Key Risk Indicators: Examples & Definitions

Many businesses spend time talking about their key performance indicators (KPIs). On the other side of the same coin sits key risk indicators, or KRIs. It’s important to set key risk indicators in the pursuit of achieving business goals. 

While key risk indicators don’t cover every single type of risk your business could face, it focuses on the main, or “key,” concerns. Here, we will break down everything you need to know about a key risk indicator, how they relate to KPIs, how to choose KRIs and tools by which you can easily keep track of them. 

Coming Up

1. What is a Key Risk Indicator?

2. The Relation of KRIs to KPIs

3. Using KRIs the Best Way

4. Choosing KRIs & Challenges

5. Qualities of Good KRIs

6. Why Organisations Struggle with KRIs

7. Designing Effective KRIs

8. Role of Technology and KRIs

9. The Bottom Line

What is a Key Risk Indicator?

A key risk indicator is an indicator, or metric, used to assess and measure a possible risk. A simple way to think about a KRI is to consider it like you do an alarm. If something is heading down the path of a disaster, you will be made aware of it by taking measurement of a KRI, rather than waiting for the negative outcomes to occur. 

As mentioned, KRIs are just a selection of measurement tools to monitor overall risk. While you won’t focus, or even know, every type of risk your business faces, you can take proactive and reasonable steps to keep an eye on the most crucial types of risk. 

KRIs can be broken down into three main categories, based on types of risk:

• Financial: These are metrics that help to quantify market risk, regulatory changes or competitive risk. 
  

• People: KRIs that measure employee satisfaction, customer churn, employee retention, etc. 
  

• Operational: Ways to take stock of risks that can stem from day-to-day like a technical malfunction or security breach. 

‍

The Relation of KRIs to KPIs 

You can easily translate the aphorism, “No risk, no reward,” to “No KRIs, no KPIs.” You’ll come across resources that separate the two, placing key performance indicators under performance management and key risk indicators under risk management. However, you really can’t have one without the other. A KRI can help greatly in informing a KPI. This is because every KPI has to be met by a strategic plan to make it come to fruition. Within strategic development, you must outline, understand and consider what risks will be brought on along the journey. 

To reach a business goal, you will undoubtedly want to track key performance indicators. The most simple way to track KPIs is through automation tools that can leverage real-time data. Such software runs processes for you to reduce risk inherently. Simultaneously, you can view dashboards to see how processes are performing. Easy-to-read visualisations and reports allow business leaders to keep track of KPIs and monitor any changes made for success. If you aren’t reaching KPIs, then you will look to resolve issues hindering success. 

In the same vein, as you measure a KPI, you’ll want to be measuring a KRI. This is because a KPI helps answer questions as to how to achieve a business goal. In this pursuit, your business naturally assumes risk. A KRI answers what risk you are likely to face that could inhibit your business reaching its goals. A KRI can also be an early warning device to signal that a KPI won’t be met because an issues has occurred. 

Using KRIs the Best Way

Now that it’s easier to see how a KPI and KRI are inherently linked, let’s discuss how to use KRIs in the most effective manner. 

Firstly, you’ll want to define business goals and associated KPIs. Once that’s been done, you’ll devise a strategy. Part of the strategy development includes outlining each associated risk and choosing KRIs to monitor the risk. To define a KRI, you’ll want it to fulfill these three characteristics:

• Quantifiable (numerically, percentages, ratios)
• Specific 
• Predictive 
  

KRIs and KPIs only matter if they are being measured and tracked. This can be done with data. The more data you can access and transform into insights, the better equipped your team will be at making smart business decisions. Automation software is built for this purpose. 

Automation software has the power to pull data from various sources within your business. It can combine, transform and analyse data in seconds, granting you access to real time data analytics. Not only does this help to meet KPIs, but it also is a useful tool to have when you set thresholds for KRIs. If a key risk indicator has a quantifiable threshold to sound the alarm, then you can trust a software system to read the data as it's occurring so you can react in a timely manner before risk wreaks havoc. 

