Public Risk September 2011

Published by the Public Risk Management Association

www.primacentral.org

SEPTEMBER 2011

KNOW WHEN TO HOLD ‘EM, KNOW WHEN TO FOLD ‘EM

TIPS FOR THE ART OF

NEGOTIATION CUTTING POLICE TRAINING COULD BE A COSTLY MISTAKE

“SELLING” RISK MANAGEMENT

PUBLIC RISK MANAGEMENT ASSOCIATION

YOUR

RISK MANAGEMENT JOURNEY BEGINS HERE

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Volume 27, No. 8 | September 2011 | www.primacentral.org

The Public Risk Management Association promotes effective risk management in the public interest as an essential component of public administration.

PRESIDENT Cindy B. Mallett, AIC, CWCP, ARM-P Risk Manager City of Gainesville Gainesville, GA

CONTENTS

PAST PRESIDENT Laura Peterson, JD, MPA Director of Risk and Insurance University of Wyoming Laramie, WY PRESIDENT-ELECT Dan Hurley, CSP, ARM-P, MS Senior Director, Risk Management & Safety Norfolk Public Schools Norfolk, VA

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6 Know When to Hold ‘em, Know When to Fold ‘em

DIRECTORS Eddie Beecher Risk Manager City of Pompano Beach Pompano Beach, FL Betty Coulter Risk Management Director City of Asheville Asheville, NC

TIPS FOR THE ART OF NEGOTIATION

Matt Hansen, MPA Director, Risk Management Division City & County of San Francisco San Francisco, CA

By Sarah Perry, ARM-P, Debbie S. Champion and Megan Usovsky

Dave Parker, ARM-P Risk Manager Pima County Sheriff’s Department Tucson, AZ

12 CUTTING POLICE TRAINING COULD BE A COSTLY MISTAKE

Marilyn Rivers, CPCU, ARM, AIC Director of Risk and Safety City of Saratoga Springs Saratoga Springs, NY

By Stephen Tobler

Regan Rychetsky Director, HHS Enterprise Risk Management and Safety Texas Health and Human Services Commission Austin, TX

15 “SELLING” RISK MANAGEMENT

By Marcus Beverly, CPCU, AIC, ARM-P

EXECUTIVE DIRECTOR Mark G. Doherty, CAE EDITOR Jennifer Ackerman, CAE Director, Communications 703.253.1267 • jackerman@primacentral.org ADVERTISING Donna Stigler 888.814.0022 • donna@ahi-services.com

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Public Risk (ISSN 0891-7183) is published 10 times per year by the Public Risk Management Association, 700 S. Washington St., #218, Alexandria, VA 22314 tel: 703.528.7701 • fax: 703.739.0200 email: info@primacentral.org • Web site: www.primacentral.org Opinions and ideas expressed are not necessarily representative of the policies of PRIMA. Subscription rate: $140 per year.

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IN EVERY ISSUE 4 News Briefs | 19 Advertiser Index | 20 Member Spotlight

Copyright 2011 Public Risk Management Association Reprints: Contact the Reprint Outsource at 717.394.7350.

SEPTEMBER 2011 | PUBLIC RISK

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I’m a PRIMAtalker.

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PRIMAtalk is the easiest way to get an answer to your risk management-related questions as well as exchange ideas and information. This forum gives members quick feedback on issues that are important to risk managers and their work.

For more information or to join PRIMAtalk, visit www.primacentral.org.

Message from PRIMA President Cindy B. Mallett

PEOPLE, NOT PROCESSES

T

omorrow is a big day.

I am writing this on the eve of my return to work after four weeks of recuperation from my second elbow surgery. The original injury, which occurred in my home in December, sidelined me for eight weeks. The months in between have been filled with doctors visits, painful physical therapy and the functional difficulties associated with an injury of this type.

