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The Dimensions of Risk Management -August

By Michael Vincent

28 December, 2006

Local government is the area of government in Australia that is subject to rationalisation and restructure.   They are climbing into the 20th century at a high velocity.   No longer can they be seen as an area of patronage and waste.  Outsourcing is the key driver of change and existing employees are competing at all levels with outside suppliers.

This is a fertile area for the identification and management of risk in all its facets.  Len Parson has been a worker in local government for many years and is undertaking the course in risk management, he has chosen for his project an examination of a typical local government establishment and sought to prove that risk management can be used by management as a tool to ensure the overall protection of the corporate earnings, resources, assets and personnel.

Further he believes the same principles could be used on a regional basis to share costs and resources.   It could be utilised to generate additional income for any local government entity that chose to compete in the area of risk management, as a service.

He believes that far too many people and businesses see risk management in too narrow a scope and some still see it as nothing more that a purchase decision for insurance.    His study aimed to dispel this myth to the local government sector.

To achieve this aim four basic questions needed to be posed and answered in order  to demonstrate to the local government sector the viability of establishing formal risk management positions, structures, guideline and policies.

1.Why have a risk management structure?

Correct application of the principles of risk management can conserve the resources of local government, both financially and operationally.  It can enhance the effectiveness and efficiency of local government by ensuring that resources and funds are redirected to the areas demonstrating most need.

2.What are the benefits?  Are they "one offs" or recurring?

Obviously a mixture will occur but analysis shows that up to 80% of the savings will be recurring.  An example of this is workers compensation and absenteeism, results can be readily quantified.  In addition the insurance decision becomes paramount, i.e. to insure and outsource or purchase or to self insure.

3.What are the costs?

The actual dollar figure will vary from entity to entity, but functions and equipment considerations are common across the local government sector, some of these are:

salaries and wages, direct overheads programme based expenditures, e.g. rehabilitation, safety training. education, professional and financial considerations.

external consultants initial set up costs e.g. motor vehicles, office furniture etc.

4.Will the structure be self funding?

This needs to be considered on a case by case basis.   However the study demonstrates that the probability is "yes", savings generated by correct construction of the function within local government will establish the unit as not only self funding but potentially revenue generating either by the selling of services to others or by appropriation of savings generated.

The following table demonstrates the areas considered for risk management and how they can build on the most commonly occurring structure across the local government  sector.

Risk Management Structure and Functions

Existing Functions, Additional New Functions

insurance premiums & claims total corporate risk management self insurance administration insurance supervision workers compensation and claims personnel (rehabilitation) safety officer actuarial statistical services

loss control engineering services claims investigation insurance broking services external consultants rehabilitation and claims management secretarial services

The implementation of the above structure will lead to an organisation structure that is staffed and trained to supply the following services:

1.Support and assist in the achievement and maintenance of corporate strategy, objectives and goals.

In addition it should be staffed to identify, isolate and control the following events:

2.Risks that expose local governments assets, personnel and systems to loss or injury.

3.Risks that may jeopardise local governments' financial and operational resources to loss, including exposures arising out of contract, professional and statutory breach.

4.Risks that may expose the councils to litigation and risks that may jeopardise their financial integrity.

5.Risks that may expose elected members.

6.Give professional advice and make recommendations to council and divisional managers concerning actions required to treat, reduce, transfer or retain risks.

The public at large place faith and trust in the local government sector, it beholds the sector to have systems and controls in place that ensure that faith and confidence is deserved, maintained and enhanced.             

About the Authors

Senior Lecturer, Department of Accounting and Finance

Faculty of Business and Economics

Monash University