Developing Key Indicators: KPIs, KRIs, and Effective Risk Management

What is the difference between KPIs and KRIs?

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

• Monitors progress in meeting goals, objectives, or outcomes
• Provides greater oversight of performance trends and aids in resource allocation
• Examples: market share growth, customer/membership growth, net interest margin/rate, net worth growth, return on average assets

KRI: a metric that provides an early signal of increasing risk exposure and its potential impact on strategic initiatives and/or objectives

• Monitors the organization’s risk profile and relevant emerging risks
• Provides additional response time to accept, avoid, mitigate, or reduce the possible impact of the risk
• Examples: market share, market size, customer/membership retention rates, change in interest rate, profitability

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.

KPI Characteristics

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

KPI Process

1. Select objective to track
2. Determine goal and tolerance triggers
   • low/high parameters that trigger an alert to board or management
3. Tracking and reporting
   • deliver alerts to appropriate stakeholders
4. Regularly review and update

KRI Characteristics

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

KRI Process

1. Select risk event to monitor
2. Identify indicators that provide insight into the likelihood of the risk event occurring
3. Determine triggers that prompt proactive discussion or action to address risk exposure
4. Monitoring and reporting
5. Regularly review and update

The Benefits of Developing Key Indicators

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.

• Enables a better understanding of the organization’s risk landscape and performance
• Provides high-quality, actionable information to stakeholders (board, management, department leaders, regulators, auditors, etc.)
• Embeds risk considerations in strategic business decisions
• Improves corporate governance and enterprise risk management
• Establishes common terminology for discussing risk and performance

Unlock the power of KPIs and KRIs in risk management

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:

• A built-in risk and control library featuring 60+ key indicators, 800+ risks, and 3,000+ controls that you can utilize in your workflows
• A risk calculator featuring qualitative and quantitative results
• Customizable dashboards and reports, including executive reporting tools
• Automated workflow management with integrated alerts
• And more…

Learn more about Quantivate ERM by downloading the datasheet, or schedule a personalized demo to see it in action.