Despite the challenges, I recognize one tremendous benefit that arose from this experience. I now understand what it’s like to hit a metaphorical brick wall. My accident, which was, comparatively speaking, minor, made me realize how much a sudden injury can change the course of a day, a month, a year or more. This new perspective has significantly changed the way I think about injured employees (and third-party claimants) and the affect on their quality of life. The result is a renewed commitment to listening to and understanding their concerns, not just processing their claims.

is an important tool, and benefits both the employer and the injured employee. If your RTW program needs updating, visit the PRIMA Cybrary for sample policies.)

As risk managers, it’s easy for us to become cynical (and I admit I have my moments). Perhaps a small dose of skepticism is healthy, even critical, for a risk manager to possess. However, I’m convinced that the majority of injured individuals with whom we interact are just hoping to regain some sense of normalcy.

My challenge to you this month is to remain focused on people, not processes, when you communicate with injured individuals. You, my fellow risk managers, are uniquely positioned to offer guidance, even hope, to those who are struggling with the impact of an injury.

For most of us, claims management is only one of our many responsibility areas, but it’s vitally important to those we serve.

I commend you for the work that you do!

Pain can be, in and of itself, physically and mentally debilitating. In addition, injuries often result in significant stress, worry and fear—will I ever regain full function?

What will happen to my job? What toll is this taking on my family? How will this affect my income? Those of us who handle workers’ compensation, in particular, have both an obligation to assist our injured employees and an opportunity to give them individualized attention designed to demystify the process and ease some of their fears. (A comprehensive return-to-work—RTW—program

Sincerely,

This new perspective has significantly changed the way I think about injured employees (and third-party claimants) and the affect on their quality of life. The result is a renewed commitment to listening to and understanding their concerns, not just processing

Cindy B. Mallett 2011–2012 PRIMA President Risk Manager City of Gainesville, Ga.

their claims.

SEPTEMBER 2011 | PUBLIC RISK

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News Briefs

NEWS

BRIEFS CHICAGO PUBLIC SCHOOLS TO INSTALL 50 TO 80 SECURITY CAMERAS Despite a large budget deficit, Chicago Public Schools (CPS) plans to spend $7 million to install security cameras at more than a dozen of its schools, reports WLS-TV. The cameras beam images directly to the Chicago Police Department and are being installed at the schools with the most security issues, according to CPS officials, to create a safer environment for the nation’s third largest school district. More than 40,000 students are enrolled in CPS, which has a $612 million deficit. Eighty security cameras are being installed in 14 troubled high schools.

Fenger High School was one of the pilot locations where Chicago Public Schools first installed the security camera program. In 2009, Fenger High School honor student Derrion Albert was beaten to death at the school.

Fenger now has more than three dozen high-tech security cameras both inside and outside the school building. Since they were installed, the cameras are credited with a 79 percent drop in arrests, a 59 percent decrease in misconduct as well as an increase in standardized tests scores.

Principal Elizabeth Dozier says the cameras are just one element necessary for success in troubled schools like Fenger.

“If you only use them in a reactive way, what’s that really going to do? It’s like this puzzle piece. You have to have all of those to see the numbers that we’ve seen. They’re dramatic,” Dozier said.

The proposed state-of-the-art system would place 50 to 80 cameras in high schools. Those images could be viewed by the nearest police station, CPS and by officials on their cell phones.

TULSA-AREA LAWMAKER SAYS UNFUNDED PENSION LIABILITY IS BIG ISSUE FOR 2012 OKLA. LEGISLATURE A state House committee has planned four interim studies on Oklahoma’s public pension systems, reports the Associated Press.

Tulsa Rep. Seneca Scott is among a dozen members of the House Select Oversight Committee on Pensions. Scott says the committee has an important job in fulfilling the state’s commitment to public employees.

The interim studies will examine how pension investments are handled, ways to reduce unfunded liability and pension funding formulas.

At the start of the 2011 legislative session in February, Oklahoma’s seven public retirement systems had unfunded liability of more than $16 billion compared with just $6 billion a decade earlier. In March, Oklahoma’s 57 percent pension funding ratio was third worst in the nation.

