Key Risk Indicators for Tech Firms
April 11, 2023
Inflation, rising interest rates, and a looming recession have had major reverberations throughout the tech ecosystem. In addition to the broader challenges facing the economy, tech firms are also contending with cryptocurrency and investor losses that have further strained venture capital markets. In an effort to cut costs and conserve cash, many are adopting a more conservative approach in the short term—tightening budgets, laying off workers, and generally doing more with less. However, some of these measures may have the unintended effect of increasing your liability, especially during times of uncertainty when tensions run high.
To make it through these headwinds, all tech firms should have key risk indicators (KRIs) in place to help monitor their exposures. Unlike key performance indicators (KPIs) which are lag measures of success, KRIs are lead measures that allow you to identify risks before they have a major impact on your business. With concrete data points, you can stay ahead of any potential threats or disruptions and plan proactively to mitigate financial, legal, and reputational harm.
While the specific measures you use will vary based on your firm, KRIs are a critical part of your overall risk management strategy to boost organizational resilience. To help you get started, we’ve identified some KRIs in critical areas of your business that will promptly alert you to risk, regardless of market conditions.
Disclaimer: Please note the information provided herein offers guidelines only and is presented from a liability-based perspective to help you avoid insurance claims. It is not exhaustive and should not take the place of legal advice, nor will it apply to all businesses, settings, and circumstances. For specialized guidance, please consult a risk management professional, lawyer, or a licensed insurance representative.
Key Risk & Indicators
1. Investor Risks
Investors know that market fluctuations are part of the game. But if your revenues are drastically lower than what you projected last year and there are no signs of a rebound, folks who put $30 million in to help your company grow won’t just walk away if you have to shut down or sell it at a discount. And in most cases, they won’t just sue your company to recoup what they invested—they might even go after your management team personally.
Private companies should pay closer attention to early warning signs in their specific market segment. For instance, if your software platform targets retail companies, factors like declining sales, rising inflation, and increasing unemployment could indicate a decrease in software licence renewal rates and challenges in closing sales opportunities.
You could also monitor the performance of other companies in your investors’ portfolio and try to gauge the overall financial health of their investments. If these companies are doing well, then investors may be more inclined to support you during difficult times. But if they’re experiencing losses, investors may pull back their involvement with certain companies and prioritize the ones they feel can ride out the storm. Being aware of these dynamics can help you adjust investor and board expectations accordingly and strategize effectively to mitigate cash burn.
2. Financial Risks
The tech industry is about constant growth, especially for firms in the start-up phase. Making calculated risks to gain market share and build brand recognition and hoping that your revenue will catch up to your expenses sooner or later.
But in periods of slowdown, even a minor disruption could jeopardize your financial stability. Supply chain bottlenecks, design flaws, and network security issues can all keep you from delivering products or services as promised, stalling your clients’ operations. And if their bottom line is impacted, you could be hit with a lawsuit for breach of contract, negligence, lost revenue, and more—even if you’ve done nothing wrong.
Alternatively, you might have the product or services readily available, but clients that have been hit hard by economic downturns may be unwilling to proceed. If consumer demand decreases across the board, you won’t be able to make back what you spent on R&D, sales, marketing, product development, and more, tying up your cash flow and straining your business.
To effectively manage financial risks, it’s essential to go beyond operating costs and debt levels. Think outside the box and consider factors that can contribute to revenue volatility, like:
- Supply Chain Disruptions: That includes the number of events that impact the flow and activities of your production, distribution, or sales, like a natural disaster, delivery delays, or supplier bankruptcy.
- Concentration Risk: While it’s critical to test the waters, overreliance on a single product, service, market, or small number of clients or industries poses major risks to your revenue stream. If even one of your big clients reduces or ends the relationship, you could miss your sales goals.
- Emerging Technologies: Keep a closer eye on new trends and innovations in the tech industry. Industry competition may put pressure on pricing, while rapid advancements can quickly render your products or services obsolete, leading to declining sales and profitability.
- Compliance Risks: Failing to keep up with new regulations or changes in requirements could result in significant financial penalties, legal action, or even reputational harm, disrupting operations and hindering financial targets.
- Cybersecurity: Stay current with the tech industry’s evolving threat landscape. Try to track breaches, understand who’s at risk, and why. By identifying trends in the frequency and severity of attacks, you can adjust your cybersecurity measures to protect against potential financial losses.
