The risks of commercialism – can you afford not to take them?

24-07-2017

By Caroline White, Finance Advisor and Trainer, Local Government Faculty, CIPFA

Commercialisation in the public sector, be it trying to raise income or reduce costs to maintain service delivery, through whatever model best suits, brings with it risk, and traditionally the public sector is risk averse.

Risk is not the same as uncertainty, although the two terms are sometimes used interchangeably. Risk is a logical probability function, uncertainty is anything but. We are told to be 'risk aware' not risk averse, which involves making decisions – do you tolerate, ignore, treat or transfer risk?

Those authorities still to try a more commercial approach will need to begin by identifying significant assumptions and risks. For generations, officers and councillors alike have been drilled to ensure stewardship and accountability of public money. Things have been done in the same way for a long time, and organisations may be reluctant to change their approach. 

However the risk now is of sticking with the status quo and not considering a commercial approach at all in the public sector. A commercial approach is not right for every organisation to the same degree, but it should only be ruled out after the risks have been considered in a systematic and rational manner. 

Although many public sector organisations comprehend the technicalities of risk, given the complexity of their organisational structures and the need to place many issues in a political context, the actual understanding of risk does not always get through to the right people. Those charged with governance may have experience of commercialism in their own working lives, but that isn’t necessarily an understanding of public sector commercialism. Also, a local authority’s appetite for risk will be different if it 'goes commercial'. Organisations will need to address these issues, and ensure that there is effective corporate ownership of risk.

The same tools and approaches to risk are used in the public and private sector, there are just different risks to be dealt with. Commercial organisations will take risks, which are quantifiable, but hate and avoid uncertainty, which is not. As a result, commercial risk registers are full of known risks. 

However, most of the difficult, uncertain functions of public sector organisations are kept in-house anyway, as to the commercial world they are not considered viable. So if we are already keeping the most difficult stuff in-house and doing that well, then we should at least consider trying the ‘safer’ stuff commercially, where we can calculate the risk and decide how to deal with it.

What if the worst does happen and it does go wrong? Failure must be viewed as a learning opportunity, but local authorities will need to carefully consider the risk of failure with public money. However, can we afford not to try?

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