Building the KRI (key risk indicators)
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The development of Key Risk Indicators has enhanced the prospects of business performance significantly and its usage has extensively evolved over time. Their immense potential in facilitating the business growth and excellence has contributed to its popularity in recent times. More and more organizations are building KRIs nowadays and benefiting from their use. Let us look at some of the key steps involved in the process of developing KRIs.
Detect the Risks:
- Identify the risk involved. The first step is to identify the risk involved in the business and to understand the root cause for the same.
- Measure the effectiveness of identified risks indicators for the business. These can be measured by basically two tools:
- Gap Assessment: It uses seven dimensions, (namely- measurement frequency, levels of trigger, criteria for escalation, lead or lag, ownership of metrics, availability of historical data and accuracy of the data source) which are rated 1 to 5. It helps in judging the effectiveness of KRI.
- Design Matrix: It is a matrix which shows the relationship between various risks indicators and their causes. It is a qualitative tool.
- Improve risk indicators. In this step various risk indicators are tested against the tools i.e. Gap Assessment and Design Matrix. After that the not so strong risk indicators are removed from the list. The list is reduced to a maximum of five KRIs.
Analyze the Risks:
- Validate the risk indicators and identify the trigger level. The process of validation deals with statistically analyzing the historical data of risk and the KRI. In case historical data is not available, a proxy event driver can be used. The resultant correlation between the event driver and the KRI guides in setting the trigger levels. In case, validation is not required for the data, trigger levels can be obtained on the basis of business requirements.
- Design the Dashboard Reports. Dashboards usually use graphs, tables etc and help in the better understanding of the KRIs in particular and the entire business situation in general. It helps the management to review the actions taken and to adopt appropriate controlling measures.
- The plan of control. It is a brief summary of all the actions and the specifications with regard to the KRI. The control plan helps the management to take up a series of predefined and appropriate steps each time a KRI is triggered in the business.
The aforementioned theory can be utilized by businesses in developing the KRIs. Either a top- down or a bottom –up approach can be used, depending on the business scenario and the prevailing situation.
