Key Risk Indicators

In today’s fast paced business world, being able to identify, monitor and manage risk is critical to any organisation’s sustainability and success. One of the best tools to do this is to use Key Risk Indicators (KRIs). These metrics give you valuable insight into potential risk exposures and allow you to make informed decisions to mitigate those risks.

What are Key Risk Indicators?

Key Risk Indicators (KRIs) are metrics that measure the main drivers of exposure of key risks. They are early warning signs, so you can detect potential issues before they become big problems. KRIs are often quantitative and measure the quality of the control environment within a business.

While Key Performance Indicators (KPIs) measure the performance of operational processes, KRIs give you a different view by highlighting the weaknesses and vulnerabilities. By doing so they give you a more complete view of the risk landscape and enable proactive risk management.

Example

KRIs can be tailored to the organisation and risk profile. Here are a few examples to show how KRIs can be applied in different industries:

1. Financial Services

In the financial sector KRIs are critical for managing operational risk. For example an investment bank might use the following KRIs to monitor its processing systems:

• System Downtime: Measures the number of minutes a system is down. High system downtime means reliability issues and potential disruption to trading.
• System Slow Time: Tracks the minutes a system is busy and slow. Frequent slow times will impact transaction speed and customer satisfaction.

These KRIs help the bank to identify where the system needs to be improved and take action to ensure business runs smoothly.

2. Manufacturing

In manufacturing product quality and operational efficiency is key. KRIs for a manufacturing company might be:

• Defect Rate: Measures the percentage of defective products. A rising defect rate means there’s an issue in the production process that needs to be fixed now.
• Machine Downtime: Tracks the time machines are down for maintenance or failure. High machine downtime will impact production schedules and costs.

By monitoring these KRIs manufacturers can fix problems early and maintain high quality and efficiency.

3. Healthcare

In the healthcare industry patient safety and regulatory compliance is key. KRIs for a healthcare provider might be:

• Medication Error Rate: Measures the number of medication errors per 1,000 prescriptions. A rising error rate means there’s an issue with the medication administration process.
• Patient Readmission Rate: Tracks the percentage of patients readmitted within 30 days of discharge. High readmission rates means there’s an issue with patient care and discharge planning.

These KRIs help healthcare providers to identify where patient care can be improved and comply with industry regulations.

Why are they important?

KRIs are important for risk management for several reasons:

To use KRIs as early warning signals organisations need to set thresholds or trigger points for each indicator. These thresholds are the levels at which risk exposure becomes unacceptable and requires immediate attention. Setting the right thresholds involves looking at historical data, industry benchmarks and expert judgement. 

1. Early Warning System – KRIs are an early warning system, alerting you to potential risks before they become major problems. By monitoring KRIs you can see trends and patterns that indicate emerging risks and take action to mitigate those risks.
2. Informed Decision Making – KRIs provide data to inform decision making across the organisation. By understanding the drivers of risk exposure you can prioritise resources and actions to address the most critical risks. This leads to better risk management and better overall performance.
3. Risk Awareness – Implementing KRIs creates a risk aware culture within the organisation. Employees at all levels become more aware of potential risks and their impact on the business. This awareness leads to a more proactive approach to risk management and less likelihood of surprises.
4. Regulatory Compliance – Many industries are regulated. KRIs help organisations demonstrate compliance with those regulations by providing measurable data on risk management practices. This can be particularly important during audits and inspections where evidence of good risk management is required.

How to Develop Key Risk Indicators

To get the most out of KRIs you need to follow a structured approach to developing and implementing them. Here are the steps to follow:

1. Identify Key Risks –  The first step in developing KRIs is to identify the key risks the organisation faces. This involves a thorough risk assessment to understand the potential impact and likelihood of different risks. Key risks will vary by industry but common categories are operational, financial, compliance and strategic risks.
2. KRIs – Once the key risks are identified the next step is to define the KRIs that will be used to measure those risks. KRIs should be specific, measurable and relevant to the identified risks. They should provide clear insight into the drivers of risk exposure and be aligned to the organisation’s overall risk management objectives.
3. Thresholds – To use KRIs as early warning signals organisations need to set thresholds or trigger points for each indicator. These thresholds are the levels at which risk exposure becomes unacceptable and requires immediate attention. Setting the right thresholds involves looking at historical data, industry benchmarks and expert judgement.
4.  Monitor and Report – Monitoring and reporting of KRIs is critical to ensure they provide real time and accurate information. Organisations should have processes for collecting, analysing and reporting KRI data. This includes defining roles and responsibilities for KRI monitoring and ensuring relevant stakeholders receive regular updates on risk levels.
5. Review and Refine – KRIs shouldn’t be static; they need to be reviewed and refined regularly to remain relevant and effective. As the risk landscape changes new risks will emerge and existing risks will change in significance. Regular reviews of KRIs will ensure they remain relevant.

Conclusion

Key Risk Indicators are essential for monitoring and managing risk in today’s fast changing world. By providing early warnings, informing decisions, increasing risk awareness and supporting regulatory compliance KRIs allow you to navigate uncertainty and stay resilient. A KRI framework requires a structured approach from identifying key risks to defining, monitoring and reviewing KRIs. With the right KRIs in place you can manage risk proactively and succeed sustainably.