Key performance indicators (KPIs) and key risk indicators (KRIs) are two critical ingredients of sound risk management. Developing key indicators helps ensure that strategic objectives are being maintained in alignment with risk appetite. While many organizations use the terms interchangeably, they serve different purposes.
KPI: a measurable value that demonstrates how effectively an organization is achieving key strategic objectives
KRI: a metric that provides an early signal of increasing risk exposure and its potential impact on strategic initiatives and/or objectives
Together, these key indicators help organizations understand how events in the past (KPIs) or events in the future (KRIs) have impacted or may impact the success of business strategies.
Defined: Each KPI should provide meaningful information about the objective being tracked and reflect a specific performance metric to ensure consistent data collection, measurement, and comparison
Progress-Oriented: Each KPI should provide specific evidence that documents the organization’s status in achieving the objective and facilitates oversight of performance change or trends
Timely: Each KPI should be based on data that is available within a reasonable, predictable period of time to ensure the metric can be measured and monitored at a regular frequency
Specific: Each KRI should address a specific early indicator of increasing risk and include trigger limits or thresholds that specify when escalation procedures should begin
Measurable: Each KRI should represent an aspect of risk exposure (as designated by a number, ratio, percentage, or other metric) that can be measured, monitored, and compared over defined periods of time
Managed: Each KRI should be assigned to a measurement owner and a risk owner
Both KPIs and KRIs are informative, proactive risk management tools that help the board, management, and other stakeholders make more strategic decisions. Integrating the two metrics in a single ERM system can equip organizations to understand the relationship between risk and business performance, contributing to a holistic view of the enterprise, better risk forecasting, and improved ability to meet strategic objectives.
Organizations that don’t leverage KPIs and KRIs to improve risk management may suffer unnecessary risk exposure or underperformance in critical business areas. However, developing key indicators and understanding their significance for business strategy can be a difficult undertaking.
Quantivate Enterprise Risk Management (ERM) Software helps simplify the process of developing key indicators and streamline overall risk management with: