July 21, 2014
Think of organizations that you consider “risk takers.” How many of those are federal agencies? I’m guessing not many, or more likely, none. Why? Well, in general, federal agencies are risk averse. There are many reasons for that.
First, there is often limited upside in taking risk in the federal government. Successful risk taking is not necessarily followed by related program budget increases or rewards for the individuals involved. Second, if an agency takes a reasonable risk and is unsuccessful, that effort is more likely to be branded a failure rather than a valuable learning experience. Finally, some believe the current climate in our nation’s capital creates a “better safe than sorry” environment. For example, the Senior Executives Association recently stated that, “With increasing frequency many career senior executives are avoiding risk and are becoming inclined to make ‘safe decisions’ as opposed to the ‘right decisions’—or decisions (in their minds) that could potentially be career damaging in the current climate.
I’d add another reason to this list: Many agencies are risk averse because they lack the fundamental tools for managing risk.
What are these tools? There are three: a common definition of risk, a framework within which to manage it, and the untapped potential of risk-related data. Without these components in place it is very difficult—if not impossible—for leadership to make informed and thoughtful decisions about risks.
What Exactly Is Risk?
Let’s start with the definition. What is risk? It sounds like a simple question but it’s not. Ask a room full of federal executives and managers to define risk and you’re likely to get a range of responses. This should concern all of us who have a strong interest in the efficiency and effectiveness of government. Why? Because managing risk is fundamental to fulfilling any agency’s mission and achieving goals and objectives, and it’s difficult for a senior management team to manage risk if they don’t have a shared understanding of what risk means.
Discussions to define risk frequently center on how to prevent something bad from occurring. The discussion, I would suggest, should also focus on how taking risk can help make something good happen—that is, be a positive driver of performance and outcomes. When you think about risk in those terms, it can be viewed as a two-sided coin.
A common definition of risk is, “The potential for loss or harm, or the diminished opportunity for gain, that can adversely affect the achievement of an organization’s mission.” More simply put: Organizations can increase value by taking appropriate risk and can lose value by failing to manage risk.
A Risk Framework
Besides creating a common definition of risk, agencies need a structure through which they can manage risk at an enterprise-wide level. Enterprise Risk Management includes governance, roles and responsibilities, policies and procedures, and systems—to mention a few of the framework components. While this takes time and resources, you can’t adequately manage risk without these things any more than you could manage finances or information technology, areas where these same components have been long recognized as essential and are used every day in federal agencies.
Don’t Forget the Data
Over the years, I have heard many federal executives utter these words: “We have lots of data, but little information.” There may be a certain degree of exaggeration in that statement, but its core point is true and concerning. While reams of data are being collected and stored every day, the full potential for that data to inform leaders about risks and how to manage them in truly meaningful ways is seldom realized. Without sophisticated analytics and risk sensing tools, agencies don’t have a line of sight into risk. Without that line of sight, risks cannot be adequately understood or effectively managed or mitigated.
Accepting or mitigating risk should be an integral part of an organization’s strategic decision-making processes. Enterprise Risk Management helps agencies make informed decisions about which opportunities to pursue and which hazards to avoid based on their goals, the levels of risk they can accept, and organizational structure.
Simply put, some risks are worth taking. Others are not. Knowing which are which is the challenge agency senior leaders and management continually face. It’s not enough to be aware of risks. Leaders must also have the courage to make the acceptance-mitigation decisions to make the most of opportunities where taking risk can drive performance.
W. Todd Grams is a director at Deloitte & Touche LLP. Formerly, he was chief of staff and chief financial officer at the Internal Revenue Service and executive in charge of management and chief financial officer at the Department of Veterans Affairs.
(Image via Lightspring/Shutterstock.com)
July 21, 2014