Lawmakers made changes this year that are expected to save nearly $7 billion over the next 30 years.

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PREVENTING DISASTER Industry leaders are calling on Congress to quickly approve a multiyear extension of the Department of Homeland Security (DHS) antiterrorism program for chemical facilities, which expires later this year, reports Chemical and Engineering News. Chemical manufacturers need assurance that the billions of dollars they are currently spending to upgrade security will continue to meet the government’s regulatory requirements years into the future, industry officials say.

SUBWAY TERRORIST ATTACK NOW VIEWED AS PRIME TARGET IN NEW YORK Nearly a decade after Sept. 11 forced New York to rethink its defenses against a terrorist attack, officials see the city’s sprawling subway system as a prime target, reports the International Business Times.

Subway bombings from Minsk to Madrid have sharpened awareness that the New York City subway, which carries 5.2 million riders on the average weekday, could be vulnerable without stepped up safety measures. So officials have worked to bolster the system’s defenses, employing everything from bag checks to security cameras to counterterrorism training for police officers.

Officers patrolling the subway now rely on more than 30 bomb sniffing dogs, a network of security cameras providing live feeds of highly trafficked stations and motion detectors monitoring ventilation systems.

Messages instructing passengers to be alert—“if you see something, say something”—pepper the trains.

“We are now at the point in the legislative process in which our biggest threat is complacency,” Lawrence D. Sloan, president of the Society of Chemical Manufacturers & Affiliates (SOCMA), an industry trade group, told reporters during a two-day conference in Baltimore. Nearly 700 people from the chemical industry, government, academia and the security arena attended the 2011 Chemical Sector Security Summit, an annual event funded by DHS and SOCMA. Sloan noted that two committees in the House of Representatives have passed legislation to reauthorize DHS’s Chemical Facility Anti-Terrorism Standards (CFATS) program for seven years, and a Senate panel has approved a three-year extension. “We risk having these bills pass only to allow them to fall victim to the legislative calendar and default to another one-year extension,” he remarked.

In 2006, Congress gave DHS three years to establish a federal security program for facilities that make, use, or store large amounts of hazardous chemicals. Initially, DHS’s authority was set to expire on Oct. 4, 2009, a deadline for Congress to pass a permanent, comprehensive program.

But lawmakers have been unable to agree on how to structure CFATS for the long term and have instead continued the statutory authority for the program through the annual appropriations process. Under the most recent extension, that authority is scheduled to expire on Oct. 4.

Sloan said there is urgency to pass legislation by Sept. 23, after which the House and Senate will recess until Oct. 3.

In addition to new technology, officers are being trained to make keeping an eye out for potential terrorists part of their daily duty. That includes instructing NYPD officers on telltale warning signs that should spur suspicion, like a person walking stiffly and perspiring profusely. The police conduct drills in which undercover officers attempt to sneak decoy “bombs” into the subway, patrol tunnels running under the East River and perform tens of thousands of random bag checks a year.

SEPTEMBER 2011 | PUBLIC RISK

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KNOW WHEN TO HOLD ‘EM, KNOW WHEN TO FOLD ‘EM

TIPS FOR THE ART OF

NEGOTIATION

By Sarah Perry, ARM-P, Debbie S. Champion and Megan Usovsky

How can you build trustworthy relationships and gain business advantages?

Negotiate successfully. Negotiation effects almost every aspect of our lives.

Whether it is asking someone to take out the trash, coordinating insurance coverages for a major construction contract, or finding a middle ground on union benefit demands, negotiation is a learned skill that you can practice and successfully achieve.

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NEGOTIATION DEFINED Negotiation is a procedure through which we collaborate with others to solve conflicts and strategize plans. It encompasses communicating to exchange your wants and needs with all the parties involved, often while settling opposing interests. The word “negotiation” comes from the Latin meaning to shift from “doing business” to “bargaining.” Likewise, as the old saying goes, “business as usual” should be avoided when negotiating. The empty promises and superficial subtleties that often occur in everyday business transactions will not guarantee others will trust you, nor want to deal with you. Instead, these sorts of tactics may deter others from actively working with you. To form lasting business relationships, learn the subtle distinctions of a powerful negotiator: be genuine, plan, listen and study the details of your needs as well as the other negotiators’ wishes.

