Business Risk Management in Government: Pitfalls and Possibilities

TLDR: In the public sector, risk management has been a hot topic in recent years as mentioned in this paper, with a variety of business risk management approaches being proposed in the public and private sectors, such as risk management of offenders, health-care systems, tax audits and the operations of weapons systems.

Abstract: Business risk management, taking a variety of forms, has been a growth point in corporate management in recent years. That change in emphasis is said to stem from responses to high-profile disasters like Bhopal and Exxon Valdez, increasing legal and regulatory pressure on risk management and a search for new approaches to formulating corporate strategy. Risk management of many types is well-established in the public sector, in domains as various as the management of offenders, health-care systems, tax audits and the operations of weapons systems. Risk management has always been central to strategic planning in defence, internal security and foreign affairs. But risk management systems in government tend to be policy-domain-specific. Most are directed towards policy rather than 'business' risks and some are focused on risks to third parties rather than risks to producer organisations. Accordingly, if the various private-sector business risk approaches raise issues for the design of institutional routines in government, the issue concerns how far a generic approach to factoring risk into decision-making at senior managerial level is appropriate across government. In principle a case could be made for a more generic approach that involved the integration of business risk management techniques into management control and organisational strategy in the public sector. Many of the environmental and technological changes causing risk management to assume greater importance in business strategy (like increased litigation risks, risks of IT failure, financial risks arising from global markets) affect governments as well as business. There is evidence that the 1999 Turnbull ICAEW report on internal control has influenced public as well as private sector developments. Inquiries into government decision making often produce examples of risks being taken with public money or the quality of public services without adequate strategic consideration at senior management level or careful contingency planning. Yet public servants are almost equally often berated for being too risk-averse and not sufficiently entrepreneurial. A business risk management approach offers the possibility for striking a judicious and systematically argued balance between risk and opportunity in the form of the contradictory pressures for greater entrepreneurialism on the one hand and limitation of downside risks on the other that are experienced by contemporary public sector managers.

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Figure 2. Three Potential Pitfalls of Inappropriate Business Risk Management in Government

Figure 3. Implications for Good Practice

Figure 1. Equivalences Between Private and Public Sector Risk Management