A key risk indicator is a measure used in management to indicate how risky an activity is. Key risk indicators are metrics used by organizations to provide an early signal of increasing risk exposures in various areas of the enterprise. It differs from a key performance indicator in that the latter is meant as a measure of how well something is being done while the former is an indicator of the possibility of future adverse impact. KRI give an early warning to identify potential event that may harm continuity of the activity/project. KRIs are a mainstay of operational risk analysis.
According to Risk IT framework by ISACA, key risk indicators are metrics capable of showing that the organization is subject or has a high probability of being subject to a risk that exceed the defined risk appetite. Organizations have different sizes and environment. So every enterprise should choose its own KRI, taking into account the following steps:
Consider the different stakeholders of the organization
Make a balanced selection of risk indicators, covering performance indicators, lead indicators and trends
Determine thresholds and triggers for the set of KRI's
Locate and fold in data sources that contribute or feed data into KRI triggers
Determine notification methods, recipients, and action or response sequences
The constant measure of KRI can bring the following benefits to the organization:
Provide an early warning: a proactive action can take place
Provide a backward looking view on risk events, so lesson can be learned by the past
Provide an indication that the risk appetite and tolerance are reached
Provide real time actionable intelligence to decision makers and risk managers
Advances in hosted cloud data storage, data federation, and data aggregation have enabled data supply chains for real time calculation of key risk indicators across heretofore unlinked or disconnected data sources. Risk level dashboards can be supplemented with real time push notifications of risk. Systems methods and tools addressing triggering of notifications when targets are attained for key risk indicators have been evolving. Calculating and enabling notifications of key risk indicators used to be a unique benefit of enterprise software packages. With the evolution of API's to calculate trigger values for key risk indicators across various data sources, the potential for risk managers to include data external to an enterprise or external to an enterprise database has changed the risk management landscape.
Qualities of good key risk indicators
Some qualities of a good key risk indicator include:
