What Are Key Risk Indicators (KRI)? What Do Organizations Benefit from Using Them?

Today’s business and regulatory environment exposes companies to an uncertain risk landscape! Considering the increasing vulnerabilities and potential disruptions, a systematic plan to manage risk is particularly important. As a matter of fact, big brands like the Bank of America, JP Morgan, Amazon, and Facebook have committed several massive, short fallings with respect to compliance and regulatory obligations. Regulatory authorities had slammed BOA with a series of fines for multiple compliance offenses like mortgage loan servicing and foreclosure abuses amounting to $11bn to $25bn in agreement and again multiple settlements with DOJ amounting to approximately $16bn. It’s not just one of the cases. In 2021, the GDPR regulatory fine went up 40%, and brands like Marriott and British Airways were stung with fines for a series of violations. The failure to conduct a risk assessment and risk management can turn fatal!

How do we address and alleviate risk? To begin with, creating an enterprise risk management (ERM) framework — involves identifying, assessing, monitoring, and mitigating risks methodologically. It uses a series of metrics to predict the high-risk areas letting you take timely action. Basically, metrics are quantifiable measures to indicate performance. In general, risk metrics identify areas where your risk management processes struggle and need more work.

One of the key metrics used in ERM is key risk indicators (KRI).

How are KRIs defined?

The COBIT 5 framework defines KRIs as metrics that show that the enterprise is, or has a high probability of being, subject to a risk that exceeds the defined risk appetite. They are key to monitoring the risk and optimizing controls for course correction. Moreover, they report and communicate risk management performance results and deviations to the relevant stakeholders, helping them take the right decisions about risk management.

Furthermore, KRIs, with other valuable metrics like KPIs, provides key insights into an organization’s risk profile and changing risk landscape. They help predict risks that can impact the organization adversely. They indicate the changes in the levels of risk profile and provide early warnings about the risk and control environment.

For KRIs to be effective, they should follow some characteristics. For instance, KRIs should be:

• Measurable

• Quantifiable

• Comparable

• Informational

• Predictable

• Relevant to risk

All things considered, KRIs are expected to answer the following questions, “what are the risks that can disrupt organizations from achieving their objectives? This tool’s primary and most crucial objective is to alarm well before something heads down the path of disaster.

Why are KRIs important?

As discussed in the previous sections, KRIs form an integral part of the enterprise risk management framework, and it helps in identifying risk trends and spotting weaknesses in controls.

The significant reasons why KRIs are essential are:

• Promote objectivity in risk management practices

• Implement benchmarking, creating perspective and efficiency

• Measure risks and provide insights into the weak spots

• Assist in risk monitoring and control process

• Identify emerging risk trends

• Alert stakeholders in advance about weaknesses in controls

• Enable teams to design and strengthen effective risk responses

What are the types of KRIs?

Since key risk indicator monitors risks concerning the objectives of the organization, KRIs developed for an organization can be completely different from the others. Even so, they can be listed broadly into four major categories.

Operational KRIs:

These indicators arise from day-to-day operations and could range from process inefficiencies, weak controls, leadership changes, and changes to strategic plans.

Human resource KRIs:

These are people factors that Human Resource departments commonly use. These indicators range from employee satisfaction, employee turnover, labor shortage, talent retention

Technological KRIs:

Technology-related KRIs quantify technologies elements and provide indicators for digital risks, system failures, data breaches, etc.

Financial KRIs:

These indicators measure economic factors, market risks, changes in budget, revenue goals, changes in strategic direction, and regulatory changes.

How do you design your KRIs?

Developing effective KRIs requires a deep understanding of your organization’s business objectives and risks that might deter them from achieving these goals. For example, if your organization’s objective is to increase the revenue by 30 in a specific market, you might devise strategies to achieve it. But risks can crop up and affect strategic initiatives. Map your critical risks to strategic initiatives and analyze the performance of their key metrics. Ideally, the KRIs need to be evaluated over a period to arrive at a logical conclusion. Add new metrics as new risks arise, as the old ones might not effectively measure the changes. The expert vet KRI designs provide insights on root cause events, threshold, and stress levels. They ensure that warnings are effectively communicated in time rather than in an incident.

What should the ideal KRI roadmap look like?

A KRI roadmap can shed light on creating a KRI framework. Here is an example of what a high-level roadmap should look like:

1. Establish the framework

2. Provide training on KRIs

3. Conducting workshops with business units

4. Finding the primary KRIs for the company

5. Establish tolerance levels for KRIs

6. Tracking and reporting KRIs

7. Creating remedial measures

8. Adding controls and updating them

Select the KRIs that are measurable, meaningful, and predictive (leading indicators). In particular, you need to map all aspects of risk to various indicators, such as the probability, impact, and action plan. A robust risk framework combines indicators that let estimate risk probability, risk impact, and risk action plan. Set the thresholds based on industry indicators or internal evaluation. Establish escalation processes, and ensure timely reporting to relevant stakeholders.

Here are some examples of KRIs that are commonly used:

Financial risk: value at risk (VaR), days payable outstanding.

Operational risk: number of compliance deadlines missed, Meantime Between Failures (MTBF).

Role of Technology in Measuring and Managing Risks

Technology helps in creating metrics and measurements for various risk parameters. Modern risk management technology looks not only for risks but also must measure the various processes, controls, and objectives. Once you establish the parameters the system should monitor, establish thresholds for rising and dropping indicators. Utilize your risk management technology to knit a story around KRIs and communicate the variations and impact to the stakeholders. Technology makes it easier to set and analyze critical risk areas, thresholds, and breaches. Additionally, harness the technology to demonstrate compliance, and communicate the reasons behind specific actions and the situations that led to those actions since the audit trail tracks and records all the potential information

Conclusion

Basically, an organization’s ability to manage risks rests on its understanding of indicators of potential risks to a great extent. Hence, developing and leveraging KRIs is critical to successful risk management processes. Having stated that, selecting the right KRIs, designing them with thought and deliberation, and monitoring them continuously over a period are equally vital for them to be effective.

VComply Compliance and Risk Management platform seamlessly combines risk assessment, management, and mitigation tools and functionality into an easy-to-use package. It empowers compliance and risk teams to operate at maximum efficiency. Risk teams can use it to collaborate freely with the workshop functionality and enforce controls to mitigate losses.