There are many situations a business may face and prepare for using a risk management plan. Risk management can help a business maintain its success or improve its operations by preventing or handling risks that may or may not occur. To know if your risk management plan is effective, you can use key performance indicators to measure certain aspects of risk. In this article, we discuss what KPIs for risk management are and list seven that you can use to measure your risk management procedures.
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What are KPIs for risk management?
KPIs, or key performance indicators, for risk management, are metrics for assessing risks for a business. KPIs evaluate the critical parts of a business that it needs for it to be successful in meeting its objectives. Their primary function is to monitor business strategies and operations and measure their performance so you can determine effectiveness and efficiency. A business can set key performance indicators to gauge success, improve performance and guide decision-making. KPIs can be:
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Qualitative: This type of KPI uses subjective characteristics, such as customer satisfaction.
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Quantitative: This type of KPI uses objective data like percentages.
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Leading indicator: Leading indicators are predictable changes because of specific situations.
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Lagging indicator: A lagging indicator is an insight into a change after it occurs.
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Input: This type of KPI measures resources used.
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Output: This KPI measures the result of a process or activity.
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Process: This KPI measures the efficiency of a particular activity.
What is risk management?
Risk management is the identifying, examining and controlling of threats to an organization before they occur or when they happen. Threats can be natural disasters and weather-related, financial or legal issues or errors with strategic management. Businesses often classify risk into three categories:
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Business: This type of risk is anything that can threaten an organization’s success or ability to achieve its financial goals, such as a change in customer product preferences.
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Non-business: Organizations often consider this type of risk to be something not in their control, such as politics.
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Financial risk: A financial risk is when there’s a possibility of an organization losing money, such as when it makes an investment or lends money.
7 KPIs to use for risk management
Here’s a list of seven KPIs you can use for risk management:
1. Risks you identify ahead of time
Identified risks are those risks that you already are aware of or expect to occur and create a plan to manage. These risks don’t always happen or, having identified them, you can take action to prevent a problem before the risks emerge. Identifying risk as early as possible can help a business create procedures to avoid that risk in the future or minimize the impact of the risk on the organization should it occur. With a risk reduction plan, you may see fewer identified risks over the long term.
2. Actual risks that take place
Actual risks are your identified risks that happen. For example, an actual risk for a coffee shop might be the vendor that supplies their cups is late with their delivery. Your risk reduction plan for actual risks that occur may have an alternative plan in place. A coffee shop that doesn’t get its cup delivery on time, for instance, may already know where it can get supplemental cups quickly, or have a secondary vendor it might contact.
3. Unidentified and unexpected risks
These types of risks are the ones you aren’t aware of or expect, however, you can plan for them to occur and prepare accordingly. Sometimes, you can’t identify a risk because it depends on time or progress, or it occurs because of your response to another risk. An example of an unidentified risk might be a change in technology, which can affect how a manufacturer builds its product. To manage these risks, also called known unknowns, you can establish a procedure to handle any risk ahead of time.
4. How often the risk may happen
This is how often a risk or risks may occur. You might design your risk reduction plan to prevent risks from happening, but they can still happen. Having an effective plan can help you prevent the risk from occurring more frequently. For example, a coffee shop that experiences delayed vendor deliveries may decide to buy its supplies directly from the manufacturer instead of through a third party to ensure it has fewer issues.
5. How severe the risk is to your business
This is how severe or damaging the risks that occur are to your business. Your plan for managing a risk often includes the resources you might need to handle it and the people you may need. The more severe the risk, the more time or people you may need to use. An effective risk reduction plan can help you allocate the appropriate amount of resources, depending on the risk.
6. Costs to your business because of a risk
These are costs to your business because of the risk that happens. When a risk occurs, it’s helpful to have a risk management procedure or solution that’s cost-effective. Costs to a business because of risk can include:
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Financial
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Legal
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Reputation
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Resources
7. How fast and effective your solutions are
This is how fast and effective your solutions to actual risks are. Your risk reduction or mitigation plans can show how prepared you and your business are to handle a particular risk. If your solution to risk functions correctly, then you know your risk management is effective.
Why is it important to use KPIs in risk management?
Using KPIs in risk management is important to businesses concerned with ensuring risks don’t happen, or if they happen, they either don’t affect their goals or have little effect. Identifying and measuring the frequency and severity of risk can help your company achieve and maintain its overall health because you can create an efficient plan for managing risk.
I hope you find this article helpful.
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