The UK government’s policy of ‘more for less’ is presenting some particular challenges for the public sector as pressure mounts to demonstrate value for money. But can the risk management function within these organisations do the same?
There are certainly going to be difficult times ahead for the public sector, predicts Dr Lynn Drennan, chief executive of the public sector risk management association Alarm. She says that the recent general election campaigns highlighted the extent to which political parties were relying on cuts in the cost of public services to help improve the state of the economy.
A March 2010 report by a government taskforce charged with producing proposals on how local authorities can be more efficient without affecting high-quality frontline services put forward ten areas for action, says Drennan, including cutting out waste and unnecessary duplication.
Zurich Municipal’s head of strategic risk, David Forster, points out that the old business models that public sector organisations used to deliver services are becoming increasingly outmoded, as cost and quality pressures are forcing change. For example, following a pilot scheme and a report earlier this year, public sector bodies are being urged to share facilities and remove duplication. Forster says: “One of the biggest areas of organisational change is implementing this.
And there are risks when you have a shared service across two or three local agencies. Who is actually running it? How can we ensure you get your fair share of that service? What happens when things go wrong?” In many cases, the changes are radical. For example, last year Barnet Council adopted the so-called
‘EasyCouncil’ model: continuing to provide basic services to the whole community but offering greater benefits to those prepared to pay more, with more efficient outsourcing central to the move.
Essex Council has signed a £5.4bn (€6.46bn) deal with IBM to supply and manage public services, a strategy that it claims will save 20% of the authority’s budget in the next three years. Inevitably, these types of new approaches to procurement management will become widespread, necessitating a change in culture and different skill sets.
Andrew Jepp, Zurich Municipal’s head of local government, says that a potential protracted period of budget cuts and possible job losses could have a detrimental effect on staff morale and raises the possibility of industrial disputes. “Poor morale and disruption may impact on the quality of essential services to community – and that becomes a reputational risk issue,” he warns.
In addition, says Jepp, a reduction in head count would have an economic effect on the community, particularly in some areas where the public sector is the largest employer. “If you cut employment, you reduce people’s spending power, with fewer people paying council tax and more claiming benefit. It’s important to get the balance right to ensure that you’re going to be able to meet your objectives.”
Merge and conquer
It is not only local authorities that are having to make these types of changes. Zurich Municipal’s police and fire segment head, Simon Dixon, says that police and fire authorities, faced with the same budgetary constraints, are starting to pool resources. For example, police authorities in adjacent areas are sharing a significant number of non-frontline functions.
“Increasingly, more consortia are being created to work collaboratively on insurance and risk management issues but also will often share other functions,” he explains. “The biggest consortium includes 11 policy authorities in the South and South- East, who buy insurance collectively and are moving forward together on risk management. Ultimately, there may well be one claims function across all 11 authorities. If there is a property query, one person will go back to the insurer or get a legal opinion and disseminate the information through the whole consortium so there is a consistent message.”
Dixon believes that this approach is likely to grow in other areas, such as shared human resources functions and in areas of procurement, as well as insurance. “There will always have to be local policing with knowledge of the region but back-office functions can be merged.” Consortia are also on the agenda for fire authorities, with similar goals in terms of sharing and pooling of resources, while increasingly police and fire authorities are working together on areas of mutual interest, such as combating arson.
Charities and social organisations are undergoing similar organisational change, says Zurich Municipal’s head of charities and social organisations (CSOs), Paul Emery. And they face an additional challenge with the increasing outsourcing of service delivery from local authorities to CSOs. “They need to consider whether they are required to take on council employees as part of the deal, and the associated pension and salary liabilities, as well as performance management and the inevitable cultural changes,” he warns.
“Some of the funding models that are being suggested would mean that charities will need a more flexible approach to managing their risks and the ability to scale up and down quickly,” he continues.
“For example, if individuals in the community have personal budgets and can buy services directly from providers, what happens if they frequently switch between suppliers?”
He also sees a potential risk to cashflow where an authority’s payment to the charity is based on outcomes. Emery cautions charities to build the cost of managing these risks into tenders.
In addition, some large national charities are exploring group structures, pulling together other organisations in the same sector to form consortia or partnerships to deliver against tenders or contracts with local authorities.
For education and social housing organisations, change is bringing additional concerns. “There is an increased demand for social housing due to the recession, yet budgets have been maintained putting increasing pressure on limited resources,” says Zurich Municipal’s head of education and social housing, Tom Shewry. “A shortage of housing stock often results in having to put people into rented accommodation and bed and breakfast facilities, placing significant pressure on finances.”
Shewry also warns of the dangers of cutting back on perceived non-priority functions such as maintenance, which in the long term has significant issues for housing organisations in terms of value of their stock, the safety of tenants and potential liability for claims.
