Practical Approach In Creating Predictive Organizational Key Risk Indicators

All businesses face risks and challenges and without these, companies will not strive to do better. With these risks, there is a need for business managers to come up with a tool or a system that will aid them in predicting what will most likely happen in the future in relation to the risks that might be encountered. Now, we can use the key risk indicators which act as warning signals for the organization. They provide useful information regarding the changes in the business that might bring danger into the firm. The KRI system is particularly helpful in operational management because most of the time the risks occur during operations. There can be accidents, injuries, even deaths as well as production delays and equipment failure. Before something goes wrong, it is important that you detect the factors that might cause the business to break down.

When setting up your KRI system, it is important that you think of the indicators as predictive KRIs. This is because they will be the ones that will tell you the potential threats which could easily become perilous in the company. Before you begin building your key risk indicators, take note that there are four different categories of such. The first one is the coincident indicators, which are considered as proxy measures that can include metrics about internal error and near misses. The second one is the causal indicator, which is all about the root causes of the events which may produce threats in the company. These many be system down time and percentage of tardy purchase orders.

The third category of key risk indicators is the control effectiveness indicator which will provide the company with continuous monitoring when it comes to the performance of operations and controls. The metrics that can be used here are percentage of the supplier base that uses data transfer encryption and the cash spent on non-approved suppliers. The last classification is the volume indicator, which is more popularly known as the key performance indicators. The volume indicator is tracked similarly as the KRI. When the former changes, there is a possibility that the probability and the impact of the risk event will increase.

It is actually not a difficult task when building the key risk indicators especially now that there are templates that you can download and use for your own system. However, it is still important that you know what the KRI system methodology is all about. Primarily, you will need to identify the metrics that are being used by your company in the present time. This is where most businessmen realize that creating predictive KRIs start with risk assessment. Then, you will have to assess the gaps, which means that you need to evaluate the metrics on whether or not they are effective in evaluating the risks in the business. Third is to improve those metrics that do not seem to fit the KRI system which will then lead to validation and identification on trigger level. You will need to statistically analyze the historical data regarding the risk event and the metrics that you have.

After that, you can now design the dashboard using the metrics that are critical for the process owners, the business managers as well as the senior management. The last step is to formulate a control plan and define the escalation criteria.