequacies in the conception, organization, or implementation of procedures for recording any events concerning bank's operations in the accounting system/information systems.

Need for Risk Management and Monitoring:

There are a number of reasons as to why there is so much emphasis given to Risk Management in Financial Sector now a day. Some of them are listed below: -

1. Present structure of joint stock companies, wherein owners are not the mangers, hence risks increase; therefore proper tools are required to achieve the desired results by covering the risks.

2. The financial sector has come out of simple deposit and lending function.

3. The world has become very complex so the financial transactions and instruments.

4. Increase in the number of cross border transactions which caries its own risks.

5. Emerging markets

6. Terrorism Remittances

Risk monitoring in financial sector is very crucial and an inevitable part of risk management. Risk Monitoring is important in the financial sector due to the following reasons:

1. Deals in others' money

2. Direct stake of deposit holder.

3. Much riskier sector than trading and manufacturing.

4. Previous / Recent problems faced by banks i.e. stuck portfolio that is credit risk.

5. Bankruptcy of Barings Bank due to short selling / long position that is market risk.

6. Operational risk does not has immediate impact, but important for continuity and progress of organization.

7. Appetite of a financial institution to take risk is related with the capital base of the institute so it caries a huge risk of over exposure.

Components of Risk Management Frame Work

Risk Management Frame Work has five components. First of all risk is Identified, then it is Assessed to classify, seek solution and management, after assessing quick Response and implementation of solution and the last phase is Monitoring of the risk management progress and Learning from this experience that such problem never occur again. Whole process is to be well Communicated during the entire process of risk management if it is to be managed efficiently.

The International Organization for Standardization (ISO) has defined risk management as the identification, analysis, evaluation, treatment (control), monitoring, review and communication of risk. These activities can be applied in a systematic or ad hoc manner. The presumption is that systematic application of these activities will result in improved decision-making and, most likely, improved outcomes.

Structure of Risk Management

Depending upon the structure and operations of organization, financial risk management can be implemented in different ways. Risk management structure defines the different layers of an organization at which risk is identified and managed. Although there are different layers or level at which risk is managed but there are three layers which are common to all. i.e.

Risk Management

For managing risk there are certain basic principles which are to be followed by every organization:

1. Corporate level Policies

2. Risk management strategy

3. Well-defined policies and procedures by senior management

4. Dissemination, implementation and compliance of policies and procedures

5. Accountability of individuals heading various functions/ business lines

6. Independent Risk review function

7. Contingency plans

8. Tools to monitor risks

Institutions can reduce some risks simply by researching them. A bank can reduce its credit risk by getting to know its borrowers. A brokerage firm can reduce market risk by being knowledgeable about the markets it operates in.

Functionally, there are four aspects of financial risk management. Success depends upon

A. A positive corporate culture,

No one can manage risk if they are not prepared to take risk. While individual initiative is critical, it is the corporate culture which facilitates the process. A positive risk culture is one which promotes individual responsibility and is supportive of risk taking.

B. Actively observed policies and procedures

Used correctly, procedures are powerful tool of risk management. The purpose of policies and procedures is to empower people. They specify how people can accomplish what needs to be done. The success of policies and procedures depends critically upon a positive risk culture.

C. Effective use of technology

The primary role technology plays in risk management is risk assessment and communication. Technology is employed to quantify or otherwise summarize risks as they are being taken. It then communicates this information to decision makers, as appropriate.

D. Independence or risk management professionals

To get the desired outcome from risk management, risk managers must be independent of risk taking functions within the organization. Enron's experience with risk management is instructive. The firm maintained a risk management function staffed with capable employees. Lines of reporting were reasonably independent in theory, but less so in practice.

Internal Controls

Para one on first page of the 'Guidelines on Internal Controls' issued by SBP provides:

"Internal Control refers to policies, plans and processes as affected by the Board of Directors and performed on continuous basis by the senior management and all levels of employees within the bank. These internal controls are used to provide reasonable assurance regarding the achievement of organizational objectives. The system of internal controls includes financial, operational and compliance controls."

The current official definition of internal control was developed by the Committee of Sponsoring Organization (COSO) of the Treadway Commission. In its influential report, Internal Control - Integrated Framework, the Commission defines internal control as follows:

"Internal control is a process, effected by an entity's Board of Directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

 Effectiveness and efficiency of operations.

 Reliability of financial reporting.

 Compliance with applicable laws and regulations.

This definition reflects certain fundamental concepts:

 Internal control is a process. It is a means to an end, not an end in itself.

 Internal control is effected by people. It is not policy manuals and forms, but people at every level of an organization.

 Internal control can be expected to provide only reasonable assurance, not absolute assurance, to an entity's management and board.

Internal control should assist and never impede management and staff from achieving their objectives. Control must be taken seriously. A well-designed system of internal control is worse than worthless unless it is complied with, since the assemblance of control will be likely to convey a false sense of assurance. Controls are there to be kept, not avoided. For instance, exception reports should be followed up. Senior management should set a good example about control compliance. For instance, physical access restrictions to secure areas should be observed equally by senior management as by junior personnel.

