Strategic advice | August 2024 3 things to know about key risk indicators

Think of key risk indicators as a cross between a smoke alarm and a weather radar system. For risks specific to your company, they provide an early alert so you can quickly address potentially serious problems. For general macroeconomic and environmental risks, they help separate and monitor ongoing concerns beyond your control so you can analyze and plan for the possible impacts of each.

KRIs identify easily observable warning signals for each risk, allowing you to pinpoint quantifiable metrics you can monitor to estimate their potential impact. For example, a KRI for inflation could track the movements of the consumer price index and the producer price index—as well as divergences between the two—to alert your company to potential inflationary threats.

The majority of potential threats facing your company can be categorized into one of four risk quadrants. Understanding which risks fall into which quadrants can help you determine where a potential risk may have the most impact on your business. This allows you to select appropriate KRIs depending on your circumstances—and implement them into your overall risk management strategy.

Carefully selecting and incorporating KRIs appropriate to your industry—and business—into your risk management strategy can keep you ahead of potential problems. But it can also maximize risk management efficiency in ways that go beyond the foundational advantage of a reliable early-alert system. Here are three more benefits to consider.

Improved decision making: Studying the metrics that KRIs monitor doesn’t just help you anticipate and adjust risk management priorities to preempt threats. It also provides data on macroeconomic conditions, industry best practices, and operational efficiency that can help strengthen and streamline your strategic initiatives.

Enhanced performance monitoring: When you select and implement KRIs that align with your company’s circumstances, they allow you to track the performance of initiatives within your risk management plan. That way they can serve as performance indicators of your overall risk management strategy, even as they alert you to potential threats.

Strengthened resource allocation: Ranking KRIs by likelihood and potential magnitude of impact can give you a clearer picture of your company’s overall pool of resources for managing risk. This can increase your ability to reprioritize KRIs in the face of sudden shifts, maximize the efficiency of resource allocation, and help ensure an adaptive, cost-efficient risk management strategy that harmonizes with your current operations and future goals.

What’s the practical outcome of realizing KRI advantages like these? According to McKinsey & Company, roughly 75% of surveyed risk managers identified the benefits of integrating structured risk resilience tactics like KRIs as crucial to the improvement of risk culture in businesses of all types.^{Disclosure 3}

Before you begin integrating KRIs within a risk management strategy, first identify whether each is closer to a “smoke alarm” or “weather radar.” Beyond knowing which quadrant a particular risk falls into, making this distinction helps you determine how to incorporate KRI data into your overall risk management plan.

For example, in the financial quadrant, selecting a KRI that tracks bad debt ratios for accounts receivable can provide a close-up “smoke alarm” alert. This warning signal can flag inadequacies in your collection efforts—and help you implement prevention measures gleaned from the same industry best practices your KRI is benchmarking against. Economic instability and interest rates are beyond your control but tracking them with KRIs can still give you “weather radar” alerts that can empower you to craft mitigation tactics.

Making this distinction clarifies how you’ll apply the data from your KRI metrics to your risk management plan, but you’ll still need to rank the likelihood and potential impact of each risk before you can effectively implement them. Accomplishing that is a three-step process:

Following these three steps increases your company’s chances of going beyond a strengthened risk management strategy. Enabling the early identification and consistent risk tracking increases your overall adaptability to threats, which raises the likelihood of your company achieving strategic resilience.

That’s the ultimate goal in risk management, and realizing it starts with KRIs. When you’re prepared to use them in your strategy, your Truist relationship manager will be ready to help you take that step.