HOW TO NEGOTIATE Most people enter into a negotiation before they are adequately prepared to bargain. Many times, they do not even realize they are in a negotiation. If you follow a few simple steps you can get what you want without alienating those you are working with. First, organize, then bargain, and finally, implement the changes you have cooperatively developed.

STEPS TO EFFECTIVE NEGOTIATION: Preparation The foundation of a successful negotiator’s approach to an unsettled matter is properly planning and preparing before ever beginning to negotiate. This step allows you to take the initiative to figure out your desired outcome, what you are willing to accept, what your costs will be, and research the other negotiators’ positions. Boiled down, this step is a learning process: educate yourself and commit to the negotiation facts.

Considering how your behavior affects others is incredibly important to the start of your preparation process. When you know this, you can determine your preferred negotiation style. Do you control the conversations that you have with persons you interact with? If so, you may be a dominant negotiator. Alternatively, if you are capable of persuading others to see your viewpoint, you are an influencer. If you remain neutral on most topics and refrain from letting your emotions escape, you are a steady negotiator. And if you are empathetic to others and have an ability to thoroughly envision the risks involved in any situation, you are a conscientious negotiator. Once you know your own negotiation style, you can easily discern the other negotiators’ styles.

Negotiation and Bargaining After preparing for a negotiation, it is time to start working with the other participants. To begin, agree on an agenda, no matter how informal. Make sure everyone involved agrees on what you are attempting to accomplish.

Consider logistical plans: Is it necessary to meet face-to-face? What is the optimal time frame for the negotiation? Decide whether an independent third party or mediator should be involved. Even in impromptu discussions, laying some groundwork will facilitate a successful outcome.

During the negotiation, continue to be aware of the other parties’ position. Ask questions.

Learn as much as you can about the facts and perspectives from all sides of the problem. Acknowledge that some people are involved in the negotiation process for nothing more than a chance to have their story heard—give them this opportunity. Allowing the other side to be heard often moves the issue toward quicker and more satisfactory resolution

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Tips for the Art of Negotiation

To form lasting business relationships, learn the subtle distinctions of a powerful negotiator: be genuine, plan, listen, and study the details of your needs as well as the other negotiators’ wishes.

for everyone involved. The goal is to reach an agreement acceptable to everyone involved.

Conclusion and Implementation To solidify the result of the negotiation and bargaining phase, conclude with an agreement acknowledged by all the negotiators. This is usually a written, signed document that contains details of further actions and agreements that were decided on in the negotiation process. Pay attention to the finer points but don’t sweat the details.

And finally, make sure the agreements and decisions made during negotiation are honored. All of the work of the negotiation process may be lost or severely undermined if you do not follow up on what was decided. Be vigilant but do not rely on others to make certain your interests are protected. After all, negotiation results are only as good as its parties’ participation and willingness to see that the conclusion is carried out.

NEGOTIATION TOOLS Researchers at Stanford University conducted a study of top executives on what abilities they possessed or acquired that allowed them to move ahead in the corporate world at a fast pace. The study revealed one characteristic that was particularly frequent among those who held titles of high obligation: the ability to work on a team. The individual decision to join forces with others to accomplish a specific goal—or teamwork—is also an instrument of negotiation.

Teamwork requires not only voicing one’s ideas but also hearing others’ thoughts. This type of cooperation is achieved by two simple negotiating tools.

The first negotiation tool is the ability to freely ask questions during a negotiation. Asking questions seems very basic, but probing the other negotiators will help you learn their facts and determine their positions.

This tool will undoubtedly get their attention and may even stall them or buy you more time. Asking questions framed with your own facts also lets you give information about your own situation and this could lead or mold the other participants’ thinking.

