Managing Risk and Performance

Discover analytical tools and practices to help improve the quality of risk management in government organizations

Federal agencies increasingly recognize the importance of active risk management to help ensure that they can carry out their missions. High impact events, once thought to occur only rarely, now occur with surprising frequency. Managing Risk in Government Agencies and Programs provides insight into the increasingly critical role of effective risk management, while offering analytical tools and promising practices that can help improve the quality of risk management in government organizations.

• Includes chapters that contribute to the knowledge of government executives and managers who want to establish or implement risk management, and especially Enterprise Risk Management (ERM), in their agencies
• Features chapters written by federal risk managers, public administration practitioners, and scholars

Showing government officials how to improve their organization's risk management capabilities, Managing Risk in Government Agencies and Programs meets a growing demand from federal departments and agencies that find themselves increasingly embarrassed by risky events that raise questions about their ability to carry out their missions.

Foreword xv

Preface xvii

PART One

Introduction and Overview

CHAPTER 1

Managing Risk of Federal Agencies and Their Programs through Enterprise Risk Management 3
Thomas H. Stanton

Risk Management as an Essential Part of Federal Management 3

Risk Management as an Integral Part of Good Decision Making 5

The Unique Challenges of Managing a Government Agency 6

Establishing Effective Risk Management 8

Managing Risk in Government Agencies: Overview of the Book 11

References 16

CHAPTER 2

The Need for Effective Risk Management 17
Douglas W. Webster

Defining Risk 18

The Source of Uncertainty: Change 20

Risk and Reward 22

The Risk Management Process 23

The Essence of Organizational Success: Stakeholder Value 29

The Role of Information Technology in Risk Management 31

The Importance of Organizational Change Management 31

Putting It All Together 32

Conclusion 33

References 34

CHAPTER 3

Introduction to Risk Management for Government Managers 35
Thomas H. Stanton

Fitting Risk Management into an Organization 36

Promising Practices in Risk Management 45

Observations about Risk Management in Government: What Works and What Doesn’t 54

Conclusion 60

References 60

CHAPTER 4

Risk Management and Challenges of Managing in the Public Sector 63
Paul L. Posner,Thomas H. Stanton

Unique Risk Management Challenges of Public Programs 65

Third-Party Governance: The Challenge of Managing Risk across Organizational Boundaries 68

Goal Setting, Accountability, and Prioritization of Risks 77

Concluding Observations 81

References 83

CHAPTER 5

Creating and Keeping Your Options Open—It’s Fundamental 87
Brian Barnier

The Real World Is Rarely Simple and Stable 87

Systems Set the Stage 88

Managing More Easily—Options in Time 89

Examples of Options in Time in Practice 95

Conclusion 110

Key Points 111

References 111

PART Two

Moving toward Enterprise Risk Management

CHAPTER 6

Introduction to Enterprise Risk Management for Government Managers 115
Douglas W. Webster

Shortcomings of Traditional Risk Management 116

The Impact of Managing Risk within Silos—a Case Study 119

The Maturation of Traditional Risk Management into Enterprise Risk Management 121

Key Principles of Enterprise Risk Management 126

What Enterprise Risk Management Is Not 129

The Payoff 133

Summary 134

References 136

CHAPTER 7

Implementation of Enterprise Risk Management at the Office of Federal Student Aid of the U.S. Department of Education 137
Fred Anderson, Cynthia Jaspers Vitters

Overview of FSA 138

Initial Implementation of ERM at FSA 140

Initial Activities and Challenges in Implementing Enterprise Risk Management at FSA 142

Expanding the ERM Program—a Change in FSA’s Business Model 144

Key Considerations and Challenges When Implementing the Expanded ERM Program at FSA 148

Conclusion 158

References 159

Acknowledgments 160

CHAPTER 8

Integrating Enterprise Risk Management with Strategic Planning and Resource Management 161
Jeffrey Stagnitti

Context 161

Enterprise Risk Management and Strategy 167

Enterprise Risk Management and Resource Management 170

Conclusion 172

CHAPTER 9

Building Enterprise Risk Management into Agency Processes and Culture 175
John Fraser

