Crash course, by Andrew Jepp

26 Jun 10
Local authorities can learn lessons about efficient risk management from the private sector, says Andrew Jepp in the latest of our monthly series of sponsored columns

Local authorities can learn lessons about efficient risk management from the private sector, says Andrew Jepp in the latest of our monthly series of sponsored columns

While this week’s emergency Budget included little to hearten local authorities, it does at least put some end to the speculation about the extent of cuts in local government.

Now is the time for councils to start implementing the large-scale change programmes that all will need to undertake. Some organisations will already have some of these changes in train, while others might be starting from scratch.

What we know for sure is that few have the necessary risk management practices and processes in place, leaving them potentially vulnerable to the operational, reputational and financial fallout that will inevitably strike in the months and years to come.

So what could, and should, local authorities be doing to ready their organisations for this unprecedented programme of cuts and downsizing?

The answer is, perhaps, an unexpected one: learn from the commercial sector.

The financial crash that largely precipitated the cuts in this week’s Budget exposed the simultaneous complacency and risk-taking of some private sector organisations. But it also provided some salutary lessons in risk management that the public sector could take heed of.

The collapse of global markets showed the majority of corporations to be hugely exposed and underprepared for the crisis. Many risks were poorly anticipated, some were flatly unexpected. Crucially, risk management itself was not a major priority at a time when risks were becoming increasingly complex, diverse and interconnected.

Today, however, the commercial sector is developing a multi-dimensional approach to managing risk. This uses disciplines such as enterprise risk management – leading from the top – and business continuity management, carrying on in emergencies. IT disaster recovery is a good example. The result is an integrated risk framework of true business ‘resilience’, which allows organisations to plan for, react to and recover from risks.

This shift from reaction to readiness is the kind of proactive approach that local authorities need to be taking today. They must prepare for the increasingly wide-ranging risks they already face, which will be intensified by the fundamental changes they are about to embark upon – from redundancies to new outsourcing models.

To a certain extent, councils are already taking the first steps on this journey towards resilience. The Civil Contingencies Act, for example, gives local authorities the responsibility to ensure community resilience, should a civil emergency occur. But now, local authorities need to prepare for risk throughout all the public sector layers – organisational, community and supply chains – and in every eventuality.

A more resilient approach to risk will not only enable an organisation to act quickly and effectively in the face of challenging circumstances, it will also help create a more efficient organisation more broadly. Being resilient will enable authorities to better identify their strategic priorities and give them more scope to innovate.

And, perhaps more importantly, resilience can also reduce the total cost of risk. This is about much more than simply reducing the annual insurance premium. It needs to encompass intangible and tangible risks, uninsurable and insurable risks, annual costs and whole-life costs. Climate change-related incidents, such as flooding, are on the increase and the cost of dealing with them can run into millions of pounds.

A resilience approach minimises this cost by ensuring that councils’ response and recovery plans are established and that, via the continuity programme, major suppliers and partners are included upfront, meaning everyone is prepared. Consequently, the immediate impact on the community, the length of the recovery period and its associated cost can all be reduced. Only by understanding the total risk profile and the full financial and non-financial costs that flow out of it can local authorities ensure there are no nasty surprises further down the line.

Clearly, local government is a different environment to the private sector and the latter, too, still has room to improve its risk management. But there is plenty the public sector can borrow from the recent experiences of its private sector counterparts, many of whom have had to undergo the exact same staff and spending reductions now being demanded of local government.

To not learn those lessons could lead to councils being overtaken by the scale and pace of risk and, ultimately, facing a future reputational crisis of their own.

Andrew Jepp is head of local government at Zurich Municipal

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