A practical approach to defining indicators within an integrated ERM Framework Workshop Overview Many organisations have made considerable progress in the area of enterprise and operational risk management since the financial crisis in 2007/2008. However events over the last few years have demonstrated, and continue to demonstrate the need to make improvements in organisational risk management capabilities and tools. One area of weakness and, particular challenge for many organisations is around indictors, specifically developing and managing with Key Risk indicators (KRIs). KRIs have a vital role to play in monitoring and managing risk exposure within any organisation, and should be developed and deployed in the context of a wider indicator suite which includes Key Performance Indicators (KPIs) and Key Control Indicators (KCIs). Workshop Objective This interactive workshop provided attendees with a deep understanding of developing and managing with Key Risk Indicators. We started by providing an overarching management framework which integrated strategy execution and risk management. We then moved on to clarify the role of KRIs, alongside KPIs and KCIs. Using a combination of presentations and practical examples, we were able to: Learn how to define robust suite of indicators, including the different between Leading and Lagging, and Financial and Non-Financial indicators Understand how to use a well-structured risk definition to guide the definition of KRIs Understand the relationship between risk appetite and KRIs, and however Risk Appetite should influence the definition of KRIs Understand the role KRIs play in scenario analysis Understand the role of KRIs in the risk assessment process Understand the role of KRIs within the risk, regulatory and management reporting Who Attended: CROs, Directors, General Managers, Senior Management and Managers of: Operations, Operational Risk Management, Enterprise Risk Management, Internal Audit, Compliance, Operational Risk, Strategy and Performance. Please contact andrew.smart@stratexsystems.com for more details about the presentation or to have a talk about our software solutions.

1. Managing with KPIs and KRIs
Prepared
for:
StratexSystems
Webinar
Series
1
November
2012

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2
The objectives of this session are:
§ Introduce 3 types of indicators
§ Discuss the steps taken in defining indicators
§ Provide ‘knowledge transfer’ to give you the skills and tools to
define indicators

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The Balanced Scorecard was introduced in 1992 which
led to an explosion in the use of indicators
“What
you
measure
is
what
you
get”
Raison
d'être
for
Balanced
Scorecard
was
to
provide
a
‘balanced’
set
of
performance
measurements.

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The credit crunch and subsequent fall-out is rewriting
the rules on strategy execution (and risk management)

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5
Firms need to take an integrated approach which
enables sustainable strategy execution
Performance
Management
Risk
Management
Strategy
Management
AppeEte
What
are
we
trying
to
achieve?
Are
we
on
track?
What
is
our
Risk
AppeEte?
Are
we
operaEng
within
appeEte?
Governance
&
CommunicaEons
Culture

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§
6
Such an approach must be underpinned by a
‘conceptually sound’ data model
6
ObjecEves
KPIs
AcEons
Key
Risks
KRIs
AcEons
Assessment
Key
Controls
KCIs
AcEons
Assessment
Events
CerEficaEon
Risk
AppeEte

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7
What is an indicator?
§ An Indicator is a numeric value produced through the combination of
measures which provides business insight.
§ Indicators inform management discussions and provides an indication of
past, present or future state of the business, from a perspective of:
§ Performance (KPIs)
§ Risk (KRIs)
§ Control (KCIs)
§ Defining indicators and measures enables:
§ more focused and timely responses to emerging issues
§ better informed business decisions

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Indicators and Measures – What is the difference?
What is a measure?
§ A measure is a business value or fact which is generated as a result
of the activities of the business.
§ Net Income (£) is a measure. It tells us the Net Income in £ terms
generated by the business activities.
What is an indicator?
§ An Indicator is a numeric value that is produced through the
combination of measures which provides business insight.
§ Expressed as %’s, ratios etc.
§ Indicators inform management discussions and provide an indication
of past, present or future state of the business.
§ Net Income (£) as a % of target

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The three different types of indicators answer different questions
Key Performance Indicators
§ An indicator which enables an organisation to define its performance targets based on its
goals and objectives and to monitor its progress towards achieving these targets.
§ KPIs are used to answer the question: “ Are we achieving our desired levels of
performance? ”
Key Risk Indicators
§ An indicator which is used by organisations to help define its risk profile and monitor
changes in that profile.
§ KRIs are used to answer the question: “ How is our risk profile changing and is it within
our desired tolerance levels? ”
Key Control Indicators
§ An indicator used by organisations to define their controls environment and monitor levels
of control relative to desired tolerances.
§ KCIs are used to answer the question: “ Are our internal controls effective? Are we ‘in
control’? ”

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10
Types of Indicators
§ There are primarily two types of indicators, Leading and
lagging (As a rule of thumb a good mix is a ratio of 2:1).
§ Leading indicators are those indicators that provide an
early signal/early warning that the standards set/agreed in the
business will or will not be achieved.They are input indicators.
§ Lagging indicators are those indicators that provide a signal
that the desired outcomes/targets have or have not being
achieved by the business.They are outcome indicators.

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The three different types of indicators should be
related and can be reused

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A simple example of reuse of indicators across
indicator types

13. Defining Indicators

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Basic steps in defining Indicators
Step 1 – Set the Context
Step 2 – Develop a ‘long list’ potential indicators and measures
§ Understand the difference between SHOULD, COULD and ARE
Step 3 – Evaluate Indicators and indicator combinations to determine the
‘vital few’
Step 4 – Operationalise your chosen few, recognising this is an iterative
process and they will change.

