“Corporate compliance” means that your company and its employees follow the laws, regulations, standards, and ethical practices applicable to your operating environment.
In today’s data-driven landscape, however, compliance officers need quantitative measures to assess compliance performance. To do this, they must identify Key Performance Indicators (KPIs) for their compliance program.
Tracking these KPIs provides deeper insights into the organization’s policy and regulatory compliance posture. KPIs also communicate the strengths and weaknesses of the compliance function to relevant stakeholders.
So, what are the best metrics to measure a compliance program’s effectiveness? This article addresses the role of KPIs in compliance management. First, let’s explore the benefits of KPIs.
What Are the Benefits of Measuring Compliance Effectiveness?
A robust compliance program is essential to assure adherence to both internal policies and external regulations. Such a program provides a systematic set of guidelines to:
- Set the right expectations around compliance practices and employee behaviors;
- Keep employees focused on following the rules that help the organization achieve its goals and mission;
- Minimize the possibility of regulatory fines and expensive lawsuits;
- Prevent customer churn due to non-compliance.
But more is needed to implement a compliance program. It is also essential to measure it against key benchmarks to enhance effectiveness, identify gaps, and align with regulatory requirements.
Enhance Compliance Effectiveness
Measuring compliance effectiveness is the first step to managing, maintaining, and enhancing compliance effectiveness. By measuring compliance, you can better understand whether the organization’s policies, documents, manuals, and internal controls reduce risk and improve compliance.
Identify and Address Gaps
By measuring compliance effectiveness, you can identify gaps and determine if you need more staff or better technology..
Keep Up with Regulatory Demands
In 2020, the U.S. Department of Justice (DOJ) released updated guidelines about what compliance programs should be able to do to be deemed “effective.” Periodic assessments of the program’s performance were one of those capabilities – and that requires KPIs and metrics.
What Are Compliance Metrics?
With relevant, comprehensive, and up-to-date compliance metrics and KPIs, you can measure your company’s ability to remain aligned with internal policies, external rules, and government regulations. You can better understand how well your organization’s compliance program is (or isn’t) operating.
Compliance KPIs provide an “early warning system” to detect compliance issues quickly so you can fix the problems and improve your controls. You can prevent fines, regulatory damage, customer churn, financial losses, and bad publicity by taking prompt action.
Some compliance metrics may also be known as key risk indicators or KRIs. KRIs are crucial indicators of potential risk. They can help you with risk assessment and check whether existing controls are helping to reduce the effect of these risks.
How is compliance measured?
Compliance is measured by employing specific metrics to assess various aspects of a compliance program. Key metrics include:
- Mean Time to Issue Discovery: This metric measures identifying compliance issues quickly. It’s calculated by dividing the total time to discover all compliance issues by the total number of incidents.
- Mean Time to Issue Resolution: This metric gauges the efficiency of issue resolution. It’s calculated by dividing the total time to resolve all issues by the total number of issues.
- Compliance Expense Per Issue: This metric determines the cost-effectiveness of the compliance program by dividing the total compliance budget by the number of issues managed.
- Severity Gap Between Predicted and Actual Risks: This metric assesses the accuracy of risk assessments by comparing predicted risk severity to actual severity, both financially and operationally.
- Risk Mitigation Timeframe: This metric measures the time it takes to implement changes necessary to mitigate identified risks.
Accurate measurement is reliant on advanced technology and reporting capabilities. These metrics provide organizations with valuable insights into their compliance programs’ effectiveness, efficiency, and cost-effectiveness, enabling ongoing improvement and risk management.
How to Use Risk Management to Establish Compliance KPIs
Effective compliance begins with the risk management process, which determines your organization’s objectives.
Determine Organizational Objectives
You can only measure compliance effectiveness with baseline goals. To identify those goals, you need to ask some critical questions like:
- What are the enterprise-wide objectives?
- What risk mitigation strategies enhance business performance and strengthen profitability?
- What kind of unexpected events may reduce operational efficiency?
- Which risks may affect current or future revenue streams?
- What is the likelihood of these new risk events?
The above list shows that to create appropriate compliance KPIs, you need to consider not only present risks but future risks and potential challenges as well. It’s also crucial to consider that different industries have different objectives, which may require different compliance KPIs.
Assess Compliance Risks
To identify the correct compliance KPIs for your organization, you must assess the compliance risks you face – that is, the chance that you will not be able to meet your regulatory compliance obligations. To do this, ask questions like:
- What compliance obligations would pose the biggest enforcement threats if we fail to meet them?
- Given our current operating processes, which compliance obligations will we likely not meet? (Your most likely risks might differ from your most significant risks.)
- What processes that we have now support our efforts to meet compliance objectives?
- What are the most reliable, data-driven ways to assess whether those processes work as intended?
What Are Some Key Metrics and KPIs My Compliance Officer Can Use?
As mentioned, every organization is different, and no “one size fits all” solution exists. That said, some standard compliance metrics can give you a starting point.
