3 Risk Management Metrics To Build Your Program Around

The days when risk management was solely the responsibility of an organization’s risk and compliance departments are long gone. Risk landscapes have evolved and become much more complex, and that has transformed risk management from a niche discipline to an enterprise-wide responsibility that everyone needs to pay attention to.

At forward-thinking organizations, senior management is keenly aware of this trend, and they’re focused on understanding the risk environment and building a culture of risk awareness.

This shift in mindset has increased the responsibility of GRC leaders to highlight their work and share their insights with the board, C-suite, and other important stakeholders in their organizations.That growing responsibility represents a massive opportunity for risk leaders to earn their seat at the table, where decisions that drive the future of an organization are made.

The best way to do that is to zero in on key metrics that communicate an organization's risk profile, risk tolerance, and opportunities in a clear and easy-to-follow manner. Risk professionals work with a vast amount of data and oversee numerous cross-functional processes, and being able to harness it all to improve the way they communicate risk gives them more influence on business strategy and the direction of an organization.

In this article, we'll dig into specific metrics that compliance and risk managers should include in their risk management process to add more nuance and value to their programs.

How to start mastering risk metrics

The best place to begin with risk management metrics is by taking a holistic view of the business and identifying the metrics that matter most to your stakeholders.

These metrics can be viewed as both key performance indicators or KPIs, which speak to the performance of your ERM framework, and key risk indicators or KRIs, that highlight the evolving scope of risk so you can prepare for the future.

Common Metrics To Include in Your Risk Analysis

• Total number of risks identified
• Total number of identified risks that occur
• Total number of unexpected risks that occur
• Total number of risks mitigated
• Percentage of risks mitigated
• Mitigation timeline
• Business costs associated with risk

All of these risks should be tracked and monitored within your ERM software. Ideally, that platform allows you to see a connected view of risk and controls, and enables customization of reporting dashboards so you can easily communicate key risks to internal stakeholders.

The metrics we'll talk about in the next section are constructive in providing a backward look at how well your existing ERM system and practices have fared. But they can also provide a springboard for more productive discussions about the changing nature of the risks your organization is facing.

Risk Metrics You Should Be Reporting On

1. Risk Appetite and Risk Tolerance Versus Risk Exposure

When aggregated, a review of the company’s risk appetite and risk tolerance in comparison with its risk exposure ensures that the organization is operating in a manner consistent with its strategic and operating objectives and risk is being managed appropriately.

In addition to reviewing these metrics on an enterprise-wide basis, you should provide more detailed reports for more specific types of risk (including third-party, cyber, and IT security risks) and the likelihood of occurrence, risk concentrations, and risk interrelationships.This review also provides an opportunity to detail mission-critical risks, their potential impact, and any mitigants or action plans in place. If the firm is taking outsized risks in any one area or capacity, it’s critical to build organizational awareness so that it can be managed appropriately.

This presents a prime opportunity for a discussion of risk exposure and factors that may involve risk appetite and tolerance. If your organization is considering or in the midst of digital transformation, should the firm review its risk appetite? Are there digital risks that are not adequately being captured by existing tools or processes?

In another example, as organizations move to an increasing number of remote employees, what does the expanding risk perimeter mean for your risk exposure, and do you have the right tools and processes in place to protect your firm?

2. Risk and Controls Incidents

Tracking the number and type of risk incidents will help you understand whether your risk management processes and systems are adequately capturing and monitoring for critical risks, and help you gauge the accuracy of your measurement methodology, so you can make improvements over time.

Monitoring this metric will also reveal if there is a need for systemic fixes in the event that any incidents that do occur were unanticipated, greater in severity than expected, or recurring.

A discussion of risk and controls incidents shouldn’t just be a recap of last year’s incidents and how they can be avoided in the future. Depending on the audience, it could be the foundation for a deeper discussion about the quality of your organization’s risk culture and level of risk awareness. If there is inconsistency within your firm about how risk is perceived and managed, is it due to a lack of awareness or understanding? Are there opportunities to enhance your risk culture? These deeper questions help demonstrate the value of risk management and build a shared culture of risk.

