The Importance of Risk Management in Government

For businesses in the private sector, risk management practices have redefined how these businesses operate. However, this is currently no form of coherent risk management guidance for public sector businesses.

In order to establish a clear guidance program, the inherent differences in the private and public sectors must be weighed against each other. To isolate these differences and create recommendations based on these core factors, three prominent areas of government risk management are identified and discussed frequently:

• Differences between private and public sector risk management.
• Potential problems of inappropriate risk management guidance.
• Suggestions for good practice.

Differences Between Private and Public Sector Risk Management
Towards developing a sturdy business risk management approach for the public sector, determining what should be the foundations of it is integral. Conflicting perspectives as to whether it should build upon exclusive public-sector experiences and problems, or based upon developed business models, creates a divide as to how public sector risk management should be operated.

However, the second option presents more challenges than benefits, due to the inherent differences between private-sector business models and the way the government is operated. This can be specifically categorized by three features in traditional business risk management approaches that have no direct parallels found in government – with these being:

• Often, risk management guidance is fixated on the enterprise as the primary decision-making unit. In government, there are often many organizations who are delegated the responsibility to make decisions that then pass through to one another, as opposed to a single profit center.
• Risk is established in terms of the level of shareholder value to an organization, yet in the public sector, there are no shareholders, meaning that enterprises who are categorized as public entities are assessed in their value to the public – which is a complicated value to quantify.
• The identification and calculation of risk are based on the use of decision aids and tools that help present a correlation between risk and general business strategy. However, this is difficult to accomplish with government entities, due to the delegation of decision making across multiple organizations.

Potential Problems of Inappropriate Risk Management Guidance
If business risk management practices are inappropriately applied to the government, it could contribute to the worsening of the blame-avoidance culture that plagues public organizations.

There are varying levels of problems that can arise from the inappropriate implementation of risk management strategies, with the three being identified as:

• Liability Limiting Imperative – Many business risk management practices focus on limiting the liability of the business, which can lead to the gradual worsening of blame avoidance practices. Due to the lack of liability, the blame will be passed through to the government entity that is in a politically weak position – as opposed to those who are best equipped to take responsibility.
• Mechanistic Approach – Overly mechanistic risk management practices further the sense of bureaucracy within government, as public entities will have to follow procedural rules at their own expense.
• Unbalanced Application – Due to the transparency of government entities in comparison to private entities, inappropriate risk management processes could result in errors or malfunctions of the strategy being withheld, thus undermining transparency and constructive learning.

Suggestions for Good Practice
The reimagining of business risk management strategies or guidance is essential as a preventative of further negative repercussions of improper practice, as previously references, due to the detrimental impact they can have on business operations. Three identifiable suggestions for good practice in terms of risk management are:

1. Community Focus – As a way of promoting team building and a team-based approach to reduce blame-shifting; creating procedures that bring together all systems and organizations with responsibility in the business, must be developed.
2. Emphasis on Systemic Risk – Particularly in government based entities, systematic risk must be emphasized as a way of avoiding governmental blame avoidance tendencies and to have managing boards focus on real issues within the public sector.
3. Intellectual Deliberation – Often practices proposed by the government are procedure based tick-box questionnaires, instead of intellectual deliberation as to identifying the problems and finding resolutions to them. Meaning that procedures must be developed to help foster a space of discussion wherein time and resources are supplied to help increase efficiency.