What Are Key Risk Indicators? And How to Get Started
From the competitive market to data security threats, every modern business needs a risk management system to protect internal processes. It is critical for key risk indicators to be integrated into the risk management framework to ensure companies can track emerging threats in real-time.
By understanding the value of a key risk indicator, organizations can incorporate them into business strategies to anticipate hazards.
What are Key Risk Indicators?
Key risk indicators (KRIs) are metrics that measure the probability that a business will be exposed to a threat and how it relates to their risk appetite. A risk appetite is how many hazards a company is able to withstand in order to reach a financial target. Once an organization exceeds their risk appetite, threats can have a significant impact on their stability.
In order to avoid this, many businesses monitor KRIs to ensure they remain way below their tolerance levels. When the metrics alert companies of emerging risks, they can mitigate threats before they can impact operations.
KRIs must be quantifiable, so management can quickly assess potential risks. For example, retailers can monitor a customer KRI that reflects negative reviews for a new product. On the other hand, manufacturers may have a KRI that measures the likelihood of machine malfunctions.
Other common KRIs include-
- Employee turnover
- Employee satisfaction
- Customer retention
- Security breach
KRI and KPI Relation
KRIs and key performance indicators (KPIs) are closely related as they both help companies quickly assess their health. However, they are often kept separate because they measure completely different components to success.
While KRIs are used to detect emerging risks, KPIs measure a business's performance in various departments, such as-
- Profit margins
- Lead times
- Customer engagement
- Meeting financial targets
KPIs are able to quantify a company's success but are unable to detect risks that may affect it. Both metrics are needed to create a balance of risk and financial insight. Therefore, organizations need to monitor both KRIs and KPIs to gain a holistic view of their overall stability.
For example, a retailer may find that their customer acquisition KPI has remained steady, but the KRI for a new product shows that the majority of customer reviews are negative. Therefore, the business must promptly reevaluate their product development to address consumers' concerns before it affects the new shoppers' advocacy.
5 Components of the KRI Process
KRIs are essential to every business's risk management, so owners must understand the process of translating risk identification to mitigation practices.
1. KRI Identification
First, companies need to define their existing metrics and assess the gaps between them to improve their insights. For example, a retailer may have employee turnover and employee satisfaction KRIs but lack a performance evaluation metric. This KRI could potentially explain low retention rates.
Management can identify KRIs by performing a risk control self-assessment (RCSA) in which all departments are interviewed. However, companies must not rely too heavily on the interview results, as they may be biased. Instead, organizations should focus on defined, significant risks that have the ability to impact the control environment.
The metrics should be quantified through values, ratios, percentages, or trends. This enables managers to collect and review months of KRIs to define patterns.
2. KRI Selection
Once all of the KRIs are outlined, businesses need to choose the metrics they will continuously monitor. The KRIs should be insightful, predictive, and comprehensive. There should also be a balance between leading and lagging metrics to create a holistic risk management perspective.
Management should be careful not to choose indicators that are difficult to gather, manage, or provide limited information.
3. Establishing Thresholds
At this point, businesses need to define their risk appetite before they can establish thresholds. These risk benchmarks determine how much the company is willing to handle before taking action. Once KRIs reach these targets, the management system will send warning alerts to the managers.
Once the risk thresholds are drafted, they must be approved by the board of executives before they are implemented.
4. KRI Monitoring and Reporting
KRIs can be tracked daily, weekly, monthly, or quarterly, depending on what is measured. For example, customer-related KRIs should be tracked daily, while supplier-related metrics can be monitored monthly.
To ensure timely reports, businesses should implement a KRI framework and policy that enforces their management schedule. KRI reports should be relayed to both stakeholders and risk managers so they can improve their governance practices.
5. Mitigation Plans
Companies must have risk mitigation plans (RMPs) in place for high-risk events, such as threats with high severity or frequency. If businesses are unaware of their high-risk items, they should assess their control levels and prioritize threats.
How to Use KRIs
KRIs provide valuable insight into emerging threats that a business otherwise may not have known. However, many companies are unaware of how to take advantage of these metrics.
Organizations should incorporate KRIs into their business strategies from the start, as they can greatly impact if a company can meet its targets. As each goal is established, project managers must determine the performance requirements and potential risks that affect progression to the benchmark. This means that KRIs should be monitored alongside KPIs to cross-examine risks and performance metrics.
Once the metrics are assigned, management should estimate the values they must maintain in order to achieve their goal within their time restraint. This way, employees can take immediate action if the metrics exceed their risk appetite.