Business owners often find themselves puzzled by unexpected losses at the end of
a quarter or year. Then, upon closer inspection, it becomes clear that these
losses were linked to a handful of activities that posed a high risk to the
So how does a business spot such unfavorable events, understand their potential
harm, and reduce the resulting losses — all while still working towards the
business and strategic goals? This is where key
risk indicators (KRIs) come into play.
Risks are unavoidable in any organization, and KRIs play a crucial role in risk
mitigation, helping you stay on top of potential high-risk situations.
This article discusses what KRIs are, how to identify and use KRIs effectively,
how KRIs relate to key performance indicators (KPIs), and how these concepts
collaborate to drive the company’s success. Let’s explore further.
What Is a Key Risk Indicator? (KRI)
A KRI is an early warning sign that something is changing in your organization’s
A set of KRIs is akin to a tailored dashboard that monitors various aspects of
your operations. KRIs uncover crucial information about risks that might
otherwise go unnoticed. These indicators will help you identify the root causes
behind potential issues before the risks escalate.
Whether used as independent measurements or in conjunction with other
risk-related data, such as loss events or assessment outcomes, KRIs are an
important part of a company’s
enterprise risk management system.
Good KRIs have three important characteristics:
- Measurable metrics. KRIs are based on measurable data,
allowing you to gauge and assess risks using concrete information.
- Quantifiable information. These indicators provide
quantifiable data, whether that’s numerical values or percentages. This data
helps you monitor the evolution of risks within your company’s risk profile over
- Accuracy and risk control. KRIs are accurate
representations that aid in developing risk assessment and control strategies.
Using these indicators, you can maintain the integrity of your business
initiatives and assure they remain undisturbed by potential risks.
Identifying Key Risk Indicators in Four Steps
Creating effective KRIs requires a thoughtful approach. To develop them, your
risk management team should follow the steps below:
Step 1: Identify the company’s goals and weaknesses
Begin by identifying the company’s goals and vulnerabilities. KRIs should align
with the business objectives, and these objectives must be set before you can
pinpoint relevant KRIs. This process helps avoid unnecessary complications in managing
Once the business goals are established, identifying the risks that could hinder
those goals becomes easier. For example, if your business goal is rapid
expansion into emerging markets, some of your key risks might be corruption in
those local markets, supply chain glitches, and compliance with the markets’
data protection rules.
Clear business goals are the foundation, upon which you build your risk
management framework. Having clear objectives gives you the necessary business
context to rank risks in order of importance. This, in turn, assures that your
KRIs remain relevant over time.
Step 2: Understand possible risk impact
Risk exposure gauges the potential future losses linked to the identified risks.
When you analyze the business’s risk exposure, you prioritize risks based on how
likely they are to happen and the potential damage they could cause.
This assessment of risk exposure helps you understand how much risk the
organization is comfortable taking and how to control losses within acceptable
You can figure out risk exposure using this simple equation:
(likelihood of a risk happening) X (total potential loss from the risk) =
Step 3: Establish KRIs
Once you’ve determined which risks matter most based on the business goals and
their potential impact, it’s time to establish the indicators.
Begin with the top-priority risks. Collaborate with internal experts within the
operational teams to determine the right KRIs for each risk. For instance, if a
risk involves customer data
loss, the privacy or IT security teams might suggest tracking failed user
log-ins or password reset requests as KRIs to spot potential cyber-attacks.
Remember, effective KRIs are metrics closely tied to business goals, and they
can be measured, compared, and help anticipate future issues. Any KRI you
develop should meet these criteria, so that they provide practical guidance for
Step 4: Keep tabs on your KRIs
Measure the KRI data against the established risk limits. If a KRI consistently
exceeds these limits, it’s a clear signal that something’s off. This could mean
business practices are too risky or that the KRI itself isn’t well-designed.
Either way, it’s a sign that further investigation is needed.
Next, we recommend integrating these indicators into your ongoing risk
management and reporting routines. This involves having a plan to notify the
right risk managers, business unit leaders, and team members if risk limits are
crossed or getting close to being crossed.
The core of risk management lies in constant monitoring combined with making
necessary adjustments to how the business operates. Refined KRIs are the
cornerstone of making well-informed strategic choices as you work toward the
business objectives while managing risks effectively.
Examples of Key Risk Indicators
KRIs take on different forms based on the type of risks they aim to mitigate. By
aligning with the organization’s risk appetite, KRIs function as an early
warning system, notifying you of potential deviations from established risk
thresholds. Below are four examples of KRIs.
Technological KRIs encompass risks associated with the use and management of
technology within the organization, which may range from hardware malfunctions
to software failures to cybersecurity issues, among others. Examples of
technological KRIs include:
- Data breach potential. Track the number of data
breaches and unauthorized access incidents and monitor the effectiveness of
cybersecurity measures in preventing breaches.
- Mean Time to Repair (MTTR). Evaluate the average time
required to repair and restore systems after incidents.
- System downtime impact. Measure the frequency and duration
of system outages and assess the operational consequences of prolonged
- Data breach potential. Track the number of data
In this category the focus is on assessing risks linked to financial performance
and stability. Such KRIs include:
- Financial market risk quantification. Evaluate the
potential risks associated with market fluctuations and consider the impacts of
regulatory changes on financial outcomes.
- Competitive risk assessment. Analyze competitive risks to
determine how rivals might affect the organization’s overall financial
- Performance against financial benchmarks. Monitor
deviations from financial benchmarks so that you can gauge performance and
identify areas that need attention.
