Your early warning system for business risks
After two years of planning, a company launches a promising new product, only to face a sudden halt when a key supplier fails—and worse, is found engaging in fraudulent practices that threaten the company’s reputation.
A framework of key risk indicators (KRIs) could have mitigated these issues. While taking risks is necessary for business growth, KRIs help organizations balance potential benefits against dangers, serving as an early warning system across all industries.
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What are Key Risk Indicators (KRIs)?
Building an effective KRI framework
What are Key Risk Indicators (KRIs)?
Key Risk Indicators (KRIs) are quantifiable metrics that organizations use to identify, measure, and monitor potential threats before they materialize. These strategic tools provide early warning signals that enable businesses to anticipate risk events, enhance decision-making processes, and strengthen their enterprise risk management (ERM) framework. By tracking KRIs, organizations can proactively address emerging risks that could otherwise negatively impact operational performance, financial outcomes, and strategic objectives.
The strategic value of KRIs extends far beyond simple risk measurement. When properly implemented, KRIs serve as a risk intelligence system that bridges the gap between high-level risk management strategies and day-to-day operations. They transform abstract risk concepts into actionable insights, allowing leadership to allocate resources more effectively and make data-driven decisions under uncertainty.
Unlike lagging indicators that report on past events, KRIs are forward-looking, enabling organizations to shift from reactive crisis management to proactive risk prevention. This predictive capability is particularly valuable in today’s volatile business environment, where early risk detection can create significant competitive advantages and protect shareholder value. By establishing risk thresholds and escalation procedures tied to KRIs, companies can build resilience into their operations while still pursuing growth opportunities.
KRIs vs. KPIs
While Key Performance Indicators (KPIs) measure success toward business objectives and desired outcomes, Key Risk Indicators (KRIs) specifically monitor potential threats and vulnerabilities that could derail those objectives, serving as early warning signals for emerging risks.
Generally speaking, KPIs look back as well as ahead. They look at measures of past and current performance as businesses pursue future objectives. KRIs are forward looking. They seek to identify future risk events so that they can be sidestepped or at least mitigated. That noted, KRIs should align with a company’s KPIs and its overall strategic objectives. That’s because KRIs identify risks that could derail the goals that KPIs measure.
Building an effective KRI framework
An effective KRI framework needs to realistically and reliably identify potential risks. This framework should incorporate the business attributes that are important to the organization and the objectives it wants to achieve. From there, it can develop a comprehensive risk profile.
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Dive into strategies ↗Identifying risks
Identifying and assessing risks needs to be thorough and clear-eyed. A business should particularly focus on those risks that could damage its ability to achieve its objectives. Here are some notable examples of such risks:
- Fraud. Like the company in the opening example, businesses can become victims of fraud perpetrated by “good” customers or vendors. The fraudster may even be someone inside the company. Companies need to investigate the backgrounds of these parties before onboarding as a key strategy for preventing fraudulent activity.
- Supply and demand problems. The pandemic revealed the fragility of many supply chains. Companies in construction, manufacturing, and many other industries found it difficult to get essential components. Though the pandemic has receded, companies still need to manage supply chain risks. Many companies now must also prepare for the uncertain effects of new tariffs on supply chains and on sales.
- Noncompliance. Staying on top of the ever-changing regulatory landscape is a constant challenge. Noncompliance can result in costly penalties and lost reputation (as well as lost customers).
- IT system failures. Ransomware, data breaches, and other forms of cybercrime continue to hurt businesses large and small. The rise of AI-powered deepfakes could make cybersecurity failures more common and more disruptive.
Measuring risks
A company needs to identify the best measurements for predicting risks. These metrics could include financial reports, operational data, and incident reports. The business can then establish processes for how this information will be collected, measured, compared, and quickly acted upon.
There are a couple of risk measurement approaches that many businesses have found useful. One is risk scoring. This is a systematic method of evaluating and quantifying potential risks. It enables organizations to prioritize risks and allocate resources where they’re most needed—that is, the risks that could result in the most damaging risk events.
Another strategy is a risk assessment matrix, a visual tool for evaluating and prioritizing risks. It helps businesses analyze risks, envision risk scenarios, and make informed decisions based on impact and mitigation. Like risk scoring, a risk assessment matrix ranks risks from low to high. Risks are ranked in terms of their importance in achieving measurable operating objectives.
Clarifying risk appetite
Ranking risks and establishing KRI metrics can help businesses determine their risk appetite. Risk appetite is the overall level of risk a company is willing to take on to achieve specific operational goals. It differs somewhat from risk tolerance, which identifies how far the organization is willing to deviate from that risk appetite. This makes it essential to establish limits or thresholds that indicate when the levels of certain risks become too high.
Integrating with existing risk governance structures
Preemptive risk mitigation links KRIs to risk appetite and risk management. This allows risk management efforts to focus on high-risk areas. It also facilitates effective communication of risk to key decision-makers and other stakeholders.
Monitoring KRIs over time
Continuous review and refinement of KRIs is essential since market conditions, regulations, and threats are always subject to change. To ensure that their KRIs remain effective at identifying and measuring potential risks, businesses should regularly review and assess these benchmarks. Ongoing monitoring of KRIs over time helps organizations track changes in risks and risk levels and determine how well each KRI is performing. They then can revise their KRIs as necessary.
Supporting effective KRIs with effective solutions
KRIs are essential for building a resilient organization. These crucial metrics can allow executives to act preemptively before high-risk situations can hinder operational objectives. To help companies streamline the identification and monitoring of KRIs, Thomson Reuters Risk & Fraud Solutions offers AI-powered advanced analytics, reliable data, and real-time alerts that keep organizations ahead of potential fraud and other risks, ensuring regulatory compliance and operational integrity.
