No man is an island – especially when it comes to Key Risk Indicators

Key Risk Indicators (KRIs) have traditionally been used as an internal metric to support and augment an organisations risk policy, inform risk appetite and identify potential problems. They are designed to represent leading indicators of potential problems and as such, are extremely valuable for risk professionals to feed into their risk reporting and process management.

Whilst all intentions are good, the problem we have is that currently there are no industry standards and so essentially every organisation is only measuring themselves against their previous indicators. How can you really address the problems and move your business forward if you don’t know what the bigger picture is? Benchmarking against your peers is fundamental to ensure that you are allocating resources and attention efficiently. On the whole, the energy, commodity and financial services industries have struggled massively to address their operative risks and it’s no wonder really…

And let’s just be clear, I’m not suggesting we expose individual firms sensitive data but rather submit specified aggregated data to an objective third party who can then analyse and present industry standards which firms can then measure against.

A typical internal company analysis would include three main aspects:

  • Measure and report appropriate KRIs
  • Analyze internal trends
  • Provide actionable early warning

An industry standard would look achieve:

  • Peer comparison (industry quartile)
  • Degradation or enhancement relative to peers over time
  • Identification of externalities affecting KRIs or their management
  • Identification of additional (or superfluous) KRIs

The Committee of Chief Risk Officers (CCRO) has already published recommended practices for operative risk, dividing the area of study into two distinct components for energy firms, namely Operational Risks, and Operations Risks. Operational Risks relate to trading activity, processes, people, systems etc, while Operations Risks relate to asset operations, delivering, producing, storing etc. Industry benchmarking of KRIs should consider both of these aspects.

“We are interested in developing leading practices related to measuring, reporting, and managing risks and the KRI initiative is central to this mission. By working together with CCRO members and advocate companies to help identify, clarify, and publish these advances in risk metrics, we create an opportunity to validate current practices and uncover new ones.” Bob Anderson, the Executive Director of the Committee of Chief Risk Officers

The phrase ‘no man is an island’ expresses the idea that human beings do badly when isolated from others and need to be part of a community in order to thrive. If we are going to use KRIs as a tool for growth then we absolutely need to have a clear picture of whichever industry we are operating in.

To learn more about this initiative please get in touch with Roderick Austin.