Components of Internal Controls

Components of internal control also depend upon the structure of the business unit and nature of its operation. The COSO Report describes the internal control process as consisting of five interrelated components that are derived from and integrated with the management process. The components are interrelated, which means that each component affects and is affected by the other four. These five components, which are the necessary foundation for an effective internal control system, include:

I. Control Environment,

Control environment, an intangible factor and the first of the five components, is the foundation for all other components of internal control, providing discipline and structure and encompassing both technical competence and ethical commitment.

II. Risk Assessments,

Organizations exist to achieve some purpose or goal. Goals, because they tend to be broad, are usually divided into specific targets known as objectives. A risk is anything that endangers the achievement of an objective. Risk assessments is done to determine the relative potential for loss in programs and functions and to design the most cost-effective and productive internal controls.

III. Control Activities,

Control activities mean the structure, policies, and procedures, which an organization establishes so that identified risks do not prevent the organization from reaching its objectives.
Policies, procedures, and other items like job descriptions, organizational charts and supervisory standards, do not, of course, exist only for internal control purposes. These activities are basic management practices.

IV. Information and Communication, and

Organizations must be able to obtain reliable information to determine their risks and communicate policies and other information to those who need it. Information and communication, the fourth component of internal control, articulates this factor.

V. Monitoring

Life is change; internal controls are no exception. Satisfactory internal controls can become obsolete through changes in external circumstances. Therefore, after risks are identified, policies and procedures put into place, and information on control activities communicated to staff, superiors must then implement the fifth component of internal control, monitoring.

Even the best internal control plan will be unsuccessful if it is not followed. Monitoring allows the management to identify whether controls are being followed before problems occur. In the same way, management must review weaknesses identified by audits to determine whether related internal controls need revision.

Tools for Monitoring of Risk

Management Information System

M.I.S or Management Information System is the collection and analysis of data in order to support management's decision with respect to the achievement of objectives mentioned in the policies and procedures and the control of various risks therein.

It is this area i.e. M.I.S, where I.T can play a vital and effective role as with the help of I.T large information may be analyzed efficiently and with accuracy, so that effective decision may be taken by the management without the loss of any time.

Asset-Liability Management Committee (ALCO)

In most cases, day-to-day risk assessment and management is assigned to a specialized committee, such as an Asset-Liability Management Committee (ALCO). Duties pertaining to key elements of the risk management process should be adequately separated to avoid potential conflicts of interest - in other words, a financial institution's risk monitoring and control functions should be sufficiently independent from its risk-taking functions. Larger or more complex institutions often have a designated, independent unit responsible for the design and administration of balance sheet management, including interest rate risk. Given today's widespread innovation in banking and the dynamics of markets, banks should identify any risks inherent in a new product or service before it is introduced, and ensure that these risks are promptly considered in the assessment and management process.

Corporate Governance Principles

Corporate governance relates to the manner in which the business of the organization is governed, including setting corporate objectives and a institution's risk profile, aligning corporate activities and behaviors with the expectation that the management will operate in a safe and sound manner, running day-to-day operations within an established risk profile, while protecting the interests of depositors and other stakeholders. It is defined by a set of relationships between the institution's management, its board, its shareholders, and other stakeholders.

The key elements of sound corporate governance in a bank include:

a) A well-articulated corporate strategy against which the overall success and the contribution of individuals can be measured.

b) Setting and enforcing clear assignment of responsibilities, decision-making authority and accountabilities that are appropriate for the bank's risk profile.

c) A strong financial risk management function (independent of business lines), adequate internal control systems (including internal and external audit functions), and functional process design with the necessary checks and balances.

d) Corporate values, codes of conduct and other standards of appropriate behavior, and effective systems used to ensure compliance. This includes special monitoring of a bank's risk exposures where conflicts of interest are expected to appear (e.g., relationships with affiliated parties).

e) Financial and managerial incentives to act in an appropriate manner offered to the board, management and employees, including compensation, promotion and penalties. (i.e., compensation should be consistent with the bank's objectives, performance, and ethical values).

f) Transparency and appropriate information flows internally and to the public.

Tools mentioned above can be utilized in identifying and managing different risks in the following manner:

I. Credit Risk

It is managed by setting prudent limits for exposures to individual transaction, counterparties and portfolios. Credits limits are set by reference to credit rating established by Credit Rating Agencies, methodologies established by Regulators and as per Board's direction.

o Monitoring of per party exposure

o Monitoring of group exposure

o Monitoring of bank's exposure in contingent liabilities

o Bank's exposure in clean facilities

o Analysis of bank's exposure product wise

o Analysis of concentration of bank's exposure in various segments of economy

o Product profitability reports

II. Market

Financial Institutions should also have an adequate system of internal controls to oversee the interest rate risk management process. A fundamental component of such a system is a regular, independent review and evaluation to ensure the system's effectiveness and, when appropriate, to recommend revisions or enhancements.

