Key Performance Indicators vs Key Risk Indicators: Developing Key Indicators for Effective Risk Management

In the fast-paced business world of today, companies encounter a growing variety of both challenges and opportunities. Digitalization and globalization have created a dynamic environment where risks can emerge and escalate quickly. To navigate this terrain successfully, companies are turning to sophisticated risk management strategies that go beyond traditional approaches.

At the heart of modern risk management lies the concept of Key Indicators – metrics that provide crucial insights into an organization’s health and potential vulnerabilities. Two types of indicators stand out as particularly vital: Key Performance Indicators (KPIs) and Key Risk Indicators (KRIs). While often conflated, these metrics serve distinct yet complementary purposes in steering a company towards success.

This article delves into the critical differences between KPI and KRI, exploring how each contributes to a comprehensive risk management framework. We’ll examine how these indicators can be developed and integrated to create a robust system that not only monitors performance but also anticipates and mitigates potential risks. By understanding and effectively implementing both KPIs and KRIs, organizations can enhance their decision-making processes, improve operational efficiency, and build resilience in the face of uncertainty.

Join us as we unpack the nuances of these essential tools and discover how they can be leveraged to create a more proactive, informed, and adaptable approach to risk management in the modern business world.

What are KRIs and KPIs: Definition

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.

Key Performance Indicators: Characteristics and Process

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

Key Risk Indicators: Characteristics and Process

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

What is the Difference Between KPI and KRI?

Performance indicators and risk indicators are often confused, but it’s crucial to understand their distinct roles. Performance indicators, or KPIs, typically provide a broad view of how an organization is doing overall. While they’re great for spotting trends and keeping an eye on general performance, they might not catch early signs of emerging risks.

That’s where risk indicators, or KRIs, come in. These metrics are designed to alert management to growing risk exposures across different parts of the business. Some KRIs are straightforward ratios that executives can monitor to spot developing risks or potential opportunities that might require action. Others are more complex, combining various risk signals into a comprehensive score that can reveal new threats or chances for growth.

To get the most out of both performance and risk management, it’s smart to link each risk indicator to a related performance indicator. Performance metrics have been a staple of management for years, and one effective way to bridge the gap between performance and risk management is to weave risk factors into the company’s existing performance data. By doing this, a business can track both performance and risk simultaneously, as part of a single, integrated process.

For example, a bank might use customer churn rate as a KPI, measuring the percentage of customers who closed their accounts in the past quarter. This reflects events that have already occurred. In contrast, a proactive KRI could be the frequency of customer complaints. By monitoring rising complaint levels, the bank can identify and address service issues before they lead to account closures. This allows the bank to implement improvements and potentially reduce future customer churn.

This approach helps organizations strike a balance between managing risks and seizing opportunities. It also ensures that performance management and risk management work together smoothly, rather than operating in separate silos. By considering both aspects together, companies can make more informed decisions and adapt more quickly to changing circumstances.

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.