Identifying Key Risk Indicators (KRIs)​

To provide continuous insight into the risks, one or more Key Risk Indicators (KRIs) can be implemented. Essentially, a KRI is a forward-looking measure that provides a basis for estimating the likelihood of the risk. A KRI can be quantitative, such as turnover rate for a business unit, or qualitative, such as the adequacy of a system.

To be useful, a KRI must always be linked to one of the risk drivers (or cause). Historical performance trends are used as the basis for a forward-looking perspective. KRIs provide early warning signals by highlighting trends and changes in risk level by monitoring changes in actual performance.

KRIs can use data from SAP and non-SAP systems. Examples are:

• Cash position by day/currency (SAP ERP Financials).
• Quality of service provision (SAP Supply Chain Management).
• Number of warranty claims (SAP ERP Operations).
• Number of credit breaches per month (Commodity XL for Credit Risk).
• Employee utilization (SAP ERP Human Capital Management).
• Illness rate (SAP ERP Human Capital Management).

When designing KRIs, consider the following:

• Design the best KRIs independent of data availability. Use interim KRIs if the desired data is not available.
• Work with the business to design the KRIs.
• Keep KRIs simple so they can be easily understood.
• Establish KRIs that can be used across all business areas and locations, if possible.
• Make sure KRIs are quantifiable.

To provide continuous insight into the risks, one or more key risk indicators (KRIs) can be implemented. KRIs with good predictive capabilities are critical. Certain design steps must be undertaken before implementing a key risk indicator in SAP Risk Management.

To start, you need a specific risk event for which the KRIs are used. A KRI is not a standalone metric; it is a measure that provides a basis for estimating the likelihood of a specific risk event. Start by asking the following questions when evaluating potential KRIs:

• Can the KRI be measured at a frequency that is low enough to identify a potential risk event?
• Can KRI trigger levels be established?
• Can clear escalation criteria be established?
• Is the KRI leading enough?
• Is there a clear owner for the KRI data?
• Is the KRI data available in a SAP or non-SAP system?
• Does historical data exist?
• Is the KRI data accurate and reliable?

Next, the potential KRIs must be rated in terms of their relationship to the risk event drivers. That is, KRIs deemed to have a strong relationship to a driver must be implemented over KRIs that have a weak relationship to the same driver. Once you have selected the strongest KRIs, you are ready to start implementing them in SAP Risk Management.

You now know what Key Risk Indicators are, how KRIs can use data from SAP and non-SAP systems, and the design steps that must be undertaken before implementing a key risk indicator in SAP.

Let’s observe how Nancy implements Key Risk Indicators in the SAP Risk Management System in the following demonstration video.