Employee Complaints About Misconduct
If an employee claims misconduct within the organization, it can have severe repercussions for its reputation and financial standing. That’s why it’s critical to measure the number of employee complaints and the nature of those complaints.
Measure complaints by type of allegation: harassment, illegal activity, fraud, anti-trust, unethical behaviors, discrimination, etc. Find data to clarify questions such as:
- How many employees have filed complaints?
- What are they alleging?
- Did they complain through an anonymous hotline or go directly to a supervisor or functional head?
- Was the allegation substantiated or not?
Compliance Expense
This metric is critical for understanding which compliance issues or controls cost more to resolve than others and why. Measuring the time and effort to execute compliance activities can help you implement the most appropriate initiatives to strengthen your compliance program.
For instance, you can judge whether automation can be a feasible solution to reduce the expense of due diligence. Or perhaps a significant amount of time is spent following up on audit findings, and a workflow tool could help alleviate these tasks.
Mean Time to Issue Discovery (MTTD)
MTTD is a critical metric to measure compliance effectiveness since it shows:
- How quickly your compliance program can discover an issue;
- Whether you have a strong speak-up culture,
- If you have appropriate data monitoring capabilities to identify incidents.
To calculate MTTD, you must ascertain:
- When the issue first started (via interviews or forensic investigations),
- When the compliance team discovered it.
Mean Time to Issue Resolution (MTTR)
MTTR shows how quickly you can resolve discovered compliance issues. MTTR is important because it could indicate:
- Resource shortages;
- Lack of technology;
- Too many manual processes could be replaced by automation.
To calculate MTTR, add up the total time for all issues to be resolved. Then, divide this number by the total number of issues.
For best insights, avoid combining too many issues into one MTTR metric and track MTTR for each type of issue.
You can also track the time between discovering a risk and implementing changes to mitigate that risk. This metric shows how agile the compliance program is at implementing necessary changes and adapting to evolving risk circumstances. To calculate this time, add the mitigation times for all risks and divide by the total number of mitigated risks.
Other Compliance Metrics to Measure
In addition to the above metrics, you can better understand the company’s risk level by measuring metrics like:
- Violations of laws and industry regulations: To prevent the recurrence of violations, it’s crucial to understand the root cause of previous violations.
- Compliance investigations or audits: It’s critical to keep track of internal audits performed and the findings and recommendations that resulted. You should also be able to track whether weaknesses were corrected and whether recommendations were implemented.
- Risk reductions: If certain risks have diminished (say, as a result of improving your internal controls and compliance policies), you should measure and document these changes.
Also, a culture survey should be included in a compliance report, explaining how the company is perceived by employees and in the public eye.
Tips for choosing which compliance KPIs to prioritize
Selecting the right Key Performance Indicators (KPIs) for compliance is essential for effectively measuring and managing your compliance program. Here are some tips to help you prioritize the most relevant KPIs:
Step 1: Assess Available Data Sources for Regulatory Compliance
Commence your journey to selecting the right regulatory compliance Key Performance Indicators (KPIs) by comprehending the data sources at your disposal. Beyond the traditional compliance department, explore data from various parts of your organization, such as HR, sales, and more. These rich, untapped sources can provide valuable insights into cultural health, brand reputation, and subtle forms of retaliation.
Step 2: Contextualize Each Data Point for Risk Assessment
Putting each data point in context for practical risk assessment and regulatory compliance is crucial. This involves understanding how to interpret the data and evaluating its relevance to your compliance program’s objectives and regulatory requirements. Contextualization empowers you to make informed decisions on resource allocation, compellingly present compliance insights to your senior management, and ultimately foster a more ethical and compliant organizational culture.
Step 3: Collaborative Data Assessment for Key Compliance Metrics
Collaborate with your compliance officers and compliance team to ensure a comprehensive approach in selecting key compliance metrics. Use our Compliance KPIs worksheet to perform a health check on your current data analysis. This collaborative effort can uncover surprising insights.
Tracking compliance performance over time
In an era of stakeholder capitalism, where regulators, employees, and customers expect more from the companies they engage with, the need to measure the ethical health of your organization has never been more critical. Giving your Key Performance Indicators (KPIs) the respect and attention they deserve is essential.
Tracking compliance performance over time is not a destination but a continuous journey toward ethical excellence. It’s about understanding where you stand today, setting benchmarks for where you want to be, and consistently improving your compliance program to meet evolving demands and expectations from regulators, employees, and customers.
Let ZenGRC Streamline Your Compliance Program
It’s a challenge to keep up with the evolving compliance landscape. Streamline compliance management with Reciprocity ZenGRC. Instead of using spreadsheets, adopt ZenGRC to cut compliance costs and centralize compliance management.
A single source of truth assures your organization is always audit-ready. Policies and procedures are revision-controlled and easy to find in the document repository. Workflow management features offer easy tracking, automated reminders, and audit trails. Insightful reporting and dashboards provide visibility to gaps and high-risk areas.
ZenGRC is intuitive and easy to use. Schedule a free demo today.