Using Key Risk Indicators for Enhanced Risk Predictions
Key risk indicators (KRIs) can provide your organization with risk insights and predictions. KRIs are common in the financial sector and are increasingly being used in other industries as well. Our risk insights tool Insight360 also uses KRIs to enhance risk intelligence. Any business that wants to have more control and visibility over emerging risks needs to closely monitor the KRIs that are important for enterprise risk management.
Using the right key risk indicators
Using metrics for improved management only delivers results if the right metrics are picked. The right data should be monitored to generate insights that will highlight issues and opportunities for the business. As the name suggests, key risk indicators are metrics that directly affect risk levels of the organization.
The qualities of a good risk indicator
Here are the basic requirements for a key risk indicator to successfully predict risk
The risk metric being used should be based on data instead of assumptions. It is better to track data that is directly being generated instead of reports that may provide a subjective view of things. An organization can easily track the total number of complaints generated by a department. On the other hand, tracking the customer satisfaction level is a subjective metric. Customer satisfaction level is determined through a customer survey. The results of the survey represent the perception of customers about how satisfied they are with the organization’s services, and thus may not be an adequate metric to assess the real performance of the organization.
It should be kept in mind that there will be some subjective metrics that will need to be used. Getting data from risk assessment reports is a good example of a subjective metric that is still significant and needs to be tracked. While RCSA reports are based on self-assessment questionnaires, which can be subjective in nature, these reports are still a critical part of risk management and cannot be ignored. Businesses should focus on standardizing risk and control taxonomies and closely monitor assessments to make them as objective as possible.
Easily trackable and quantifiable
Any chosen key risk indicator should be easily trackable. Using key risk indicators that require manual collection of data to generate are usually not very efficient. The most important function of key risk indicators is that they can predict risks which may otherwise be ignored. If a key risk indicator is based on data or analysis which needs to be generated manually then there is a chance that it may still be overlooked.
Using objective, quantifiable metrics enables businesses to easily and quickly update all key risk indicators. A metric based on the number of customer complaints or the number of compliance violations is easy to track, because the data in question is already being recorded by the departments managing customer complaints and compliance. No one needs to prepare the data for the indicator – it just needs to be fed into the indicator. In summary, key risk indicators should ideally use data that is already being generated within the organization and using that data to highlight emerging risks.
An accurate view of the risks that may affect the enterprise is only possible if the key risk indicators being used are consistent across different departments. If the KRIs are being tracked within a department then it is fine for each department to have their own approach towards measuring the data. However, if the goal is to assess emerging risks that will affect the organization overall there needs to be homogeneity in risk assessments and data collection.
Inconsistent risk metrics can present a negative view of a department because a particular risk may affect a single department more than it affects any other department. It can also hide significant risks from the view – if metrics are unbalanced, the threshold being used to determine problematic indicator status may be too high for some departments.
Useful enterprise risk indicators
Based on the criterion discussed above we can determine some useful key risk indicators for enterprise risks.
Complaints per x customers
Tracking the number of complaints generated per a set number of customers can be a great indicator for emerging problems that need to be mitigated quickly. The number of customers depends on the nature of the business. If your organization is a B2C business with thousands of customers then you can track complaints per 1000 or even 10,000 customers, depending on your retail volumes. B2B businesses can track complaints per 100 customers instead.
It is very important to have historical complaint data. There will always be a certain number of complaints no matter how good your employees and services are. It is thus important to know the normal number of complaints for every business unit and process so anything out of the norm can be tracked via the key risk indicator.
Compliance violations are identified and monitored by the compliance department. All compliance violations expose the organization to risks, because compliance is in place to minimize risks. This metric is easy to track because it is already being monitored by the compliance department. It simply needs to be included in key risk indicators as well.
Every industry has its own set of KRIs because each industry has unique risks to contend with. If the business deal with agriculture then it should have key risk indicators that track the growth of crops and vegetables across the country, because it can predict increasing costs of materials and demands. A business that deals with currencies must use forex rates as a key risk indicator, and so on.
Track and analyze KRIs automatically
Is your organization looking for a better and smarter approach towards risk management through KRIs? Get in touch with our risk experts and read more about Insight360, a risk management tool that helps predict risks by combining internal and external KRIs.