This post discusses Key Risk Indicators (KRIs). In this post, you will understand the meaning, importance, types and roles of Key Risk Indicators (KRIs) in business organisations.

KEY RISK INDICATORS

Key risk indicators are predictive metrics for measuring negative impacts on a business. Key risk indicators (KRIs) measure how risky certain activities impact business objectives. They provide early warning signals when risks (both strategic and operational) move in a direction that may prevent the achievement of KPIs. A key risk indicator (KRI) measures the likelihood that an event’s combined probability and consequences will exceed the organisation’s risk appetite and negatively impact its success.

Key Risk Indicators (KRIs) are critical predictors of unfavourable events that can adversely affect organisations. They monitor changes in the levels of risk exposure and contribute to the early warning signs that enable organisations to report risks, prevent crises and mitigate them in time. Key risk indicators (KRIs) are an excellent way for businesses to keep track of issues and opportunities. KRIs and other risk environment-related data (including loss events, assessment outcomes, and business related-issues) offer considerable insights into the weaknesses within the risk and control environments.

KRIs act as metrics of changes in an organisation’s risk profile, but given the changing risk landscape, more than simply establishing them within the corporate protocol may be required. They provide a way to quantify and monitor each risk. Change-related metrics act as an early warning risk detection system to help companies effectively monitor, manage and mitigate risks. KRIs provide insight into the weaknesses in a company’s risk, control environment and processes to develop a risk assessment plan to fortify the organisation.

IMPORTANCE OF KEY RISK INDICATORS IN ENTERPRISE RISK MANAGEMENT

Key risk indicators (KRIs) are essential in enterprise risk management programmes. Businesses can benefit immensely from identifying and using KRIs. Benefits of using KRIs include: 

1. Advance notice of potential risks that could damage the organisation.
2. Provide insight into possible weaknesses in an organisation’s monitoring and control tools.
3. Support Risk Assessments. KRIs help add more detail and information to risk assessments, making them more reliable and informative to management.
4. Proactive management of emerging risks. KRIs allow for the proactive identification of emerging threats by creating an informative framework to scan for what is on the horizon. 
5. Tolerance levels and thresholds. KRIs detail at what level of risk is considered necessary for attention or direct intervention.
6. Trending KRIs – KRIs can help management track trends in risks to the organisation.
   

BUSINESS CONTINUITY METRICS

Metrics measure the completion of tasks within a business continuity programme and show resilience capabilities. There are two business continuity metrics: (1) Activity and Compliance Metrics and (2) Product and Service Metrics. 

1. ACTIVITY AND COMPLIANCE METRICS: Activity and Compliance Metrics answer the question: Are we doing the right things to prepare? These are straightforward metrics and usually, ensure that programme deliverables and outcomes are on track and consistent with expectations. Activity and Compliance Metrics are called Key Performance Indicators (KPIs).

2. PRODUCT AND SERVICE METRICS: Product and Service Metrics answer the question: Is the company adequately prepared to excel in its sector or industry? These metrics help programme leadership focus on evaluating the company’s ability to continue or recover time-sensitive activities and resources that contribute to the delivery of products and services. Product and Service Metrics are called Key Risk Indicators (KRIs).

CHARACTERISTICS OF GOOD KEY RISK INDICATORS

When developing a KRI, knowledge of the organisation and its operations (including understanding the potential risks, threats and vulnerabilities it faces) is the essential starting point. With an understanding of the company, it is easier to identify where it may be at risk. KRIs are measurable. They are predictable and often used as early warning signals while tracking trends over time. KRIs can be measured using percentages and numeric indices. 

