The federal government is the world’s largest and most complex entity, with US$3.5 trillion in outlays1 funding a broad array of programs and operations. During the last decade, because of shocking risk management failures that had widespread ripple effects, such as the housing crisis, financial fraud scandals and devastating environmental disasters, effective risk management has taken on a new urgency. These recent crises have served as a call to action, and more public sector institutions are taking steps to strengthen their risk management practices.
Many government agencies are now increasing their focus on government operations risks, especially in areas prone to fraud, waste, abuse and mismanagement, or that should be transformed to better address economy, efficiency or effectiveness challenges. These agencies recognize that solutions to risk problems offer the potential to save billions of dollars, improve service to the public, and strengthen the performance and accountability of the U.S. government.
At the macro level, this translates into the federal sector planning for massive changes, including budget cuts and reallocation of priorities and resources in alignment with operating priorities. All of this means that managing change and enterprise-wide risks will only become more critical for government entities.
Barriers to Robust Risk Management
Risk management is often more difficult for public sector institutions than for corporations:
- Mission goals override other considerations: Public sector institutions and their budgets grow out of the public’s perceived need. Mission goals have tended to be the primary (and sometimes sole) consideration when it comes to decisions about taking on risks.
- Frequent leadership changes and long-term vacancies in leadership positions: Changes tend to be much more common in the public sector among non-career leaders than in private industry. The average tenure for a government executive was 1.7 years in the 1980s – and the turnover rate is just as rapid today. Leadership vacancies can often leave agencies without effective management in place during national emergencies.
- Lack of risk management and business knowledge: Appointed leaders are commonly outsiders to government institutions and federal agencies. As a result, they may know little about the intricacies of the business and the institution, let alone risk trade-offs and the costs versus benefits involved in making critical decisions.
- Separation of operating budgets from program budgets: Because of the separation of these budgets for expenses, there is a disconnect between the financing of risks that materialize and the financing of risk management. This can lead to misaligned incentives.
- Less clear metrics: In the private sector, risk-oriented metrics provide a quantitative basis for making risk trade-off decisions. It is less clear in the public sector because most government institutions have both financial and mission objectives. Mission-impact metrics are usually difficult to quantify.
- Complex procedural requirements: Effecting change in the public sector requires complicated approval processes involving many internal and external stakeholders, resulting in less nimble and flexible processes that make changing practices very slow and difficult.
- Limited risk culture and risk mindset: Government workers are motivated primarily by the mission of their organization. As such, risk management has historically taken a back seat in decision-making at many government agencies. When a risk analysis is conducted, it is conducted by outsiders such as the Office of the Inspector General and the Government Accountability Office.
Protiviti can help in mitigating some of the high-risk issues that could translate to billions of dollars saved and further improvement in the performance of federal programs and operations.2 In view of these challenges, it will take targeted and determined efforts to strengthen risk management in the public sector. Protiviti offers best-in-class frameworks and practices leveraged in private industry that are also applicable to, and have been used to great success in, government settings. Our experts work with all levels of state and federal government to enable a risk-aware culture in agencies by helping to create greater transparency and developing a formal risk strategy through the modification of processes and establishment of a risk management organization and structure.
Find out how we can help:
- Enterprise Risk Management
1Fiscal year 2010.
2Fiscal year 2011 dollars.