5 things to remember with Key Risk Indicators

If you can’t measure it you can’t manage it. Whether you agree or not measuring stuff is important in Operational Risk Management. Key Risk Indicators or KRIs, help to predict and measure risk. Here’s five things to keep in mind with KRIs:

      1. Measure by Numbers – asking people in the business if everything is OK, will get you one answer ‘yes’. Ask the business how many or how much and you will get a number. Next week you get another one an that is when you can start comparing week by week.
      2. Segmentation – By collecting two or more of the same metric you can compare parts of the business. Comparison is more informative than a relative trending. You might find some champion risk managers and some people who need more help.
      3. Leading vs lagging – most metrics within risk management are lagging metrics. By the time the metric starts showing the risk has already occurred. Look for leading metrics which will allow you to react earlier before issues arise.
      4. Thresholds – what are your expectations of the data? What does good look like and when does it stop being good? Thresholds can be simple value limits or based upon more complex statistics. Upper and lower thresholds should be set. For example, the number of customer complains should be low, yet too low and that could show a failure to capture them.
      5. Human behavior – the Hawthorne effect, when observed a persons behavior changes. In some cases this might be desirable. We should remember that when aware of the expected or desired results, people are keen to please us. Subtle changes to reporting techniques or falsifying the data may be what it takes to stay off the radar. Thresholds should not should be private, those entering the data have no need to see the result.

If you need some help, or have any questions, please contact me.

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