Internal and external risks are then mapped to critical operational aspects of the firm to identify how those key attributes might be disrupted. Thus, characteristics of a reasonable and measurable KRI include the following:

1. Details on the people, processes, technologies, facilities and other corporate attributes most important to the organisation’s continued operation and success;
2. Identification of risks, threats, and vulnerabilities the organisation faces based on their likelihood of occurring, their operational and financial impact on the firm, and the firm’s ability to mitigate the event;
3. Ranking the business attributes in terms of their criticality to the firm;
4. Ranking of risks, threats and vulnerabilities in terms of their potential harm to the firm;
5. Linking the critical business attributes to the most significant risks to identify those issues of greatest concern to the organisation;
6. Metrics to identify when and how an identified risk becomes a serious threat to critical attributes of the organisation;
7. An ongoing process of reviewing KRIs and their metrics to identify any changes that require management review and possible action; and
8. Approval of KRIs by the company’s senior management.

ESSENTIALS OF SOUND KEY RISK INDICATORS (KRIs)

Sound KRIs should be:

1. SPECIFIC: KRIs must be accurate and precise in their measurement. 

2. RELEVANT: KRIs must be relevant to monitored risks. Good KRIs help companies identify, quantify, monitor, or manage risks directly applicable to business objectives. 

3. MEASURABLE: KRIs should be measured regularly to ensure high certainty and effective decision-making. KRIs can be measured qualitatively and quantitatively.

4. PREDICTIVE: Good KRIs help to predict future problems. Good KRIs can predict future issues that management can pre-emptively address. 

5. PROVIDE OPPORTUNITIES: It’s important to note that KRIs do not only signal threats to a company’s objectives, strategy, and overall existence. 

6. EFFICIENT: Good KRIs are simple to collect and document at a reasonable cost. 

7. COMPARABLE: KRIs track a company’s risk exposure over time for comparison. 

8. ALERT AND TRIGGER LIMITS: Key risk indicators (KRIs) trigger an alert based on set limits.

PURPOSE AND IMPORTANCE OF KEY RISK INDICATORS

KRIs are the red flags that ensure these risks are identified in advance and mitigated. In essence, KRIs provide an advanced “heads-up” enabling companies to manage their risk exposures effectively. Key risk indicators (KRIs) add value to operational risk management by playing an essential role in a company’s risk management process.

KRIs predict potential risk, especially within high-risk areas and sectors. KRIs can help with the following:

1. Identifying any risk exposure relating to current or emerging risk trends.
2. Assessing and quantifying each risk and its potential impact.
3. Providing perspective through benchmarking.
4. Enabling timely and ongoing risk control and monitoring.
5. Helping leaders and key personnel to receive alerts of possible risks in advance.
6. Ensuring sufficient time to develop appropriate and effective risk responses. and
7. Establishing objectivity within the risk management process.

KEY RISK INDICATOR SELECTION APPROACH

Two main approaches to selecting key risk indicators (KRIs) are top-down and bottom-up. 

1. Top-Down Approach: A top-down approach is the most effective for strategic KRIs. Senior management selects indicators to monitor across the business. 

2. Bottom-Up Approach: The business lines select and monitor relevant indicators within their operational processes. The bottom-up approach ensures critical risks are identified and tracked at a granular level to enable the lines of business to manage the most tangible and relevant risks.

TYPES OF KEY RISK INDICATORS 

Two primary key risk indicators (KRIs) types are Lagging and predictive.

1. LAGGING KEY RISK INDICATORS: Lagging KRIs monitor data retrospectively to identify changes in the pattern or trend of risk and activities. These types of KRIs ensure that risk exposures are managed effectively to prevent or reduce further exposure or consequence. 

2. PREDICTIVE OR LEADING KEY RISK INDICATORS: Predictive or Leading KRIs signal changes in the likelihood of a risk event. They are more likely to aid management in taking action before risks materialise.

HOW KEY RISK INDICATORS WORK

Two categories exist when discussing the risks that KRIs help monitor and manage: pure and speculative.

1. Pure risks are unavoidable occurrences like death or natural disasters which are out of the company’s control.

2. Speculative risks are voluntary risks a company undertakes with uncertain outcomes – investments and mergers, for example, or risks arising from introducing new products.

