How to Design Effective Key Risk Indicators + Best Practices
Wouldn’t it be nice to be able to peer into a crystal ball and see the threats to your business looming on the horizon?
Enter: key risk indicators, or KRIs.
While they’re a bit more scientific than fortune telling or palm reading, key risk indicators offer a glimpse into the future by tracking the potential occurrence of certain risk events.
When triggered, KRIs can alert management and other stakeholders to a potential threat that would have a significant impact on business operations, such as falling out of compliance with security frameworks like SOC 2.
Ready to learn more? We dig into the basics of KRIs, how to establish them, and tips for maintaining KRIs over time.
What is a key risk indicator?
Key risk indicators (KRIs) are a way to proactively measure risks that a business may face.
KRIs are similar to a meteorologist tracking weather patterns and alerting residents of a potential storm so they can adequately prepare. KRIs serve as an early warning system to alert business leadership of upcoming crises, allowing them time to create an action plan to mitigate that risk’s potential impact or prevent it from occurring.
KRIs are also tied to risk appetite, which sets a threshold for the level of risk exposure that a business will take on to achieve its objectives. KRIs can alert leadership of any upcoming threats that might exceed that threshold.
KRIs aren’t meant to track every specific risk that your company may face. Instead, they’re meant to track the most important types of risks that could put your business’s primary objectives and priorities in jeopardy.
KRI vs. KPI: What’s the difference?
Both key risk indicators and key performance indicators are metrics that help businesses make informed decisions and accurately plan for the future.
However, KRIs and KPIs differ in what they measure:
- KPIs focus on the past by tracking performance against a goal or objective. KPIs are used to shape behaviors.
- KRIs look to the future to manage potential risks that may or may not occur. KRIs announce troubles ahead.
KRIs help a company meet its KPIs by reducing significant risks that can jeopardize business operations.
Challenges of developing key risk indicators
While KRIs boast a wide range of benefits that include the ability to proactively address an organization's risks, businesses also face a range of challenges when it comes to setting and tracking KRIs.
In a recent poll conducted during a webinar by the CEOs of Nymro Clinical Consulting Services and Cyntegrity, 22% of business leaders said that finding the right method to calculate KRIs is their top challenge.
Other common challenges businesses face when utilizing KRIs include:
- A failure to incorporate KPIs with KRIs
- Inefficient tracking of KRIs due to lack of resources or tools such as automation
- Trouble accessing objective qualitative data to identify risk trends
- Not associating actions with risk thresholds
How to design effective KRIs
Before your business can begin benefiting from KRIs, you’ll need to do a bit of prep work. We walk through the three steps of KRI design below.
Identify relevant risks
The risks that pose the biggest threat — with a high probability of occurring and a potentially damaging outcome — are the kind you’re looking to include when you establish KRIs.
Here are a few ways to identify relevant risks:
- Conduct a risk assessment to identify the risks that will cause the biggest impacts to your overall objectives and goals.
- Review your risk register to tip you off to certain risks that are subject to swift changes in risk level, indicating that they could benefit from the early warning of a KRI.
- Keep your core business objectives at the forefront as you design your KRIs, which will help you prioritize the most important risks.
- Consider risks that fall above or below your risk appetite threshold, as they will likely need additional oversight.
There are two primary methods for choosing KRIs: top-down and bottom-up approaches.
- Top-down approach: Senior leadership selects KRIs for the entire organization. This approach can be helpful in aligning with strategic KPIs and can help the organization’s understanding of risk impact and how it can affect business objectives.
- Bottom-up approach: Business units across the organization select and monitor KRIs that map to their operational processes. The bottom-up approach ensures risks are tracked on a more granular level and fosters buy-in from departments.
Whether you opt for a top-down or a bottom-up approach, after top-priority risks have been identified you can begin to design KRIs. For initial KRIs, it can be helpful to start small with two or three indicators for your top risks.
When setting up KRIs, keep things simple by focusing on your priority risks. Include relevant subject matter experts from your organization to help identify a few key indicators that will help you properly track risks.
Remember that key traits of a good KRI are:
- Measurable: KRIs are quantifiable by percentages, numbers, etc.
- Predictive: KRIs can be used as an early warning system.
- Informative: KRIs are used to shape decision-making.
- Comparable: KRIs can be benchmarked internally and to industry standards.
Once you’ve identified an indicator, you will set the upper and lower tolerance values to track against your risk. These values can be changed as data is captured, so don’t spend too much time perfecting them in the beginning.
When you’re confident in the data being collected from your initial indicators, you can expand the KRI program into different business departments.
Maintain KRIs over time
Once KRIs are in place, they need to be monitored and tracked regularly, whether in real time or with a quarterly check-in.
Automation can help simplify this process, but you may also want to consider appointing key individuals to manually track certain indicators that make sense for your organization.
Additionally, you can use the first few data-gathering periods as a way to check if your risk threshold settings are correct. This will help ensure that future alerts are configured correctly and prevent false alarms.
It’s important to document and report all risk occurrences related to your KRIs. This should include a formal process for alerting key leadership when indicator tolerance levels are high.
Key risk indicator examples
While you can map KRIs to any aspect of your business, common KRI types include operational, financial, technological, and people-related indicators.
Operational KRIs are closely related to operational risk.
- Process inefficiencies
- Internal failures
- Leadership changes
Financial KRIs are commonly used by banks and CPA firms.
- Economic downturn
- Regulatory changes
- Budget changes
Technological KRIs are used by businesses across industries.
- System failures
- Data breach incidents
- Regulatory changes
These KRIs are often used by human resource departments or companies that handle staffing and recruitment.
- High turnover
- Low employee satisfaction
- Low recruiting conversion
Key risk indicator template
KRIs are an important operational risk management tool for risk identification and risk mitigation. Now that you understand how to develop key risk indicators, it’s time to map out your own set of KRIs. We created this simple KRI template to help you think through your business’s top risks.
Establishing KRIs is an important aspect of any enterprise risk management strategy.
Key risk indicators are an invaluable tool for forward-thinking businesses to manage upcoming threats and act swiftly to mitigate potential harm.
KRI implementation is just one of the approaches for baking risk prevention into your business. We’ve created a visual guide to inspire your business to adopt a more risk-minded cybersecurity approach.