On Thursday 22nd March, Manigent will host their second ‘Strategy & Risk Happy Hour’ in the heart of London. The strategy and risk management consultancy have created the series of events for those working in risk management as a discussion and networking platform. The forthcoming event will focus on the use of KPIs and KRIs, CEO and founder of Manigent, Andrew Smart will reveal ‘Tips & Tricks’ surrounding these indicators. Registration for this free to attend event is now open.
One of the key aspects of the Risk-Based Performance Management approach is the use of three different types of indicators, and in turn, setting out very specific definitions for each.
Key Performance Indicators (KPIs) - An indicator which enables an organisation to define its performance targets based on its goals and objectives. KPIs are commonly used to allow the organisation to monitor progress towards achieving targets. KPIs can be used to answer the question: “Are we achieving our desired levels of performance?”.
Key Risk Indicators (KRIs) - An indicator which is used by organisations to help define its risk profile and monitor changes in that profile. KRIs are used to answer the question: “How is our risk profile changing and is it within our desired tolerance levels?”.
Key Control Indicator (KCI) - An indicator which is used by organisations to help define its control’s environment and monitor levels of control relative to desired tolerances. KCIs are used to answer the question: “Are our organisation’s internal controls effective? Are we ‘in control’?”.
Manigent have found that since implementing these three different indicators (rather than simply calling everything a KPI) as part of the RBPM approach, organisations are challenged to really think through how they wish to measure and monitor their objectives, risk and controls.
Experience has shown that it can be ‘painful’ for organisations to deliver messages about the difference between KRIs and KCI’s definition, however, once implemented and using these indicators there are tangible benefits. Generally, organisations find that they have a higher quality of indicators across the board.
By using targeted indicators, more efficient and effective conversations take place and selections of ‘vital’ indicators can be clarified; rather than measuring everything and hoping results will show, which organisations commonly do.
Manigent describe the relationship between the three different types of indicators as follows:
KCIs are designed to provide an indication of how our control effectiveness is changing. They are one part of answering the question "are we in control?". Of course, KCIs should be used alongside CSA and other tools. Organisaitons should use a balance of leading and lagging indicators.
Founder of the Risk-Based Performance Management approach, Andrew Smart says, “Lagging KCIs can often be re-used as leading KRIs, if our lagging KCIs tell us that our controls are becoming less effective then, assuming a strong correlation between KCIs and KRIs, it stands to reason that our level of risk is increasing.”
Similarly, lagging KRIs can be re-used as leading KPIs, again the thinking here is if our lagging KRIs show our level of risk is increasing, it stands to reason that we will see a drop in performance (in the future).
Performance, and therefore KPIs at the top of the hierarchy because at the end of the day better controls and better risk management should contribute to the organisations ability to deliver its performance commitments.