EXAMPLES OF KEY RISK INDICATORS 

Here are examples of KRIs:

1. Technology-Based KRIs: The various technology risks in running the business, from hardware malfunctions to software failures to cyber security issues, are measured based on key risk indicators (KRIs). 

2. Financial KRIs: Financial KRIs are metrics that give information about the different events that affect the financial health of a firm. 

3. Human Resource KRIs: Human resource KRIs measure business risks, including low staff satisfaction, labour shortages, and high staff turnover. 

4. Operational KRIs: Operational KRIs measure the impact of risks ranging from failed internal strategy execution processes to ineffective internal management controls.

QUANTITATIVE AND QUALITATIVE KEY RISK INDICATORS

Organisations must communicate the risk warning so that everyone understands its significance and can respond accordingly. There are different types of quantitative and qualitative KRIs. 

1) Quantitative KRIs: These focus on provable facts and numerical data based on findings from mathematical models and analysis methods. 

2) Qualitative KRIs: These types of KRIs focus on predicting probability-based outcomes to support things like sensitivity analysis.

CRITICAL ASPECTS OF KEY RISK INDICATORS

On a business or industry’s nature, quantitative over qualitative KRIs may be more relevant. Critical aspects of KRIs include financial, human resource, operational, technical and compliance essential elements of business key risk indicators (KRIs). 

1. FINANCIAL KEY RISK INDICATORS: The financial key risk indicator is vital in virtually all organisations. Quantitative financial KRIs may be of greater significance to banks and other financial institutions. 

2. HUMAN RESOURCE KEY RISK INDICATORS: A company operates through its personnel or human resources; hence human resources key indicator is essential in business organisations. 

3. OPERATIONAL KEY RISK INDICATORS: Business operation is vital in an organisation; hence operational key risk indicator is essential in business organisations. 

4. TECHNOLOGICAL KEY RISK INDICATORS: Many companies rely mainly on communication networks. Businesses increasingly rely on telecommunication to ensure efficient and effective operations, particularly the internet. 

5. COMPLIANCE KEY RISK INDICATORS: Compliance key risk indicators (KPIs) help businesses unearth compliance framework weaknesses.

THE DIFFERENCE BETWEEN KEY RISK INDICATORS (KRIs) AND KEY PERFORMANCE INDICATORS (KPIs)

Key risk indicators (KRIs) and key performance indicators (KPIs) are essential and related. Though they are related, they are different. Hence, it is vital to understand the difference between KRIs and KPIs. Both key risk indicators (KRIs) and key performance indicators (KPIs) are essential and related. They work together to provide companies and their leaders with the metrics to fortify their businesses. They work hand-in-hand to create a complete picture for effective and timely decision-making. 

Key Risk Indicators (KRIs) are measures and metrics that relate to a specific risk and demonstrate a change in the likelihood or consequence of the risk occurring. Key risk indicators often need clarification with key performance indicators (KPIs), which help an organisation assess progress toward declared goals. KPIs identify and prioritise a company’s key objectives and monitor performance against those goals. KPIs look backwards and focus on how thriving companies are achieving their goals.

KRIs look toward the future. They assess and manage potential risks to goals. They focus on companies’ likelihood of achieving their plans based on potential risk factors. KRIs are linked to strategic priorities and identify each key goal’s current and emerging risks. 

Key Risk Indicators (KRIs) provide metrics regarding risks and their potential impact on business performance. They are an early warning capability for monitoring, analysing, managing and mitigating key risks. By contrast, KPIs demonstrate how well the organisation performs against its goals and objectives – e.g., sales, revenues and customer satisfaction.

Think of it this way:

• Key Performance Indicators (KPIs) answer the question, “How are we doing against our goals?” While
• Key Risk Indicators (KRIs) answer the question, “What is the likelihood that we might not achieve our goals?” or “What might prevent us from achieving our goals?”

