The Importance of knowing How to Use Performance and Risk Indicators

By Eduardo Pardini

The success of an organization is not a matter of chance; it results from a well-structured set of practices that ensures its sustainability and growth over time. Among these practices, effective corporate risk management stands out as a critical component. However, for this management to be truly efficient, it is essential to have a monitoring system based on well-defined indicators.

Although much has been said about the importance of KPIs (Key Performance Indicators) and KRIs (Key Risk Indicators), significant doubts remain about when and how to use them effectively. This confusion is understandable, as both types of indicators have different yet complementary purposes:

• KPIs: Performance indicators that measure progress toward the organization's operational or strategic objectives. These measure the past, the results achieved, or risks that have already materialized. They are reactive, as management acts based on them to redirect activities and/or address the measured risk factor.
• Example: The sales conversion rate is a KPI used to measure the efficiency of a sales team in turning opportunities into actual clients.
• Another Example: The percentage of interest paid due to late payments to suppliers compared to the estimated residual risk and/or the acceptable risk level defined by the organization's risk appetite.
  
• KRIs: Risk indicators that provide early warnings of potential threats that could adversely impact the achievement of objectives. These are proactive indicators, anticipating future risks before they materialize.
• Example: An increase in household debt is a KRI indicating a potential risk of reduced planned sales levels.
• Another Example: Possible pressure on production costs due to a drought in the commodity-producing region, impacting the final product price.

Clearly distinguishing when and how to use these tools is crucial for ensuring that the organization has a holistic view of both its performance and the risks it faces.

The Strategic Role of Indicators

Simply implementing indicators is not enough; they need to be strategically selected and monitored. This means that each indicator must align with the organization's operational reality and strategic planning. Intelligent use of these tools is what differentiates prepared and insightful organizations from those caught off guard by unexpected risks or unattainable goals.

By monitoring KPIs, an organization can assess whether its goals are being achieved and identify opportunities for improvement. On the other hand, KRIs help anticipate and mitigate threats before they materialize, safeguarding the results already achieved.

Sustainable and Lasting Success

When properly applied, the combination of KPIs and KRIs is not merely a recommended practice; it is an indispensable condition for ensuring the sustainable success and longevity of an organization. These indicators enable companies not only to monitor their operations but also to act proactively in response to risks and opportunities.

Thus, by adopting an indicator-based approach, organizations strengthen their capacity for anticipation, enhance their resilience, and achieve consistent results over time.

Final Reflection

I invite you to reflect: Is your organization using KPIs and KRIs in an integrated and strategic manner? If not, it might be time to reassess your monitoring processes and tools. After all, the future belongs to companies that know where they are and where they are going—without losing sight of the risks along the way.