Hard knocks for schools Schools continue to face a demand for increased efficiency and a drive to slim down costs. Here again, says Shewry, maintenance can be an issue. “We are also seeing schools merge, particularly as part of the Academy programme, which presents challenges of integration and management of a large school estate in a new and potentially less resilient building,” he explains.
With arson a major risk, some new ‘sustainable’ designs present real fire risks, Shewry warns, with protective measures such as sprinkler systems too often incorrectly seen as an expensive after-thought.
There is also a potentially for increasing the pupil/teacher ratio to save money which, coupled with managing anti-social behaviour, could have an impact on educational standards, thus risking an accusation of a failure to educate, and also affecting staff stress and sickness levels. Shewry says that colleges face similar issues. “Government continue to increase their expectations of colleges without a commensurate increase in funding.
For some, the situation has been made worse by cut-backs in funds for new buildings, especially for some colleges that demolished facilities, thinking they were going to be replaced, and now have to cope with significantly less space. The higher education sector is also affected by funding restrictions, in particular in relation to student funding, the cap on top-up fees and by global competition for students and research grants.”
Make yourself useful
Forster says that a key question for public sector organisations is whether risk management remains in-house or becomes part of the organisational change.
Liz Taylor of Liz Taylor Risk Consulting agrees. Even if risk management is not outsourced, she says there is the danger that it will be absorbed into another department such as audit or performance management. “It needs good leadership. If it’s absorbed into other departments, it won’t have the same championship and the emphasis will be different.”
“Make yourself useful. Doing nothing is not an option,” advises Taylor. “If risk managers stay silent and their systems and processes are considered to be just bureaucracies that do not add value, they are more likely to be part of the cuts. That in itself is huge risk. This is the time that enterprise and strategic risk management should be at the fore. It should be helping the decision-makers to determine where the cuts can be made to produce the least bloodshed.”
Drennan concurs, believing that a risk-managed approach is key to achieving efficiency and effectiveness by ensuring that the organisation’s key objectives are clearly articulated, that the actions required to achieve these are defined, and impediments to their achievement reduced or eliminated. “Risk management also supports innovation, as it reduces the degree of uncertainty associated with strategic decision-making, and helps empower the organisation to grasp opportunities that may enhance services and service delivery,” she says.
“Measuring performance is clearly important and benchmarking this against others in your peer group can provide some useful pointers for public sector bodies on how well they are doing and what they can learn from their contemporaries, stresses Drennan.
Following research earlier this year, Alarm partnered with CIPFA to launch its benchmarking club and the response in terms of membership has far exceeded expectations. The association will use the data produced to draw conclusions on the state of public risk management today, assisting risk managers and their organisations to use risk management to produce better outcomes, more efficiently. IRM chief executive Steve Fowler also believes that risk management may well be a target for cost cutting.
“Anything that is governance- or risk-oriented will potentially be a target, not just for reduction of costs but for abolition of the function. It is important for anyone working in risk in the public sector to make clear the value they add and, in very simple terms, not using risk management jargon that no one but other risk professionals understands.”
Taylor says that the biggest risk is paralysis – any period of change sends people into initial denial and then paralysis. She urges risk managers to examine how they can add value.
“For example, one methodology I use is to look at demand for a service versus the capacity needed to deliver it. That needs to be done in conjunction with all your possible partners. There is no room now for double-dipping, where there are overlaps between public services. Public sector bodies have to seriously enter into and encourage any partnerships that really add value.”
Taylor also advocates establishing key risk indicators and a proactive approach. “For example, if you have got a partnership that is not working very well, you can run a risk management workshop for those concerned to identify the key reasons. When you get people round the table talking about their key risks, you have a number of ‘light bulb’ moments, where people suddenly realise there are different ways of doing things to resolve the problems. And then you need to advertise what you’ve done and claim the success for risk management.”
Getting people on-side
Fowler says that managing organisational change is really about project management. “It is very easy at a time of near crisis to forget about good project management and why it exists. Then you lose your clear objectives and a year later people will be asking why things have gone wrong. Clear project initiation workshops establish the objectives of change and document them so that all stakeholders know what that change is about. Good project management means getting all stakeholders around the table signing off on what is going to be done differently.”
Fowler stresses that good communication throughout the entire process is vital. “That does not mean just writing reports to people but properly briefing people throughout the process and actively managing the communication side, getting out and about and making sure people understand.”
He believes that an important aspect of organisational change is the people involved. “In the public sector environment, you have got politicians, the elected officials, the staff and the managers of those staff. All play to slightly different rules. As far as the staff are concerned, they will be thinking first of the impact of any change on their own roles.
Therefore, communication comes to the fore again when it comes to describing what these changes might be and dealing with people’s legitimate concerns about impact on their roles,” says Fowler.
These are times of change and uncertainty, both for the public sector and the risk managers within it. Only by re-enforcing the vital role they play and the value they bring will risk managers survive the cuts.