You can’t have one without the other if you want to manage performance and risk effectively. Therefore, integrating KRIs into a company’s performance management framework is vital to linking key risk indicators (KRIs) and key performance indicators (KPIs) within the organisation. Hence, a business needs to establish the right risk indicators to monitor its performance using related KPIs.

Significant Differences Between KRIs and KPIs Based on Measures and Purposes

1. A company’s management can use a Key Risk Indicator (KRI) to measure the risk associated with an activity. Generally, a KRI indicates the possibility of a future adverse event manifesting itself. On the other hand, a Key Performance Indicator (KPI) measures a performance goal or target to achieve business strategy and objectives.
2. KRI provides, preferably, early warning signals or lagging confirmation when risks (both strategic and operational) move in a direction that may prevent the achievement of KPIs. In contrast, KPI provides directional insight into how the organisation is progressing towards strategic objectives or the effectiveness of specific business processes or control objectives.

COMMON TYPES OF INDICATORS USED FOR KEY RISK INDICATORS AND KEY PERFORMANCE INDICATORS

Here are three common types of indicators of both KRIs and KPIs: 

1. RISK INDICATORS: Risk metrics indicate that an unwanted event is becoming more likely or potentially more impactful. 

2. CONTROL EFFECTIVENESS INDICATORS: Control effectiveness indicators are risk indicators that measure and monitor the health of the organisation’s risk controls. 

3. PERFORMANCE INDICATORS: These metrics indicate success or progress towards achieving the desired outcome.

STEPS FOR DESIGNING A KEY RISK INDICATOR

Here are the steps for designing a key risk indicator:

1) Identify the KRIs: list existing metrics and classify them according to historical performance and predictability. After doing this, determine where the voids are according to those metrics. You probably have fewer from the second category.

2) Select them: choose the KRIs that meet the above conditions, i.e. measurable, comparable and effective. Make sure that the chosen ones help identify the events’ root causes.

3) Determine the triggers: establish what actions can trigger a threat and create an action plan to deal with it.

4) Monitor them: After creating the list of KRIs, you should continue monitoring and assessing your performance.

HOW TO DEVELOP KEY RISK INDICATORS TO IMPROVE A COMPANY’S PERFORMANCE

Here are the ways of improving business performance through key performance indicators:

1. Identify the Company’s Risk Exposures

2. Establish the Company’s Key Performance Indicators

3. Establish the Company’s Major Processes

The following best practices can help a business to streamline the process of developing Key Risk Indicators.

1. When identifying KRIs, involve all relevant stakeholders from the start.
2. Gain stakeholder buy-in so everyone is on the same page and vested in the success.
3. Ensure all information about KRIs and the process are accessible to all stakeholders.
4. Create a central point of contact to whom stakeholders can get support. and
5. Keeping stakeholders updated regularly.

IMPORTANCE OF KEY RISK INDICATORS IN STRATEGIC PLANNING

Do you know what the future holds for your company? While you cannot predict exactly what might happen, an excellent key risk indicator (KPI) programme will give the company an insight into likely events to reduce risks and take advantage of unexpected opportunities.

Key risk indicators (KRIs) are essential in strategic planning. Strategic planning focuses on long-term planning, and KRIs are imperative to ensure sound strategic planning. A robust risk management programme highlights an organisation’s risks and can reduce their impact or help avert them altogether. This is only possible if one can peer into the future to see what risks and opportunities may be on the horizon. But how? Key risk indicators (KRIs) are metrics the company can use to help anticipate trends that may indicate future risk.

Here are reasons why KRIs are essential in a company’s strategic planning: 

1. Key Risk Indicators (KPIs) are Forward-Looking

2. Key Risk Indicators (KPIs) are Based on Strategy

3. Key Risk Indicators (KPIs) are Measurable

4. Key Risk Indicators (KPIs) are Actionable

See a video on Risk Mapping in Risk Management: https://youtu.be/487vKnCF_Tk