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Implementing Enterprise Risk Management by James Lam

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CHAPTER 17Integration of KPIs and KRIs

INTRODUCTION

A successful ERM program not only highlights risks that an organization faces and helps avert them, but also highlights opportunities the company can take advantage of to boost growth and value. This is only possible if one is able to peer into the future to see those risks and opportunities coming down the pike. But how? Likely you are familiar with the concept of key performance indicators (KPIs), which help managers determine how well they are progressing toward their goals. While KPIs are important in ERM programs to evaluate their performance, it is only through key risk indicators (KRIs) that one can tease out trends that may indicate future risk. The adage “what gets measured gets managed” is true not just of KPIs but of KRIs as well. If risk managers can measure risk, then and only then can they optimize business decisions around it.

I'll begin this chapter by defining indicators in general, and KPIs and KRIs specifically. Because they are better known, I'll explore KPIs in greater depth before looking at the role of risk measurement and reporting in ERM. We'll then turn to the task at hand: creating effective KRIs that a company can use to anticipate future risks. I'll then elaborate on how best to implement a KPI/KRI program within an ERM framework before concluding with some best practices.

WHAT IS AN INDICATOR?

To understand key indicators, we must first understand indicators themselves. An indicator is a specific ...

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