Who's managing the risk? Understanding top exposures
- Increasing expectations and austerity are changing the risk landscape for local government
- Evolving councils are opening themselves up to new layers of risk alongside opportunities
- Many councils are failing to ensure these risks are understood and managed
Local authorities are going through a period of immense and fundamental change, as they seek to adapt to Government austerity measures and changes in policy.
But this radical process brings with it new risks, and a “very worrying” situation now exists, where risk management functions are not evolving fast enough to keep up with their changing exposure, according to David Forster, Head of Risk Proposition at Zurich Municipal.
According to the insurer, local authorities face five major risks over the next few years.
The top two of these are budget pressures, and changes in government policy and legislation.
“There’s only so much we can do to help customers with these issues,” says David. “If the Government decides to cut budgets or changes its policy, then that is passed down and local authorities just have to manage.
“But what we can do is help them deal with their response, and the risks that this creates.”
Adapting to policy
The next three risks identified by Zurich Municipal directly relate to the way local authorities are adapting to Government policy. They are organisational transformation, maintaining the right workforce and working in partnership with other organisations.
“One of the ways local authorities have found to manage cuts and policy changes is to fundamentally alter the way that they do things,” says David.
“Yes, they will look at services to see if they can be cut. But most of the things they do are statutory duties, and they have to deliver these services.
“So, instead they are looking very hard at how they can do things differently and more efficiently, and with this comes huge operational changes. For example, you now have the extraordinary situation where some local authorities are even building and operating hotels to earn money.”
Frequently, efficiency means moving from being organisations that deliver services directly, to becoming ‘enabling’ or ‘commissioning’ organisations, who decide what they need to do and then look for someone to do it from public, private and third sector.
“The big problem, as I see it, is that risk managers aren’t being involved with these external contracts, and they are only brought in at the last minute to check there is sufficient insurance cover,” says David.
“These contracts are not getting the risk scrutiny they deserve. Who is analysing the safeguarding issues and assessing them? Who is walking their way down the supply chain and checking who is supplying the suppliers?”
Councils need to radically reconsider this approach.
“Just because they have outsourced the service, it doesn’t mean that they have outsourced their statutory duty,” says David. “As the insurer of last resort, we strongly advise a more robust approach to risk management in this context.”
Maintaining a strong workforce is an essential part of this. Local authorities are profoundly demoralised by cuts, but at the same time have to upskill and face new challenges and new ways of working.
“You have two conflicting trends at the moment,” says David. “The wider economy is improving and jobs are appearing in the private sector. But in local government the trend is in the opposite direction, and austerity is set to continue, with workforces facing further cuts.
“The big risk for local authorities is that they are going to lose good people to the private sector as the economy picks up – especially now that staff have developed more private sector skills.”
In this environment, it is vital to take a risk-based approach to human resources, and deploy techniques such as strategic workforce management and talent management.
The fifth major risk is working in partnership with other authorities and other parts of the public services, in order to be leaner and more efficient. The main challenge comes from fundamental weaknesses in these new relationships that can leave authorities broadly exposed should things go wrong.
One of the ways local authorities have found to manage cuts and policy changes is to fundamentally alter the way that they do things
David Forster, Head of Risk Proposition, Zurich Municipal
“Social priorities mean that authorities have to streamline and innovate through partnerships,” says David. “But authorities need to think hard about their risk management and governance as they do this. What is their exit strategy? Who’s in charge? How do they measure success? There’s a whole shopping list of questions you need to ask before you share budgets and staff.”
Unlike contracts and other strategic arrangements, partnerships are often not based on strong contractual arrangements, relying instead largely on trust – and this can be very risky.
A survey by Zurich Municipal revealed that 76% of local authorities are concerned about the financial stability of their public sector partners.
“Some people enter these arrangements with no real understanding of what will happen if this goes wrong,” says David. “And they sometimes do, often with spectacular consequences.”
With great risk comes great opportunities, and the challenge for local authorities now is to make sure that they remember the former in the charge to realise the latter.