Private sector businesses often play a balancing act between company profit and insolvency risk. Is it necessary to perform similar analysis as part of a public sector ERM program, and how would that analysis differ?
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AFERM Experts Say...
In the government there is no profit metric or insolvency risk. However, there are costs associated with responding to uncertainties and benefits resulting from those efforts. For government entities the balancing act occurs between response costs and the benefits received from the results.
When an uncertainty has the potential for positive or direct impact, measuring the benefit received is straightforward and can occur after the fact. However, when uncertainty has potential for negative impact measuring the benefits received becomes more challenging. This results from measuring an outcome that, if the response effort is successful, does not occur.
In both situations the business case for responding to a particular uncertainty hinges on the organization’s ability to estimate response costs against the benefits received. As such, an organization’s confidence in those estimates becomes vital to the decision making process.