The second negotiation tool is the ability to listen to the other negotiators. Some say that listening is the most powerful tool for a negotiator. Listening, though, is not innate. If you were not born with the ability to hear and dissect what others have said, you can still learn this skill.

Here are a few tips to increase your listening acumen. First, take notes during discussions you have with other negotiators. Jot down questions you have as well, and when a person makes a point during negotiations, summarize and paraphrase this information aloud. This is a way of deepening your own knowledge as well as displaying to others that you are actively engaged in what they are providing. Repeat what others have said but do it in a non-verbal fashion. A great way to do this is to enumerate any vague figures they have stated or illustrate a pictorial of how you envision what has been discussed. Listening is not only a courteous action that fosters trust in the minds of the other negotiators, it also allows you to absorb their requests and build your own conclusions, thus putting you in a better position to ask for what you really need. The best tip to becoming a better listener is to have the desire to become a better listener.

Active listening is both a give and take process in negotiation. And just as you prepare to question the other negotiators’ thoughts, plan to discuss what you have prepared beforehand. Approach every step of the negotiation process with the thought that you will have to explain what you did and why you did it. Even though your interests may be diametrically opposed to the other participants’ goals, the key to successful negotiation is cooperatively working as a team. Questioning the other players is just as important as it is to listen to them. This kind of collective communication is what will lead each negotiator to a promising final solution that all can agree on and uphold.

WHAT NOT TO DO: THE MYTHS OF NEGOTIATION There are several common myths about negotiation. For example, one myth states that the harder the negotiator, the better the negotiator. In fact, the opposite is true. When people like you, they want to work with you. Beware of the pitfalls of poor negotiators and implement the correct techniques before you begin your next negotiation. Here are five common myths you should avoid in a negotiation along with the negotiation practices you should adopt: Myth: Never walk away from the table. Instead, leave if you must. If you are unable to walk from the table, you have no true negotiating power.

Myth: Never tell the other side your position.

Instead, tell the other negotiators the important facts of your case and your goals. In typical negotiations, the more

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the other side knows about your situation, the more likely the negotiations will be successful.

Myth: Do not hire a third party or mediator because both sides know their case. Instead, employ the use of a third person. In any successful negotiation, there is usually one person acting as moderator. If the parties have hired attorneys then this role may be played by one of them. Such a role does not need to compromise the attorney’s effectiveness on his client’s behalf. A moderator is simply one who takes responsibility for keeping negotiations on track.

Myth: The other participants are being honest when they tell you that they are giving you their final position or bottom-line demand. Instead of halting the conversation, urge the other parties to continue negotiations. The give and take of negotiation is inevitable. Despite the best efforts of parties to limit negotiations, the offer and counteroffer process will continue until exhausted.

Myth: Do not negotiate until the case discovery is complete and the case is ready for trial.

Instead, negotiate from the start. Settlement negotiations should start immediately and be actively pursued from the commencement of the dispute. If you have hired attorneys, ask them about the option to negotiate at your first meeting.

The art of negotiation is not a difficult skill to learn. With a little practice, both novice and veteran risk managers will have the ability to reach consensus and get the job done a little easier.

Sarah Perry, ARM-P, is the risk manager for the City of Columbia, MO. Debbie Champion is a principal at Rynearson Suess Schnurbusch and Champion and practices in law in Missouri and Southern Illinois.

Megan Usovsky is an attorney practicing in Columbia, MO.

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SEPTEMBER 2011 | PUBLIC RISK

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CUTTING POLICE TRAINING COULD BE

A COSTLY MISTAKE

By Stephen Tobler

A police officer is chasing a suspect who runs into a park, turns and appears to fumble for something that may be a weapon. Should the officer shoot or not?

A sheriff’s deputy stops to help a stranded motorist and notices an odor of marijuana. Does he have reasonable cause to conduct a search—of the person, the car, the trunk?