3. Process Areas Involved In Risk Assessment and Mitigation

The risk management function may be responsible for ensuring that identification, assessment, and reporting of risk is occurring, but they do not own the risk itself.

Process owners own the risk based on its type and scale, and they are the ones closest to any adverse impact. The greater the number of process areas and owners involved in measuring risk, the more accurately your risk is being captured and addressed by those who bear the critical responsibility of management and mitigation.

Some questions to ask yourself: As risk is reviewed by process area and owner, how can the relationship between risk management and those process areas be strengthened? Is there a shared vocabulary and consensus around the risk calculation and mitigation process? Are there opportunities for closer partnership?

Challenges of Measuring Risk Management Performance

Reporting on risk metrics is easier said than done, and there are plenty of spots where things can go wrong. Measuring risk correctly requires a nuanced understanding of an organization's risk environment, appetite, and tolerance.

Let's get into some common challenges with reporting on risk performance.

Focusing on the wrong metrics

Many risk managers fall into the trap of reporting on metrics just because they are easy to measure. Risk metrics are by nature somewhat difficult to wrangle.

If you're just reporting on the number of risks to a business and which ones actually occurred, for example, that information isn't always exactly helpful to drive organizational decision-making. While retroactive reporting is good, it won't always earn you a voice in organizational decision-making.

On the other hand, if you track the number of risks facing an organization, have the ability to model the likelihood of that risk occurring, and tie each risk to its financial impact, you can create mitigation plans based on priority. That's exactly the kind of information stakeholders can use to determine where to allocate resources.

Failing to tie risk to business impact

Any effective risk metrics program should focus on quantifying the impact of business risk, which means you'll need to add financial context to risk decisions.

Risk quantification is essentially the practice of pinning a dollar figure to a risk event. Organizations take risks all the time without the appropriate data to determine their consequences in monetary terms. They need risk models, simulations, and analyses that yield objective risk intelligence focused on the probability of loss or business impact should a risk occur.

This is difficult to do and requires multiple inputs and modeling methods, but providing this data is essential to help strategic business objectives succeed.

Unclear communication and reporting

Creating detailed reports or collecting analytics on your risk program is useless if you don't have the proper channels in place to communicate them to key risk owners or business leaders.

However, robust reporting with risk heat maps, loss exceedance curves, data visualizations, and dashboards with the right data can legitimize your program in the eyes of executives and risk stakeholders.

Using a world-class GRC platform creates the opportunity to build a risk-centric culture where aggregate data is available from one central view. Focus on providing valuable, easy-to-digest data each time you report upward so you can get on a regular cadence with key figures within your organization.`

No ongoing monitoring

Real-time reporting is essential to notice and act on developing trends. If your risk reporting infrastructure is static, you will be less likely to uncover when a potential risk becomes an imminent threat.

The effectiveness of risk management programs relies on their ability to be agile, and the best way to do that is through real-time risk monitoring. It will allow you to have an ongoing awareness of the risk environment and note, quickly, when that environment changes.

Unpredictable risks

The effects of some risks are just hard to predict.

Let's take, for example, climate-related risks. It's not always easy to know when an extreme weather event, extended heat wave, or flooding will occur and interrupt an organization's operations. It can be even more difficult to distill exactly how those events can affect an organization. Organizations need structured, quantitative risk models, simulations, and analyses to provide the right intelligence to risk owners. It's important to model out every scenario, its likelihood of occurring, and the many ways in which it could affect the organization.

It's a difficult undertaking, but one that is essential to making unpredictable risks more manageable.

Level Up Risk Management Metrics & Reporting

LogicGate's Risk Cloud® provides a foundation for a more risk-aware culture so that your organization can take a more forward-looking view of risk.

Risk Cloud allows you to link assets, risks, controls, and policies to assess and visualize risk across your organization, and unite all risk owners, processes, and data into one platform. Not only will you land on better risk metrics with more accurate, more robust data, but you'll also be able to more effectively communicate the impact and prioritization of risk to key stakeholders.