Terminology – KPI and KRI

From time to time, I write about business concepts that seem fuzzy to me. Or perhaps not all that useful.

This one is about risk management terminology. It’s not aimed at the risk professional. It’s for the rest of us who need to incorporate some of that terminology in ways that are useful and practical.

Consider the Key Risk Indicator (KRI). It’s treated as being something different than the Key Performance Indicator (KPI). I’m not sure the distinction adds any value.

Let’s start out with a definition of the Key Risk Indicator from The Audit Board:

A very reasonable definition. Perhaps.

The beneficial part of this definition is “early warning risk detection system”. That’s valuable. But aren’t all indicators an early warning risk detection system? The whole point of indicators and dashboards is to provide early warning. We monitor indicators to identify harmful trends (as early as possible) so that we can do something about it – early warning systems.

Philosophically, the KRI and the KPI may seem like they come from different sources. But, for management, I think the difference is negligible. For management, it’s easier to have a single rule that’s nice and simple; If any indicator turns red, management needs to pay attention.

But when I discuss this with executives, I actually do talk about two fundamentally different types of indicators. And this distinction can be more meaningful to these executives.

The first type of indicator I talk about is the execution indicator. When this type of metric goes from green to red on the dashboard, it’s because some strategy has not been producing the anticipated results. As an example, think ‘production output’. For some reason, the strategy isn’t working. Maybe it was a poor strategy to begin with. Or, execution was bad. Either way, it’s unlikely to magically turn itself around. So … let’s figure out the root cause. And make appropriate changes.

Second is the strategic assumption indicator. It monitors an important assumption that’s supporting one or more strategies. And it can provide a far earlier warning than an execution indicator.

As an aside – if assumptions aren’t already being explicitly identified as part of your strategic governance, you might want to recommend it. The reason, of course, is that assumptions can represent hidden risk. Explicitly identifying assumptions is a path toward ‘no surprises’.

So, clearly, I choose to talk about ‘assumptions’ rather than ‘risks’. Even though it may seem like an unimportant distinction, for many of us ‘assumptions’ are easier to identify than ‘risks’. And it’s often easier to get them out in the open where they can be discussed and documented. Plus, most people would concede that even a perfectly reasonable assumption can trend in the wrong direction over time. So convincing management to establish a strategic assumption indicator is usually easy. As a quick example, think ‘stable on-site workforce’. Maybe an important strategy assumed stable on-site staffing. Perfectly reasonable. But things change. And that’s why it makes sense to track these fundamental assumptions as indicators. Strategic assumption indicators can notify you of a potential problem months or years sooner than waiting for it to show up as a root cause within some faltering execution metric.

From management’s point of view, the strategic assumption indicator triggers a different mental response than the execution indicator. Management probably can’t find a root cause and ‘fix’ workforce stability. But they can reconsider every strategy that relied on that assumption. By readdressing the strategy, and removing the faltering assumption, a different strategy may now be more attractive. This is an easy concept to understand and can be a very effective lead indicator.

Maybe this is already how you think of KPI and KRI. Or, even better, maybe it helps you sort it out for yourself. I simply think it’s important to intentionally frame ideas in ways that are both simple and practical. And in ways that help you and your executive team make better (and earlier) decisions.

If you want, you can even use the ‘KPI’ and ‘KRI’ terminology to embody these ideas.

KPI can be explained as the early warning that a process isn’t working as planned so that you can figure out the root cause and make adjustments going forward.

KRI can be explained as the early warning that one or more strategies are based on increasingly shaky assumptions so that you can reevaluate whether that strategy is still the best choice going forward.

And, if the organization wants to continue using the phrase “key risk indicator”, I position ‘risk’ in a practical and transparent way – as the potential for faulty assumptions to derail a key strategy.

Actually, if given a choice I don’t use either ‘KPI’ or ‘KRI’ in discussions with management. In my experience, ‘execution metrics’ and ‘strategic assumption metrics’ are easier to discuss with management. It fits their existing mental framework better than ‘KPI’ and ‘KRI’; they won’t have to decode any jargon. But, if ‘KPI’ and ‘KRI’ are deeply embedded in your cuture you’ll undoubtedly want to keep using them. And if they aren’t already defined in a meaningful way, maybe this approach can help.

When you can simplify a complex topic, others are more likely to see you as an ‘expert’. And that’s a great way to build influence.