Compliance risk is a crucial priority for many businesses, largely because the penalties - financial and otherwise - of failing to comply with laws and regulations can be severe.
There are various approaches you can take to protect your business from risk, one of which is to create and monitor key risk indicators (KRIs).
As far as your compliance function is concerned, spotting these risks early and being proactive in how you manage them could be the key to success.
What are KRIs and how are they used?
KRIs are metrics used by businesses to identify and evaluate risks that, left unchecked, could develop into serious threats to the organization. By establishing and tracking the right compliance KRIs for your company, you can reduce the likelihood that you’ll be caught out by changes in legislation or increasingly strict regulatory requirements.
There are different types of KRIs that relate to various aspects of business. The main categories are:
- Financial: These are particularly relevant to compliance professionals because they’re frequently used to track regulatory changes, as well as other trends such as economic downturns and challenges in financial markets.
- HR: Specifically related to the people in your organization, these KRIs can help you monitor metrics like staff turnover, workforce satisfaction, skills shortages and recruitment conversion rates.
- Operational: You can use operational indicators to monitor key aspects of how the company is functioning, from essential human workflows to technical processes. There are many factors that could influence these KRIs, including changes in leadership or strategic goals.
Understanding KRIs and identifying those that are most relevant and useful to your business will help you extend your focus beyond succeeding in the current climate so you can prepare for future challenges and opportunities.
How KRIs link to KPIs
While they do share some similarities, there are a number of significant differences between KRIs and key performance indicators (KPIs). One of the fundamental distinctions is the 'direction' the business is looking in when it uses these tools.
KRIs are predictive and focus on looking forward. In the case of regulatory compliance, for example, your team can use KRIs to get early signals of where the business could see increased risk exposure due to legislative changes, and to make informed predictions about how this could impact your strategic goals and activities.
KPIs, on the other hand, are retrospective. They provide measurable values you can use to build a clear, data-driven picture of how the company is performing and progressing towards its most important objectives.
Another clear difference between these concepts is that KRIs focus specifically on potential risks to the business, while KPIs can be more broad in the sense of giving you a picture of performance in any area, from the effectiveness of your marketing lead generation to current customer satisfaction.
But while they’re certainly distinct, KRIs and KPIs are also connected. KRIs can be particularly useful for informing KPIs, for instance. Understanding and predicting risks is a key part of formulating strategies to achieve your goals, the effectiveness of which will be measured using KPIs. Furthermore, KRIs can give you an early warning of certain KPIs and aims not being met.
It's also possible that you’ll find yourself using the same sorts of tools to monitor your KRIs and KPIs. Data-rich dashboards, visualizations and reports enable you to look back and track progress towards core targets, but they can also prove crucial in helping you to look forward, predict future challenges and make sure you're prepared for them.
Identifying and managing your KRIs
The identification of the most relevant and beneficial KRIs for your compliance operation should be a structured, systematic process. This will give you the best chance of creating strong indicators that will provide maximum protection for the business.
Firstly, it's important to have a clear understanding of the compliance risks that are most relevant to your company. If you operate in an industry that’s currently witnessing a lot of regulatory change, for example, you'll probably want to make this a key focus of your KRIs.
Another key consideration is the quality of your KRIs. You can determine this by asking questions like:
- Are they quantifiable and measurable?
- Have stakeholders from relevant departments been involved in their creation?
- Has information about the KRIs and the processes involved in tracking them been made available to stakeholders?
- Are they relevant to the company's current and future strategic goals?
Being methodical in your approach to formulating KRIs will help to ensure the process is as efficient as possible. It will also make it easier for you to prepare for common challenges in this space, such as ensuring you can access credible and objective data to inform your KRIs.
In the long term, you should be prepared to regularly revisit and rethink your KRIs to ensure they're relevant and up to date. This could prove to be a critical aspect of your wider performance on the compliance and risk management front.