Building a Shared Understanding of Risks through Conversations 177

The Key Enterprise Risk Management Techniques 184

Improved Decision Making and Prioritization 188

Conclusion 191

References 192

For Further Reading 192

Appendix: Hydro One Inc. Enterprise Risk Management Policy 193

PART Three

Special Topics in Risk Management and Response

CHAPTER 10

Risk Management and the Dynamics of Budget Cuts 199
Thomas H. Stanton

The Dynamics of Protracted Budget Controversy and the Risk and Uncertainty They Create 200

Long-Term Budget Cuts and the Risks They Create 203

The Role of Risk Management in Reducing Chances of a Major Mishap 207

Strengthening Agencies’ Ability to Deal Effectively with Budget Pressures 215

Conclusion 217

References 217

CHAPTER 11

Managing Reputational Risk 219
Gary L. Glickman

What Is Reputational Risk and What Does It Mean to Government? 221

What Determines Reputation and How Can Government Address These Factors? 223

External Influences on Reputation 229

Consequences of Reputational Loss for Government Organizations 231

Reputational Risk Mitigation 235

Conclusion 239

References 240

CHAPTER 12

Risk Management and Decision Making: Lessons from the Financial Crisis for Federal Managers 243
Thomas H. Stanton

The Financial Crisis: How It Emerged, What Happened, and the Costs 245

Decision Making at Firms That Failed: Common Shortcomings 248

Decision Making at Firms That Succeeded: The Importance of Culture 252

Lessons in Governance, Risk Management, and Decision Making 258

Conclusion 264

References 265

PART Four

Conclusion

CHAPTER 13

Effective Enterprise Risk Management: Mapping the Path Forward 269
Douglas Webster

Recommendations 270

Conclusion 290

References 291

For Further Information 292

For Further Reading 292

About the Editors 293

About the Contributors 295

Index 299

THOMAS H. STANTON teaches at Johns Hopkins University. He is President-Elect of the Association of Federal Enterprise Risk Management (AFERM) and a Fellow of the National Academy of Public Administration. Mr. Stanton is a former member of the Federal Senior Executive Service. He holds a Bachelor of Arts degree from the University of California–Davis, a Master of Arts from Yale University, and a Juris Doctor from Harvard Law School and has written extensively on governance and risk management in the financial crisis.

DOUGLAS W. WEBSTER is the Founder and President of the Cambio Consulting Group, LLC, and co-founder and past President of the Association of Federal Enterprise Risk Management (AFERM). He served as Chief Financial Officer of the U.S. Department of Labor in 2008–2009 and has 20 years of experience consulting to over two dozen federal and state agencies. Dr. Webster received a Bachelor of Science in Engineering from the University of California–Los Angeles, a Master of Science in Systems Management from the University of Southern California, and a Doctorate in Business Administration from United States International University.

Risk management is critical for government agencies

Successfully managing risk in government agencies allows policy makers and government managers to establish the sound policies and organizational cohesion required to mitigate risks and increase agency productivity. Faced with the challenges of widespread budget cuts, political turmoil, and increased scrutiny from congressional committees and oversight bodies, government leaders must embrace and implement sound risk management practices to avoid potentially embarrassing missteps and the erosion of public trust.

Managing Risk and Performance: A Guide for Government Decision Makers is a comprehensive professional resource that will inform and empower you to:

• Understand and appreciate the need for sound risk management by Government Decision Makers
• Consider and assess the major types of risk that could prevent your agency from achieving its mission
• Build a risk management process and agency protocols that help stakeholders understand the nature of risk-reward tradeoffs and their consequences in major decisions

This book directly addresses the unique obstacles faced by government agencies in attempting to identify, assess, and ultimately mitigate the vast and disparate risks that threaten them. Stanton and Webster bring their decades of collective government agency and private sector risk management experience to the fore and provide you with real-world insights and instructions for successful risk management within government agencies. The four main sections of the book address critical risk management concepts as they specifically apply to government agencies, including:

• Building a risk management team that bridges silos within an organization
• Understanding Enterprise Risk Management (ERM) for government agencies
• Government risk management in times of crisis
• Risk management successes and failures from the financial crisis

Managing Risk and Performance: A Guide for Government Decision Makers is intended to help readers build and cultivate the necessary risk management strategies before, rather than after, their agencies experience a potentially painful lesson.