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Step 1 - Set the Context
§ Are the Objectives, Risks, Controls defined? How well?
§ Have you undertaken a consolidation/refinement process
across your ‘entity’?
§ Are your objectives clear, well articulated, well understood?
§ How many risks and controls are you managing? Is there an
explicit linkage to objectives?

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16
Step 2 - Develop a ‘long list’ potential indicators and
measures
§ Understand the difference between
§ What should our indicators be?
§ What could our indicators be?
§ What are our current indicators?
§ Avoid the natural trap of using existing indicators and measures, or those
that are easy to measure.
§ Balance the need to ‘navel graze’ against the need for action.
§ Ask your entity head – what is important and why?
§ Ask experts, consult industry benchmarks, Google.
§ Be cautious when using ‘off the shelf’ indicators and measures.

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Step 3 – Evaluate Indicators, and indicator combinations
to determine the ‘vital few’
§ Good Indicators should be
1. Focused
2. Objective
3. Balanced
4. Fact-based
5. Owned
6. Practical
SMART
Indicators
Specific
Measureable
AcEonable
&
Aligned
RealisEc
Time
framed

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Step 4 – Operationalise your chosen few, recognising
this is an iterative process and they will change.
§ Defining Indicators can become a time consuming process –
don’t attempt to develop a ‘perfect’ set!
§ Adopt an iterative approach.
§ Accept they will and should change.
§ Use initial set of indicators for approximately 3 months (3
cycles) then review.

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Defining an indicator… capture key data
Governance
and
ownership
Meta
data
about
the
indicator
Baseline
and
Thresholds

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Indicators are scored using a simple, 3 colour RAGAR approach
Out
of
control.
Take
acEon
now!
Out
of
tolerance.
Monitor
,
acEon
may
be
required.
Within
tolerance.
Learn
the
lessons
and
disseminate

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The different indicators types enhance the ‘standard’
Strategy Map

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Risk Maps and other high level visualisations of data are
important

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Each of the indicator types can be included within a
separate scorecard
Strategy
Scorecard
Risk
Scorecard
Control
Scorecard

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Example Front-page for a board report

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Example Indicator Dashboard

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Example Indicator Accountable Dashboard

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Example Detail Indicator Dashboard (via SharePoint)

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Exmaple Indicator Healthcheck

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Q&A

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About StratexSystems
“StratexPoint
enabled
us
to
reduce
the
value
of
our
opera<onal
losses
by
94%,
the
volume
by
63%
and
our
economic
capital
provision
by
23%”
-­‐
Head
of
OperaEonal
Risk,
HML
-­‐
Skipton
group
Our
mission
To
provide
an
integrated
strategy
and
risk
management
soluHons
which
enhances
strategy
execuEon,
enhance
capital
efficiency
by
15%
and
reduce
operaEonal
losses
25%
while
providing
100%
confidence
that
your
business
is
operaEng
within
appeEte.

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Our solution enables our clients to “control their risks
while executing strategy”

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§
32
Free trial of StratexLive
Stratex
Bootcamp
§ 30
day
free
use
of
StratexLive
§ Regular
‘coaching’
session
online
§ Load
your
own
data
§ Add
your
own
users
§ START
NOW

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End

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Additional Slides

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Good indicators are focused
§ Providing a ‘signal’ on specific, desirable results or outcomes.
§ Articulating the indicator as a true indicator, rather than a
measure provides focus.
§ Rather than ‘Total Operational Losses’ consider Operational Losses as
a % of Revenue
§ Can work in isolation or in combination with other
indicators.

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Good indicators are Objective
§ There should be no ambiguity as to what the indicator is
measuring.
§ There should be general agreement on how the indicator
should be interpreted.
§ Documenting the indicator with notes, rationale etc.

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Good indicators are Balanced
§ Generally should use a combination of Leading and Lagging
indicators.
§ Use a combination of financially and non-financially orientated
indicators.
§ Consider your total number of indicators and their balance
between performance, risks and controls.
• Sometimes a single indicator can be ok!

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Good indicators are Fact-based
§ Where possible, indicators should generally use ‘hard’ facts /
numbers.
§ Fact-based indictors are not as open to interpretation or
ambiguity as ‘soft’ numbers.
§ However ‘soft’ facts and ‘gut’ feel have a vital role to play in
decision making.They should supplement ‘hard’ facts via
management discussions.
§ Good example: Net Promoter Score

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Good indicators are Owned
§ Indicators use a partial RACI (Accountable inferred from the
parent Performance, Risk or Control)
§ Indicators have an updater, if manual.
§ Indicators can have an approver (often this is the accountable
of the parent Performance, Risk or Control)

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Good indicators are Practical
§ An indicator is only practical if data can be collected in a
timely fashion, at a reasonable, acceptable cost... Or there is a
plan to make this happen!
§ Indicators should inform the organisational discussion.
§ Indicators should focus on the ‘vital few’ - it is not practical to
have indicators for everything.
§ It is not practical (or desirable) to have indicators for
everything or to develop a perfect set of indicators.