A suspect in custody is handcuffed but continues to lunge at officers even after he is wrestled to the ground. How much force can the officers use to subdue him?

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These are all questions that arise frequently for almost every law enforcement agency. The ability of an officer to answer them correctly, using split-second judgment, can influence both public safety and the local government’s potential liability for damages if things go wrong.

The ability to quickly assess a situation and make the right decision is most likely dependent on a highquality training program. Yet in the current economic environment, many local governments are facing tough choices when it comes to their budgets. On the surface, it may be much more politically palatable to cut training than to take officers off the street. However, in the long run, reducing or eliminating training can be a costly mistake.

One solution may be to look for innovative methods to get the most out of limited training budgets.

ADDING UP THE NUMBERS While headlines often focus on the situation that state governments find themselves in, the local government sector has had its own share of budget challenges. The National League of Cities has estimated the revenue shortfall for local governments from 2010 to 2012 at close to $83 billion. The financial pain in 2010 was pervasive, from the largest cities (San Jose, Calif., down $116 million and Chicago short $520 million) to the smallest ones (Bossier City, La., population 60,000, lacking $6.5 million to support a budget of $50.3 million).

When the recession began, many local governments put law enforcement off limits for cuts. But by 2010, police and sheriff’s departments were seeing layoffs and other reductions. The Police Executive Research Forum, an organization that gathers data about public policy decisions, found that nearly 70 percent of police agencies cut back or eliminated training programs in 2010.

However, the decision to reduce training can have negative consequences for a local government. In the past, cities have been held liable for actions/inaction of an officer that injured people and caused damages, because the public entity was negligent about officer training.

Some courts also have ruled that a lack of funding does not excuse a public entity from its obligation to train officers. Ignoring this sentiment may mean costs, including damages, legal fees and other related matters. Ultimately, those associated costs may exceed the amount saved by cutting the training program.

FIVE STEPS FOR COST-EFFECTIVE TRAINING Between their budget constraints and their responsibilities as outlined by courts, local governments need to find cost-effective strategies for conducting law enforcement training. And once the training is in place, they should take the right steps to ensure their training policies support them against claims of liability. The following is a game plan that can help make use of limited resources: ➊ Prioritize Training Needs Training can be looked at in three categories. Some types of training are mandated by federal, state or local law and must be conducted. However, only doing the minimum required by law does not necessarily make officers either proficient or safe. Other types of training that are critical can be identified by following guidelines established by professional organizations. These are often labeled the “best practices” of the profession.

The final category should include training that is not necessarily focused on safety. This is the least dangerous category to reduce or eliminate. ➋ Focus Resources on Risk.

Once the public agency has established its priorities, the next step is to identify the highest risk exposures.

These may have to do with a local area’s demographics, geography or other factors that lead to activities that cause officer or public injuries and result in claims or lawsuits. In general, some of the most frequently filed insurance claims related to law enforcement are use of force, search and seizure, motor vehicle operations, jail and local lockup operations and employment practices. ➌ Expand Training Opportunities One way of conducting training is to get all of the officers in a single room and provide a lecture. But there are a number of methods and locations for delivering training that can be effective at less expense. For example, training information can be delivered during shift briefings, field training officer counseling, daily observation reports, Webinars and review of in-car camera images with staff. Having officers practice with firearms and real ammunition can be made less expensive by using non-lethal

Between their budget constraints and their responsibilities as outlined by courts, local governments need to find cost-effective strategies for conducting law enforcement training. And once the training is in place, they should take the right steps to ensure their training policies support them against claims of liability.

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Cutting Police Training Could Be a Costly Mistake projectiles and simulators. Police agencies can even create their own videotaped scenarios, project them on a blank wall and have officers react to them. ➍ Target the Right People with the Needed Training From the newest rookie to the veteran, from the sworn personnel to the volunteers, a public entity should make sure all of the people involved in its law enforcement program have an appropriate level of training that corresponds to their responsibilities. ➎ Document Participation Having a training program on paper may not be sufficient without a way to prove that officers took and passed the required courses. Documented evidence of training and officer proficiency can be a very compelling factor to others that maybe pursuing a claim or considering whether to press forward with a lawsuit versus settling.