Personnel metrics address risks related to employees. Noteworthy KRIs in this
- Employee satisfaction insights. Keep track of employee
satisfaction levels to gain insight into potential HR issues (high turnover,
complaints about managers, and the like) and their effect on overall
- Labor shortage impact. Monitor resource availability so
that you can plan staffing levels to maintain an adequate workforce.
- Employee retention and productivity. Evaluate employee
retention rates to understand how turnover might harm productivity and to
maintain a motivated workforce.
Operational risk management deals with risks in business operations. KRIs in
this category include:
- Operational risk exposure. Evaluate the extent of
operational risks the company faces so that you can implement appropriate risk
- Security breach monitoring. Keep an eye on potential
security breaches to prevent data compromises and their subsequent disruption.
Understanding Key Performance Indicators (KPI)
performance indicators (KPIs) are a close cousin of key risk indicators.
KPIs track how well different parts of a company are doing. They measure things
such as employee productivity, process efficiency, and the overall performance
of the whole company, all compared to specific goals.
KPIs provide valuable insights to stakeholders, including senior management, by
showing progress in both short-term and long-term contexts. Some KPIs focus on
immediate results, while others track advancements over an extended period.
Regardless of the timeframe, KPIs are important because they link directly to
the overarching business objectives.
There are two main types of KPIs: leading and lagging.
Leading KPIs demonstrate what might happen in the future, based on actions taken
now. For instance, growth percentage in the sales pipeline, growth percentage in
new markets, and number of new clients show where a company is headed.
In contrast, lagging KPIs look at what has already happened: total sales for a
period compared to goal, training completion rates, due diligence questionnaires
completed, and so forth.
Smart management teams use both leading and lagging KPIs to build a complete
picture of operational activity. This holistic approach helps management to
evaluate the effectiveness of risk
identification methods and solid decision-making.
What's the Difference Between a KRI and a KPI?
KRIs focus on potential risks and their impact on important goals. They help one
to understand potential losses, and guide decisions on whether to continue
certain activities or adjust them to reduce risk.
KRIs are like a warning system for a company’s risk management strategy,
highlighting risk trends that might pose threats over a specific period, such as
shifts in the supply
chain or economic downturns.
KPIs track progress toward business objectives. They show how well a company is
advancing toward its goals, providing insights for improvement. KPIs are more
about improving efficiency to achieve strategic goals.
For instance, if the goal is to expand market share, KPIs such as sales figures
could measure progress, while KRIs such as competitor growth or economic changes
might indicate risks to that goal.
In cybersecurity, a company might use an uptime KPI to gauge IT system
performance, while a cybersecurity attack KRI could signal potential risks.
KPIs look at events to assess their contribution to objectives, while KRIs are
forward-looking, predicting how future risk events could hinder goal
KRIs and KPIs can be used separately, or a company might not use them at all.
The most effective approach, however, is to use them together to advance
Potential Challenges to Developing Quantifiable KRIs
h2>Potential Challenges to Developing Quantifiable KRIs
Challenge 1: Data availability and accuracy
Developing effective KRIs depends upon accurate and reliable data. Gathering it
isn’t always easy, especially if the required information is scattered across
different systems or departments. Inaccurate or incomplete data can lead to
misleading KRIs, affecting an organization’s ability to provide meaningful
insights into risk trends.
Challenge 2: Resistance to change
Quantifiable KRIs often provoke resistance within organizations. This resistance
can stem from various factors, such as organizational culture, fear of change,
or lack of understanding about a KRI’s value.
It’s possible to overcome such resistance with the help of effective change
management strategies. Communication and education are key components. Clearly
articulating the benefits of quantifiable KRIs, training
employees, and involving them in the development process can all help to
alleviate concerns and build buy-in.
Challenge 3: Subjectivity and interpretation
KRIs can sometimes be subjective and open to interpretation. Different
organizational stakeholders might have different opinions on what constitutes a
specific risk and how it should be measured. This subjectivity can lead to
discrepancies in defining and agreeing on appropriate KRIs.
To overcome this problem, focus on several of the steps we mentioned earlier:
develop a clear consensus on what the organization’s most pressing risks are,
and develop data-driven ways to measure those risks. The more quantifiable your
KRI is, the less vulnerable it is to subjective interpretation.
Challenge 4: Complex risk relationships
Organizations seldom face isolated risks that operate in silos. Instead, risks
often exhibit intricate relationships, where the occurrence of one risk can
affect multiple areas of the organization in various ways. This complexity can
complicate the process of developing quantifiable KRIs.
Solving such challenges requires a holistic approach. Organizations must map out
these intricate risk relationships and consider how different risks interact and
amplify each other. Developing KRIs that account for these interdependencies
provides a more accurate view of the overall
Achieve Improved Risk Management with the ROAR Platform
Effective risk management is no longer a mere precaution; it’s a strategic asset
that determines an organization’s resilience. The RiskOptics ROAR
Platform stands out for its promise to improve risk management and transform
it into a strategic advantage.
Developed to provide complete insights into your business processes, the ROAR
Platform has tools to identify, assess, and effectively mitigate IT and cyber
Beyond identifying risks, ROAR enables you to communicate the potential impact
of these risks on the organization’s most critical business initiatives. These
contextual insights are vital for making
well-informed decisions that balance security optimization with operational
Schedule a demo to see how the
ROAR helps you confidently navigate the intricate landscape of cybersecurity.