Choosing KRIs & Challenges

Defining your KPIs strategic initiatives to achieve business goals will open the door to choosing your KRIs. KRIs are based on first having determined likely risks associated with your actions. We’ll stress it again - it’s crucial that your KRIs are measurable. 

With KRIs in place, you must then consistently track them. With a risk management strategy in place, you can address any KRI that triggers the need for action. There are some challenges associated with choosing KRIs and tracking them. However, if you find the right technological tools to assist, then you can avoid having to face the following: 

• Having trouble identifying KRIs for all risk 
• Failure in collecting and tracking adequate data to reap KRI values 
• Not connecting KPIs with KRIs 
• Not setting up an action plans if thresholds are met 
  

Qualities of Good KRIs

When defining your business’ key risk indicators, it’s best that each possesses the following characteristics: 

• Quantifiable (can be associated with numerical costs) 
• Measurable (accurately and precisely) 
• Can be validated (have a high level of confidence) 
• Relevant (measuring the right thing associated with decisions) 
  

Here are some examples of KRIs that are commonly used by those in finance: 

• Credit risk: quick ratio, current ratio, value at risk (VaR)
• Operational risk: number of accounting deadlines missed, percentage of departments without KPIs in place 
• Technology risk: mean time between failure (MTBF), mean time to repair (MTTR), Percentage of devices not covered by monitoring solutions 

‍

Why Organisations Struggle with KRIs

One of the most common struggles that organisations face when dealing with KRIs is the ability to glean insights from data. While the first necessity is choosing a measurement that is quantifiable, the second is making sure you can access and transform the required data into understandable bites of information. Many organisations fail to allocate the resources needed for this to happen. 

It’s important to choose a software tool that can manage your data so you don’t have to worry about it. In many instances, businesses collect and store data disparately across the organisation. From spreadsheets to manual data entry, there’s a high risk for errors and delayed data. But, with an automation tool, you can leverage the power of technology to access data in real time and assess trends and benchmarks at any given time. 

Furthermore, many organisations conflate key risk indicators with key performance indicators. For example, a financial institution may be increasing their clientele, adding to their bottom line. But, at the same time, their number of accounting deadlines missed - external can be growing. This will increase their regulatory risk. So, it’s important that KRIs are separately measured with regard to overall business goals. 

Designing Effective KRIs

Designing effective KRIs can be done through a mapping exercise. You begin by defining the business goal. For example, we will call this increasing profits. 

Then, you can make a map of the ways by which you can increase profits - increasing revenues or decreasing costs. Each path can be accomplished by an infinite amount of strategies, but your team can choose the most feasible methods to either increase revenues or decrease costs. Then, you want to define the risks associated with each. For example, increasing revenues could come by increasing product prices. But, this could cause the risk of customer churn or losing competitive share if you are undercut. 

So, by linking each KRI to a strategic initiative, you will be able to follow the path of least resistance. This direct pathway helps management teams keep an eye on the KRIs that matter, without getting bogged down by excess and unnecessary data points and information. 

Role of Technology and KRIs

In today’s competitive business landscape, you’ll be hard pressed to find a successful organisation that doesn’t take advantage of the most powerful business tools. Within the suite of business intelligence sits automation software that can store, track, transform and report data. At the heart of all KRIs (and KPIs) is data records. It’s up to your team to define the right KRIs to measure, but it’s up to the system to do the heavy lifting. 

With real time data analytics and reports at your fingertips, you can rest assured knowing that processes are running as planned. Once you’ve designated KRI thresholds, the system will alert you when a KRI is approaching that number. To deal with KRIs, you can design action plans in advance and leverage automation tools to follow suit once activated. 

While you manage the high-level concerns within a business, the automation tool will track, perform and report whatever you may need to meet your outlined business objectives. 

The Bottom Line 

Key risk indicators are as important as key performance indicators. The two work together to help businesses achieve their desired goals. As a business leader, it’s up to you to help design and evaluate key risk indicators. With the aid of automation tools, you can trust that data is securely collected, stored and easily accessed to review KRIs in a timely manner.