Organizations today live in a dynamic environment. Risks to your business activities are everywhere, including among the relationships you have with other parties.
From choosing supply chains to engaging in new partnerships, third-party risks have always been part of the risk assessments that organizations perform (or should perform, at least). Unfortunately, with the advent of cloud services and automation, third-party risks are now one of the most common threats that the modern enterprise faces.
Enterprise risk management (ERM) is the identification, assessment, and mitigation of risks. It requires an organization to develop a series of metrics for its most pressing risks. These metrics are known as “key risk indicators,” or KRIs.
KRIs, supported by risk appetite statements and the organization’s risk management strategy, serve as early warnings of potential risks in various areas of the enterprise. They’re meant to assure stakeholders that risks can be monitored and mitigated quickly.
Like KRIs, key performance indicators or KPIs are metrics designed to give a high-level overview of the company’s effectiveness. They are part of the organization’s performance management. The concepts of KRI and KPI are similar and sometimes confused as the same thing, but they are indeed two different metrics.
While KRIs and KPIs are both important to benchmark and achieve business objectives, they use different approaches. KPIs track and improve the company’s productivity and effectiveness. KRIs complement KPIs by helping to monitor and remove barriers to achieving KPIs. By using KRIs to keep risks in check, the organization will have less interference with its ability to meet the objectives that KPIs measure.
Effective KRIs and KPIs can improve the decision-making of management teams, and foster the creation of practical action plans against the root causes of risks. That reduces the company’s overall risk exposure.
Examples of Key Risk Indicators
Key risk indicators monitor risks to a company’s strategic plan and the company’s particular needs — so KRIs that help one company may not necessarily be appropriate for another company.
Even so, KRIs can be grouped into three main categories:
- Operational indicators: elements that identify a set of risks arising from day-to-day activities;
- People indicators: factors that evaluate the satisfaction of employees and customers, the retention of talent within the organization, and so forth;
- Financial indicators: metrics that help to calculate market risk, competition, or regulatory changes.
Some KRIs can be useful across a broad range of businesses. Following are several examples of financial metrics that can be KRIs:
Invoices Paid On-Time
This measures the percentage of invoices paid on time relative to the total number of invoices paid during a given time. This KRI indicates cash flow risks related to receiving on-time payments from customers.
Days Payable Outstanding
This metric measures the calendar days that the organization takes to pay its account balances. It indicates cash flow management practices related to meeting short-term financial obligations, usually to suppliers or vendors.
Value at Risk
Value at risk is the amount of potential loss (in monetary terms) that the company could incur if its assets lost value. So this metric identifies the appropriate amount of cash that companies should have at their disposal to cover unexpected losses.
Examples of KRIs related to risk management of operations include:
Percentage of Delayed Projects in Progress
This KRI is the number of projects currently in process that are delayed compared to the company’s total number of active projects. By measuring the organization’s project management and planning effectiveness, risks to customer satisfaction and cash flows can be identified.
Percentage of Departments Without KPIs in Place
This evaluates the number of departments that do not have key performance indicators over the total number of departments within the company. This indicator illustrates gaps of accountability within business units and departments.
Number of Regulators’ Notifications
This refers to the number of notifications or findings that the company has received from regulators in a given time frame. A company’s ability to comply with regulations imposed by the relevant regulatory bodies is critical to assure ongoing operations without disruptions.
In today’s heavily digitized landscape, companies increasingly face technical risks, too. These operational risks have the potential to derail production, resulting in costly downtime. To track these risks, some KRIs can be:
Mean Time Between Failure (MTBF)
This refers to the average time elapsed between system failures. It is measured from the moment an issue or failure is repaired until another failure occurs, and can shed light on the organization’s overall ability to manage IT systems.
Mean Time to Repair (MTTR)
MTTR is the average time needed to complete repairs to a system or application when that system breaks down. It is measured from the time the failure occurs until the system is fully restored.
Number of System Capacity Overloads
This is the number of occasions where systems exceed their established maximum capacity. It is measured as a function of request per second within a given time.
How to Develop Your Key Risk Indicators
An effective KRI is defined according to the particular needs of the company. So having a thorough process to formulate key risk indicators is essential for the risk management strategy of organizations.
This also means that the more information there is available for assessment, the more visible the organization’s risk landscape becomes. Automation plays a crucial role in monitoring KRIs, enabling real-time evaluation of risk metrics and constant modification of risk management strategies and methodologies.
Effective KRIs have some characteristics that make them easy to use and analyze:
- Accurately measurable
- Relevant to the associated risk
To start developing KRIs, define the company’s objectives and the means or processes required to meet those objectives. Once you determine these elements, you can extract potential risks or hazards to business goals. By mapping the business strategy, objectives, and associated risks, it is easier to pinpoint which indicators are most relevant to your enterprise.
ZenGRC Helps You Minimize Risks
ZenGRC’s governance, risk, and compliance software simplifies your vendor management process, records tasks from beginning to end, and gathers all vendor management paperwork. This means your teams can communicate more effectively regarding vendor relationships, and better address concerns with suppliers.
The streamlined workflow feature of ZenGRC shows task managers the dates on which suppliers responded to questions and the progress of each task. Consequently, compliance officers no longer have to waste time following up with so many third-party contractors.
ZenGRC’s automatic features handle time-consuming duties for you, enabling you to focus on the larger picture of compliance. As a result, vendor risk management is more efficient and effective.