Interest rate risk should be monitored on a consolidated basis, including the exposure of subsidiaries. The institution's board of directors has ultimate responsibility for the management of interest rate risk. The board approves the business strategies that determine the degree of exposure to risk and provides guidance on the level of interest rate risk that is acceptable to the institution, on the policies that limit risk exposure, and on the procedures, lines of authority, and accountability related to risk management. The board also should systematically review risk, in such a way as to fully understand the level of risk exposure and to assess the performance of management in monitoring and controlling risks in compliance with board policies. Reports to senior management should provide aggregate information and a sufficient level of supporting detail to facilitate a meaningful evaluation of the level of risk, the sensitivity of the bank to changing market conditions, and other relevant factors.

The Asset and Liability Committee (ALCO) plays a key role in the oversight and coordinated management of market risk. ALCOs meet monthly. Investment mandates and risk limits are reviewed on a regular basis, usually annually to ensure that they remain valid.

Risk Management and Risk Budgets

A risk budget establishes the tolerance of the board or its delegates to income or capital loss due to market risk over a given horizon, typically one year because of the accounting cycle. (Institutions that are not sensitive to annual income requirements may have a longer horizon, which would also allow for a greater degree of freedom in portfolio management.). Once an annual risk budget has been established, a system of risk limits needs to be put in place to guard against actual or potential losses exceeding the risk budget. There are two types of risk limits, and both are necessary to constrain losses to within the prescribed level (the risk budget).

The first type is stop-loss limits, which control cumulative losses from the mark-to-market of existing positions relative to the benchmark. The second is position limits, which control potential losses that could arise from future adverse changes in market prices. Stop-loss limits are set relative to the overall risk budget. The allocation of the risk budget to different types of risk is as much an art as it is a science, and the methodology used will depend on the set-up of the individual investment process. Some of the questions that affect the risk allocation include the following:

* What are the significant market risks of the portfolio?

* What is the correlation among these risks?

* How many risk takers are there?

* How is the risk expected to be used over the course of a year?

Compliance with stop-loss limits requires frequent, if not daily, performance measurement. Performance is the total return of the portfolio less the total return of the benchmark. The measurement of performance is a critical statistic for monitoring the usage of the risk budget and compliance with stop-loss limits. Position limits also are set relative to the overall risk budget, and are subject to the same considerations discussed above. The function of position limits, however, is to constrain potential losses from future adverse changes in prices or yields.

III. Liquidity Risk

The Basel Committee has established certain quantitative standards for internal models when they are used in the capital adequacy context.

a. Allocation of capital into various types of business after taking into account the operational risks i.e. disruption of business activity, which has especially increased due to excessive EDP usage

b. Allocation of the capital is also made amongst various products i.e. long term, short term, consumer, corporate etc. considering the risks involved in each product and its life cycle to avoid any liquidity crunch for which gap analysis is made. This is the job of ALCO

c. For instance Contingent liabilities not more than 10 times of capital,

d. Fund based not more than 6 times of capital

e. Capital market operations not more than 1 time of capital

f. However these limits cannot exceed the regulations.

g. Parameters of controls

o Regulatory Requirements

o Board's directions

o Prudent practices

For liquidity management organizations are compelled to hold reserves for unexpected liquidity demands. The ALCO has responsibility for setting and monitoring liquidity risk limits. These limits are set by Regulatory Bodies and under Board's directions keeping in mind the market condition and past experience.

The Basel Accord comprises a definition of regulatory capital, measures of risk exposure, and rules specifying the level of capital to be maintained in relation to these risks. It introduced a de facto capital adequacy standard, based on the risk-weighted composition of a bank's assets and off-balance-sheet exposures that ensures that an adequate amount of capital and reserves is maintained to safeguard solvency. The 1988 Basel Accord primarily addressed banking in the sense of deposit taking and lending (commercial banking under US law), so its focus was credit risk.

In the early 1990s, the Basel Committee decided to update the 1988 accord to include bank capital requirements for market risk. This would have implications for non-bank securities firms.

Thus, the formula for determining capital adequacy can be illustrated as follows:

= Tier I + Tier 2 + Tier 3 *- 8% .

Risk-weighted Assets + (Market Risk Capital Charge x 12.5)

IV. Operational Risk

To manage this risk documented policies and procedures are established. In addition, regular training is provided to ensure that staffs are well aware of organization's objective, statutory requirements.

o Reporting of major/ unusual/ exceptional transactions with respect to ensuring the compliance of the principles of KYC and Anti-money laundering measure

o Analysis of system problems


For any business to grow and stay in the market management style is a key and Risk management is basically the management style of managing the risks.

It is so important and that State Bank of Pakistan plans to replace Prudential Regulations with Risk management guidelines, which will be adopted by banks according to their size and complexity of operations.

Risk is inherent in every business and every organization has to manage it according to its size and nature of operation because without it no organization no organization can survive in long run.