Key Risk Indicators

Key Risk Indicators are tools typically used by a company's management to determine the risks related to an activity. They ensure that the management has a fair idea of the probability of risks in different aspects of the business. As a result, a key risk indicators dashboard is considered non-negotiable in operational risk analysis.

KRIs can give a perspective of risk exposure in different situations, independently or in combination with other environment-related data. Risk is an immeasurable factor in most businesses, especially small or medium enterprises. However, when done right, KRIs are predictive, measurable, and comparable. They can come in handy in operational, financial, technological, and human resources-related processes.

Key risk indicators, or KRIs, are metrics used by an organization's management to gauge risks that can negatively affect the business. They are considered the early detection systems that point out potential risks and provide the basis for organizations to curate a contingency plan.

These metrics also bring the weaknesses of the organization’s business structure and processes to the foreground. Subsequently, a risk assessment plan can be curated, allowing management to monitor, assess, monitor, and eliminate risks.

There is a myth that KRIs are only effective with operational processes. However, the metric is not limited to a particular business function. It can and has been an integral part of companies' risk management strategies.

Once the potential risks of different processes or functions are identified, management can allocate resources according to the stakes involved in a specific task. This ensures that resource and task allocation are more efficient.

Some industries are heavily regulated, including manufacturing, transportation, and oil and gas. KRIs can ensure that organizations comply with regulatory requirements, completely negating the risk of regulatory or legal issues.

Ultimately, the data obtained through curating sample key risk indicators gives the decision-makers a mountain of data that can help them gain significant insights into how the business's processes and structure can develop and how risks can be reduced or eliminated.

Operational risk key risk indicators are not the only purpose or use of KRIs. The purpose of using these metrics is more widespread. A few of the most significant areas where KRIs can be of great help are:

• These metrics are handy to gauge and quantify risks associated with each process and the impact it can make on the business.
• It can spot the potential risks of any existing or upcoming tasks.
• It is a classic enabler of ongoing risk control and oversight.
• As a benchmarking tool, it provides a clear perspective of the performance of the company.
• Since it flags potential risks in advance, it gives companies time to devise an action plan to mitigate them.
• It ensures that risk as a factor remains objective, quantifiable, and measurable.

A few characteristics categorize KRIs as efficient and reliable. They are:

• Quantifiability: The foremost trait of a good key risk indicator dashboard is that it has data expressed in numerical form or ratios. This makes analysis and decisions data-driven and is easier to track in the long run.
• Consistency: The data collection and processing methodology must be the same to ensure that the interpretation or analysis part of KRIs can remain sustainably relevant. 
• Relevance: The parameters of KRIs must be directly aligned with the organization's ongoing and potential risks.
• Sensitivity: The system must be able to detect even the most minor changes and inform the management about potential risks. Similarly, it should be able to adjust the risk assessment according to the action taken to reduce them.
• Specificity: It should give complete impetus to the organizations' issues and give clear signals whenever there is a shift in ideal parameters.
• Integration: It should be in line with the organization's overall goal, especially with the risk management process and strategy.
• Adaptation: A good KRI must be reviewed regularly. The reviews must lead to making relevant changes to ensure that it is updated and gives the best results.

Before any organization can experience the positive effect of identifying, assessing, and eliminating adverse effects, they must perform a few tasks. Here is how an organization can develop a key risk indicator dashboard:

• Key objectives: Before KRIs can be determined, an organization must understand its core objectives. For instance, if the organization wants to increase its profits, it must place parameters accordingly.
• Risk Prioritization: Risks must be segregated based on their quantum of impact on the business objectives. Management must determine the risks above and below their risk threshold and prioritize accordingly.
• KRIs Selection: The selection can be top-down or bottom-up, depending on the organizational structure and nature of the business. However, it is vital to ensure that the KRIs are measurable, comparative, informative, and predictive.
• KRIs Threshold: Setting an upper and lower limit for different KRIs gives management an idea of the potential risk in different scenarios and processes. It also makes assigning follow-up tasks to eliminate the risks.
• Review & Updation: These metrics must be revisited and evaluated at regular intervals. While automation is very much possible today, assigning the responsibility to a critical member of the team could be beneficial.

Now that most of the concept's theoretical aspects are established, it is time to discuss its practical aspects. Let's use the examples below to illustrate the real-life application of operational risk key risk indicators.

Example #1

ABC manufacturing enterprises produce corn flour, corn starch, and wheat flour. Most of their raw materials are procured from Russia, and they import a consignment every two weeks. For years, the risk of supply chain disruptions and fluctuations was minimal.

However, when the Russia-Ukraine war commenced, the supply chain and price fluctuations became a significant risk for ABC Enterprises. They onboarded more suppliers from different parts of the world. As a result, they found alternative vendors to rely on, which reduced their risk of depending on a single supplier.

Example #2

Forced labor is the modern equivalent of slavery. UN member states came together to form 17 goals toward sustainable development. During the research, it was found that over 40.3 million individuals were subject to this form of slavery as of 2016.

Further, a few pointers were identified as key risk indicators that could increase the likelihood of forced labor. The sample key risk indicators included transactional, behavioral, Know-Your-Customer (KYC), geographically linked, and high-risk business indicators.

An efficient risk management strategy must have an effective key risk indicators dashboard. It helps organizations identify, monitor, and eliminate various risks. A few of the most critical points are:

• KRIs give organizations valuable data points that help them spot various potential internal and external risks.
• It helps businesses determine the impact of different risks. As a result, they can prioritize and allocate resources according to the seriousness of the threat.
• It clearly shows early signs of emerging risks. As a result, decision-makers have enough time to reassess the situation and devise a contingency plan.
• It is common for companies to incorporate risk management software. However, having KPIs in place gives companies an additional layer of protection.
• These metrics are an integral part of reducing costs, achieving compliance, improving operations, and retaining employees.