Making Performance Metrics Risk-Aware RISK-ACADEMY Blog

Risk managers developed a troubling tendency to create parallel systems for everything. One prime example is the separation between Key Performance Indicators (KPIs) and Key Risk Indicators (KRIs). Everyone is using KRIs without even realising how RM1 they are. This artificial division doesn’t reflect business reality and creates unnecessary complexity while reducing effectiveness.

The problem with parallel risk systems

When organizations maintain separate risk metrics alongside performance metrics, they create significant problems. Teams track essentially the same information in different formats, leading to duplication of effort. These parallel systems often send conflicting messages – KPIs driving aggressive performance while KRIs suggest caution – creating confusion for decision-makers. This separation reinforces the dangerous notion that risk is something only “risk specialists” need to worry about, rather than an integral consideration for everyone.

Consider a hospital that tracks patient satisfaction scores (KPI) separately from medication error rates (KRI). Both metrics relate to the same patient care process, yet they’re managed by different teams with separate reporting lines. This disconnect creates blind spots where neither team has a complete picture of operational reality.

Transforming KPIs into risk-aware metrics

Instead of maintaining parallel systems, organizations should evolve their KPIs to incorporate risk dimensions directly. This means using ranges and thresholds rather than single targets, monitoring trends and rates of change rather than just absolute values, establishing risk-based limits that trigger specific actions, and focusing on leading indicators within existing performance frameworks.

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For a logistics company, rather than having on-time delivery percentage (KPI) and a separate vehicle breakdown rate (KRI), they can develop a risk-based delivery performance metric that incorporates both current performance and leading indicators like vehicle maintenance status, with clearly defined thresholds for different response levels.

• Throughput target of 1,000 units per day Risk-aware version: Production throughput of 950-1,050 units per day, with warning threshold at <900 or >1,100, requiring investigation and response plan when breached.
• Net Promoter Score target of 60 Risk-aware version: NPS maintained between 55-65, with alert threshold at <50 (requiring immediate customer engagement initiatives) and >70 (triggering analysis to ensure measurement accuracy).
• Project completion within 24 months Risk-aware version: Project timeline 22-26 months, with early warning at 10% schedule variance at key milestones, and critical response required at 15% variance
• In municipal water management, utilities can implement a risk-aware water quality index that incorporates both current quality measurements and leading indicators like upstream industrial activity and treatment system performance metrics with clearly defined thresholds for different response levels.
• For construction projects, companies can develop a project health index that integrates completion percentage, resource utilization trends, and schedule variance with defined thresholds for intervention. This provides project managers with a holistic view that acknowledges the interconnected nature of performance and risk.
• In healthcare, hospitals can implement patient care metrics that incorporate not just satisfaction scores but also near-miss reporting rates and staff workload indicators, creating a comprehensive view of care quality that includes both performance and risk dimensions.
• Instead of tracking only closed sales, monitor proposal-to-win ratio, sales cycle duration trends, and changes in average deal size as leading indicators of future revenue performance.
• Track participation rates in optional training, internal job application trends, and collaboration tool usage patterns as leading indicators of potential turnover issues.
• Monitor supplier delivery time variability, changes in raw material inventory turnover, and transportation provider performance as leading indicators of potential supply disruptions.
• Track server response time trends, database query performance changes, and application error rates as leading indicators of potential system failures.

Benefits of integration

By embedding risk considerations directly into performance metrics, organizations gain several advantages. They simplify reporting by maintaining one integrated set of metrics rather than parallel systems. They improve decision quality by ensuring performance and risk are considered simultaneously. They create broader risk awareness as everyone becomes attuned to risk, not just risk specialists. And they focus resources more effectively with less time spent maintaining separate frameworks.

Transitioning to risk-aware KPIs requires a thoughtful approach. Organizations should begin by reviewing existing KPIs and KRIs to identify overlaps and connections. Next, they should redefine KPIs to include acceptable ranges, thresholds, and trend analyses rather than single-point targets. They should incorporate leading indicators that provide early warning signals of potential issues.

The end result is a more streamlined, effective approach that treats risk as an inherent part of performance management rather than a separate consideration. This integration aligns perfectly with decision-centric risk management, ensuring that uncertainty is considered before and during the execution of business activities, not as an afterthought.

Which performance metrics in your organization do you think would benefit most from being transformed into risk-aware measurements, and what specific thresholds would make them more effective for decision-making?

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