While these factors won’t directly measure your financial health, monitoring them can help you determine the monetary impact of an unexpected event.
3. Human Capital Risks
Many firms have been coping with downturns by cutting costs and letting people go. However, team members that don’t leave on good terms or have trouble finding new employment might become hostile, leading to allegations of mismanagement, wrongful termination, unfair treatment, and more against your company. Even if you haven’t had any layoffs yet, employees that are nervous about job security or your business health might look for other opportunities before they have a chance to be let go, especially if they’re being paid in stock options that aren’t worth much anymore.
But cutting jobs won’t necessarily decrease your costs; in fact, it might even hurt your profitability due to a drop in performance and productivity. The tech industry is already facing a growing skills shortage and without enough talent on your side, you won’t have the resources or skill you need to grow your business, deliver quality service, and remain competitive. Plus, supervisors and senior executives that are putting in double time could become burned out from added responsibilities and time pressures. Or they could make more mistakes or falter on projects, driving up the potential of a client lawsuit.
Retention matters, even during recession. While you can always backfill roles, it’s less disruptive to retain quality employees than hire and train new ones. And if you’re not putting in the effort now, you’ll be facing talent shortages—and all the liabilities that come with them—down the line. To stay in tune with your workforce and measure human capital exposure, consider some of the KRIs below. From there, you can train and develop talent, manage employee expectations, and focus on execution.
- Recruitment and Training: Monitoring the effectiveness of recruitment and training involves assessing various factors related to the hiring and onboarding of employees, like time-to-hire, turnover, quality of hires, and the impact of training programs on employee performance and skill development.
- Absenteeism Rate: This figure measures the rate of unplanned absences (due to sickness or other circumstances) in a workplace over a period of time. High absenteeism could signal that employees aren’t feeling motivated enough to come in or that they’re experiencing personal or health-related issues (which could be exacerbated by work).
- Employee Engagement: Try to gauge the level of enthusiasm and commitment workers have towards their jobs. Low engagement can also hint at larger issues, such as poor communication or lack of opportunities for career growth. Staff that are disengaged or dissatisfied are unlikely to be invested in the company’s success.
PRO Tips: What else can you do?
As the business landscape becomes more complex and uncertain, stakeholders are increasingly prioritizing issues like governance, data privacy, and sustainability. That means tech firms can’t continue to burn through cash and operate with the same “growth at all costs” mindset anymore.
Instead, they’ll have to adapt to changing expectations and regulatory environments. They’ll have to rein in spend culture and become cash-flow positive. And they’ll have to grow organically and be more creative with how they can achieve their goals.
While KRIs are a valuable tool for ongoing risk control and monitoring, you’ll need to supplement them with a comprehensive risk management strategy to reduce disruption, stabilize your business, and mitigate any potential liability. Here are some tips to get started.
1. Be methodical.
In addition to the categories above, you may want to monitor other key areas of your enterprise, like technology, data security, supply chain, and more. Assign key KRIs to each cause and expand as needed, but don’t have so many that managing them becomes a hassle. Too much data could be overwhelming, but too little might not give you any intel.
For maximum efficacy, all KRIs should be measurable, comparable, and predictable, with fixed thresholds, like the number of units produced, volume of cargo loaded, or increases and decreases by a certain percentage. Having specific trigger levels will allow you to quantify each risk, determine likelihood, and forecast occurrence.
Finally, have compliance and internal audit experts vet your KRI designs for each unit and leverage technology where you can to map out risks and track follow-ups.
2. Devise a game plan.
The more you know, the more you can prepare. With sound data and greater visibility into your risk landscape, the insights from KRIs can help you:
- Classify stress points (i.e. low, medium, or critical), (forecast), and determine which risks should be addressed first.
- Develop appropriate and effective action plans to control risk. That includes anything from diversifying revenue streams to building up cash reserves to streamlining supply chains, and more.
- Set up disaster recovery and contingency plans to respond to shifting market conditions, disruptions, or other unforeseen events. For example, if you rely on certain suppliers for technical partners, you can purchase a few months of buffer stock or look into alternate vendors, locations, or transportation routes so shipments aren’t affected.
Even if it adds some cost back into your “lean” production systems, risk controls are a necessary trade-off to avoid the effects of lost revenue, market share, investor confidence, and client trust.
