Key Risk Indicators: A Proactive Approach to Risk Management

Key Risk Indicators (KRIs) are metrics used to measure and monitor potential vulnerabilities that could negatively impact an organization’s ability to achieve its objectives. Simply put, they are warning signs to help you spot potential problems before they become real threats.

We’ve broken down everything you need to know about KRIs — what they are, why they matter, and how to leverage them to protect your organization and optimize performance.

KRIs vs. KPIs: What’s the Difference?

Unlike Key Performance Indicators (KPIs), which help show how well things are going, KRIs highlight where things can go wrong. Here are some key differences between the two distinct, yet equally important metrics:

Focus:

KPIs measure performance, while KRIs measure potential risks.

Perspective:

KPIs look at past and current performance, while KRIs look forward to anticipate potential risks.

Objective:

KPIs aim to improve performance, while KRIs aim to mitigate risks and prevent adverse outcomes.

In short, KPIs are for playing offense, while KRIs are for measuring defense.

If you’re tracking performance, you also need to be tracking risk. By incorporating KRIs into risk management strategies, you can achieve your goals while minimizing losses and maintaining a competitive advantage.

Benefits of Tracking KRIs

Proactive Risk Mitigation

KRIs help organizations identify and understand the risks they face, making them more likely to detect threats earlier on. This way, they can take proactive measures before risks escalate into more significant issues.

Informed Decision-Making

With access to relevant risk data and insights, leaders can make more informed strategic choices, allocate resources effectively, and prioritize risk management efforts. This data-driven approach enhances risk intelligence and helps organizations respond swiftly to emerging threats or changing market conditions.

Regulatory Compliance

Many industries and regulatory bodies require organizations to implement risk management frameworks. The Federal Financial Institutions Examination Council (FFIEC), for example, has established requirements for banks to create a formal risk management program. Tracking KRIs can help organizations keep up and maintain compliance with industry regulations.

How to Determine Relevant KRIs

KRIs can help organizations manage a wide range of risks — operational, compliance, financial, strategic, and reputational.

Conduct a Risk Assessment

The first step in identifying relevant KRIs is to conduct a comprehensive risk assessment. A quick SWOT (strengths, weaknesses, opportunities, threats) analysis can help you find the areas that require the most attention. Do this across each of the organization’s core areas — including operations, finance, compliance, and security.

Align with Business Objectives

There should be a clear connection between your KRIs and your organization’s goals. Identify the activities and processes that are key to meeting your targets and focus on eliminating threats that might get in their way.

Identifying both leading indicators and risk factors impacting strategic organizational objectives is critical to long-term health and performance.

Assess Data Availability and Quality

You can’t track risk without reliable, high-quality data. Evaluate the data sources available within your organization and identify the ones that can provide accurate information that is relevant to your KRIs.

Poor data quality can lead to inaccurate insights and flawed decision-making. To maintain data quality, organizations should:

• Establish Data Governance: Implement policies and procedures for data management, including data collection, storage, and processing.
• Ensure Data Accuracy: Implement checks and validations to ensure the accuracy of data inputs and calculations.
• Maintain Data Consistency: Ensure consistent data definitions and formats across different systems and departments.
• Regularly Audit Data: Conduct regular audits and data quality checks to identify and address any issues or inconsistencies.

Defining KRI Thresholds and Targets

Establishing acceptable risk levels and defining clear thresholds for each KRI is crucial for effective risk management. These thresholds serve as early warning signals, allowing you to proactively identify and address potential issues before they escalate into bigger problems.

KRI thresholds should be realistic and aligned with your organization's strategic objectives and risk tolerance.

You can also set targets to track improvements over time. That way, you’re not just reacting to risk — you’re actively preventing it. These targets should be ambitious yet achievable, encouraging continuous improvement and driving the organization toward better risk management practices.

Action Plans for KRI Breaches

When a KRI breaches its defined threshold, it's crucial to have an established action plan in place. This plan should outline the necessary steps to address the identified risk promptly and effectively.

1. Have a Clear Escalation Path

Determine who needs to be looped in, how they should communicate, and when they should act. Escalation procedures should be tailored to the severity of the breach, ensuring that more critical issues are addressed with greater urgency and involvement from higher levels of management.

2. Analyze Root Causes

Once the right people have been notified, conduct a root cause analysis to identify the underlying factors that led to the KRI breach. This involves gathering data, reviewing processes, and examining potential vulnerabilities or weaknesses in the organization's risk management practices. By understanding the root cause, you can develop targeted solutions to address the issue effectively.

3. Establish Mitigation Strategies

Once you’ve analyzed the root causes, it’s time to take action. Mitigation strategies may include process improvements, policy updates, additional controls, or resource allocation adjustments. The goal is to minimize the likelihood of similar KRI breaches occurring in the future and to strengthen the organization's overall risk management framework.

It's important to note that not every risk can be predicted by a metric. KRIs, while useful, could lead to an overreliance on quantitative metrics that may not capture the full scope of risks. That’s why it’s important to leave space for human judgment and plan for unexpected “black swan” events.

Moving Forward with Confidence

Risk mitigation isn’t “set it and forget it.” As your business grows and changes, your KRIs should evolve too. This may involve refining KRI thresholds, modifying action plans, or introducing new KRIs to address emerging risks.

At Eide Bailly, our advisors work with teams to identify the KRIs that matter most, improve data quality, and build action plans that work in the real world.