What Is a Key Risk Indicator? Plus Tips

By Indeed Editorial Team

Published September 15, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Being proactive and making preemptive decisions for a company is necessary in the business world and can help lead businesses to success. Management professionals use key risk indicators, or KRIs, to gauge how risky a decision or strategy may be and how it might impact their company or business if it's implemented. Key risk indicators can help in situations like these and aid in crisis mitigation and prevention and assist companies and business in making educated, relevant business plans for the future.

In this article, we define what a key risk indicator is, discuss common characteristics of these metrics, explore the relationship between key performance indicators and key risk indicators and offer tips for creating the right key risk indicators for your company or business's goals and objectives.

Related: How To Analyze Risk: Steps and Benefits

What is a key risk indicator?

A key risk indicator is a measurable indicator that shows how risky a decision, activity or plan may be for a business or company. A type of metric, these indicators typically monitor operational, technological, financial and staff processes such as security breaches, economic downturn and staff turnover rate but can be used for other aspects of a business as well. These indicators help professionals in decision making processes by quantifying the level of risk pursuing something will pose for the business and often prevent crises from occurring if the risk is determined to be unmanageable for the company to handle. Some examples of what key indicators do are as follows:

  • Monitor changes in risk levels

  • Give early warning signs for potential issues

  • Take stock of risks impacting business operations

  • Quantify market risk

  • Measure employee retention rates

  • Provide easily accessible information

  • Monitor competitive risk

  • Measure customer retention rates

Related: Risk Avoidance vs. Risk Mitigation: What's the Difference?

Characteristics of key risk indicators

Key risk indicators have several characteristics that encompass what they do and how they help businesses. These characteristics include:

  • Measurability: The processed information is quantifiable, precise and usable in future measurement processes.

  • Relevance: The information that is being processed is relevant to the business, its objectives and its goals and reports on elements that will directly impact them.

  • Predictive ability: The metric can predict potential future problems the business will encounter unless preemptively acted upon.

  • Accuracy: The indicators are as accurate as possible and is sourced from thoroughly analyzed and verified sources.

  • Audit ability: The way in which information reported by these indicators was sourced is verifiable and can be evaluated and compared against other information.

  • Ease of monitoring: The collection, analyzation and reporting process of this information is simple and easy to conduct and review.

  • Comparability: The reported information can be used in future benchmarking and comparison processes.

Related: Organizational Risk: Importance and How To Assess It

What is the relationship between key risk indicators and key performance indicators?

The relationship between key risk indicators and key performance indicators, otherwise known as KPIs, can be closely liked. However, these two indicators differ because one, a key risk indicator, warns against potentially risky or adverse impacts on a business, and the other, a key performance indicator, measures how well something is performing. It may be beneficial to link any key risk indicator to a key performance indicator to see how something performs after a key risk indicator determines it to not be risky to the business.

Related: A Complete Guide To Key Performance Indicators (KPIs)

Deciding whether to use a KRI or KPI for your business

It can be unclear as to whether you should use a key risk indicator over a key performance indicator to track something, but the two metrics function differently and will show different results. For instance, a software company may create a key performance indicator that tracks the number of antivirus program downloads and whether or not customers use the program after they download it. The key performance indicator may then display an event in which customers deleted the program after installation, showing bad performance rating. However, using a key risk indicator would be a more proactive way to track this data to see if programs such as those were typically unused or removed after being downloaded.

Related: What Is a Key Performance Indicator (KPI)? Examples, Best Practices and How to Create Them

Tips for developing key risk indicators

Before you develop your key risk indicators and decide what they should analyze and evaluate, you may want to consider a few things. Consider these tips for creating key risk indicators for your business and strategy plans:

  • Focus on the most important or timely key risk indicator first: It may be helpful to focus on the most important or timely key risk indicator first when deciding which ones to develop. For instance, if you're interested in measuring staff operations, you may consider developing a key risk indicator that revolves around a specific staff related issue.

  • Be specific: In order to create the most accurate key risk indicators, you may want to be as specific as possible in determining what you want the metric to evaluate and monitor. This way, these metrics can warn against specific issues that may arise.

  • Identify the most effective key risk indicators: It can be beneficial to identify the most effective key risk indicators so that the process of developing the right ones is as relevant, efficient and effective as possible.

  • Simplify the data collection process: To make the development process as easy as possible, it may be helpful to simplify the data collection process for your key risk indicators. Streamlining the data collection process may also decrease the amount of time it takes the key risk indicator process to complete.

  • Aggregate key risk indicators: While it may be easy enough to report all data that the key risk indicators find, the amount of information may be repetitive or and provide more detail than necessary to be fully understood. You may consider aggregating these metrics instead to streamline this process.

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