RELATED: 10+ Tips for Talent Retention
3. Be dynamic.
Re-evaluate your KRIs, controls, and contingency plans regularly; older KRIs may become irrelevant and routine assessment will help you determine your firm’s overall progress, pinpoint areas of improvement, and maximize performance. If your initial procedures fail to produce positive results, update your controls as needed. Depending on how you’re doing, you might even need to change your objectives, sales strategies, or the product narrative entirely.
Additionally, as the business landscape evolves, so will your risks—and your KRIs. Be sure to account for new risks that arise by keeping up with any new developments that could affect your firm, including industry trends, market changes, global events, regulatory issues, emerging technologies, and more. Modify your KRIs accordingly and provide ongoing risk management training to your entire team so they’re up-to-date on best practices.
Above all, get comfortable with being uncomfortable. It’ll be some time before the market stabilizes and you might need to adjust multiple times before you see consistent success. Be prepared—and be willing—to be wrong; having a flexible mindset will help you weather unexpected challenges and stay agile in the face of change.
4. Strengthen your insurance coverage.
Insurance might be number one on the docket when you’re looking to cut costs, but it’s a vital component of risk management to protect your bottom line. Whether you’re at fault or not, you’ll still have to defend a lawsuit, tying up valuable resources that you can’t afford to spend—resources that could be better spent growing your firm. And keep in mind: lawsuits aren’t just costly or inconvenient; they can also destroy your reputation and scare off potential investors and clients.
With a comprehensive policy, you can respond quickly and effectively and ensure that legal action doesn’t jeopardize your business momentum, your standing, or your financial well-being. In addition to your standard business policies, like Professional Liability Insurance and Commercial General Liability (CGL) Insurance, consider other coverages that will help to offset the potential financial loss from any major events, such as:
- Data Security & Privacy Breach Insurance: Protects your business and covers your losses in the event of a breach, like if your company’s information is stolen or exposed by a hacker, or accidentally released by an employee. This policy covers both first-party expenses (costs incurred by your business following a breach) and third-party expenses (costs incurred by a third-party who was affected by the breach). Learn more here.
- Directors & Officers (D&O) Insurance: Defends your business leaders and board members if they’re personally sued for any actual or alleged wrongful acts in managing the company, such as poor governance, failure to act, financial losses, misallocation of funds, operational failures, and more. This coverage is critical to protect both your corporate and personal assets if you’ve invested a lot of your own resources in your business. Learn more here.
- Employment Practices Liability (EPL) Insurance: Protects your organization from claims made against you by employees, such as discrimination, harassment, wrongful termination, failure to employ, and more. This coverage typically comes bundled with your D&O Insurance policy. Learn more here.
- Trade Credit Insurance: Protects your cash flow by insuring your receivables and covering some or all of a client’s bad debt, including your largest, high-value, and high-risk accounts. If a client defaults on their payment, your policy will pay out a percentage of the remaining debt (up to your policy limit). This coverage also offers ongoing credit monitoring services and collection services for your clients. Learn more here.
5. Work with a risk advisor.
Every tech firm is different and the right KRIs and risk management plan for you will depend on a variety of factors, including your size, location, operations, industries served, and more. Unfortunately, as a tech firm, you might have trouble finding an insurance company that understands your business model or the demands of your industry. That means you could end up overpaying for coverage that you won’t use or worse, unprotected when you need it most.
That’s why it’s critical to work with a licensed broker that specializes in the technology sector. With over 40 years of experience and a decade of serving technology firms, we can help you navigate economic headwinds and become resilient in the face of change. Our dedicated advisors will:
- Keep you informed about emerging threats, legislation, and innovations that could affect you and share what steps other firms in your industry are taking;
- Provide you with comprehensive insurance and risk management solutions that align with your business goals and budget;
- Regularly reassess your exposures and readjust your strategy to scale with your leadership, people, and processes.
With greater insight into your risk landscape and a dedicated partner by your side every step of the way, you can confidently stay ahead of the curve, no matter the delay, disruption, or hurdle. You can work to control your exposures—and your costs—long-term. You can focus on what’s most important: your business.
To learn more, connect with PROLINK today!
PROLINK’s blog posts are general in nature. They do not take into account your personal objectives or financial situation and are not a substitute for professional advice. The specific terms of your policy will always apply. We bear no responsibility for the accuracy, legality, or timeliness of any external content.