As local government enters a world of uncertainty and unprecedented budget cuts, managers must look above and beyond the obvious risks
Local authorities have now set their first budgets since the funding cuts of the 2010 Comprehensive Spending Review – and it is clear just how much they will need to save.
Lancashire County Council, for example, is cutting £179m over the next three years and the London Borough of Brent £100m. The scale of these cuts means local authorities are confronted with a host of new and evolving risks to understand and mitigate.
Effective risk management has long been critical for local authorities, but as an estimated 80% of risks are intangible and thus uninsurable, simply being aware of ‘concrete’ risks – from data loss to fire – is not enough. To guarantee long-term resilience and prevent spiralling costs if things do go wrong, councils must take into account the more intangible, knock-on effects of the issues and decisions they face, thus considering the whole life or ‘total cost’ of risk.
It is difficult to come up with a universally applicable definition of the ‘total cost of risk’, as the particulars of each council and each public service can vary significantly. But risk managers can be aware of their own total cost by taking time to consider all risks, large and small.
These vary from the obvious and tangible, such as increased building wear and tear following property rationalisation, legal costs and clean-up projects following major incidents to the less tangible and direct, such as reputational damage, supply chain failure and falling workforce morale leading to employee tribunals.
Risks can come from within an organisation or from external factors, such as a crash in the property or banking markets or extreme weather conditions. For example, managers working out the whole-life risk of a school will need to consider not only issues such as teacher illness, building repairs and theft but also the possibility of buildings being severely damaged and forced to close or relocate because of fire or flooding.
This in turn means considering how to ensure continued teaching in these circumstances and the cost of any reputational damage that could ensue from ‘failure to educate’ claims or loss of pupil exam work. There might also be an impact elsewhere in the community. For example, if pupils are relocated it could put pressure on other schools, while community groups using school facilities out of hours might be forced to close.
Understanding the whole-life cost is particularly crucial for local authorities owing to the statutory requirement for them to act as ‘stewards of community risk’, managing risk within the community as well as within their own organisation. It is a role that might become more complex and more prominent in the future as the government’s Big Society drive encourages the public to become more involved in service provision in their community, often with little prior experience. For local authorities, this could create a new dynamic of transferred duty but retained responsibility, which will require a different focus.
Intangible risk is also evolving in other ways, as changes to regulatory, commercial and operational environments introduce new dangers. Reliance on digital technology brings the possibility of data loss, fraud or identity theft, while climate change means more frequent occurrences of formerly ‘freak’ weather conditions that can bring communities to a standstill.
And, as councils look for new ways of working and providing more for less, they are likely to be entering into more and different supply chain agreements, where risks are spread across public and private organisations. Being aware of all risks will mean that a local authority can better equip itself to deal with any issues – tangible or intangible – arising from this evolving context.
Ultimately, understanding and confronting the total cost of risk will enable local authorities to find efficiencies that are less likely to have costly implications in the long term. For councils looking to marry their savings with better service provision, taking a whole-life approach to risk could prove to be invaluable.
Andrew Jepp is director of public services at Zurich Municipal