When establishing an effective training program, public entities should not overlook their insurers as a potential resource. Their agent or broker can help them determine if the carrier provides risk control services, such as loss analysis, customizable samples for law enforcement safety policies or other information that can help to demonstrate the public entity’s commitment to effective officer training.

Local governments are juggling many factors as they try to make the best budget decisions under difficult circumstances. For the sake of officers and public safety in general, public entities should not overlook the need for adequate training. Training is an investment that may save them more than it costs.

Stephen Tobler is a senior risk control consultant with Travelers.

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“SELLING” RISK MANAGEMENT

By Marcus Beverly, CPCU, AIC, ARM-P

Part One of a Two-Part Series

Most people who practice risk management don’t consider themselves salespeople, and that’s probably a good thing, at least if your perception of a salesperson is someone pestering you on a car lot. But the fact is, to be even marginally successful as a risk manager, claims examiner or safety professional, you need to be good at selling.

Risk management requires a unique combination of skills that are also important for a good salesperson. These skills mirror the qualities of risk management itself, in that they combine both technical and emotional qualities that can be challenging for one person to exhibit. But to “sell” risk management you must be able to do two things: • Make a business case for the needed resources; and • Persuade others to care about implementing measures to reduce risk.

Making a business case is the technical side of risk management, while persuading others to care is the more emotional side.

Effective risk management is then all about appealing to both the “head” and the “heart” of your target audience. Let’s look at how to convince the “head” that effective risk management is a smart business move.

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“Selling” Risk Management

Risk management requires a unique combination of skills that are also important for a good salesperson.

These skills mirror the qualities of risk management itself, in that they combine both technical and emotional qualities that can be challenging for one person to exhibit.

MAKING YOUR CASE— THE TECHNICAL SIDE The technical side of risk management involves making a business case for the needed resources and/or a commitment to implement risk management techniques. An effective argument starts with a good outline: • Background on the issue/risk and priority • Analysis of expected benefits to the organization: the cost/benefit analysis • Analysis of the various options or return on investment (ROI) • Expected costs and scope • Analysis of potential risks • Analysis of the risk of doing nothing or gap analysis

The next step is to calculate the return on investment (ROI) to determine which treatment of which risk yields the most bang for your buck. After all, rarely if ever will you have enough money, time or other resources to manage every risk you’ve identified. The ROI is determined by dividing the profit or savings resulting from an activity by the cost to produce the profit or savings.

Note the outline for a business case looks very much like the first steps in the risk management process itself, beginning with identifying and prioritizing risks and analyzing options for addressing those risks. Important activities in making a business case include analyzing a plan’s costs and benefits, calculating the return on investment for competing options and estimating the cost of doing nothing through gap analysis.

An analysis for a technique to reduce police civil rights discrimination claims is illustrated below:

Cost/benefit analyses for risk management activities often mean calculating the cost of risk before and after implementing a particular risk control measure. If the benefits, in the form of lower cost of risk, outweigh the costs of implementing the measure, then it makes sense to implement it. The Cost of Risk formula is: Retained Losses + Transfer Costs + Administrative Costs + Loss Control = Cost of Risk

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These are the direct and easily measurable costs of risk, but indirect or “soft” costs also exist and should be factored into the equation as well: the cost of a replacement to fill in while someone is off work, loss of productivity, loss of morale, lost reputation and, ultimately, the associated loss in support, sales or revenue.

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SIMPLE COST/BENEFIT ANALYSIS

• $25,000 = Average legal defense costs for a police civil rights discrimination claim • $20,000 = Cost of digital audio/video recording devices for all officers, with storage • $5,000 = Net benefit of preventing just one claim with a recording of the event • 25% = Return on investment ($5,000/$20,000).

The ROI of 25 percent is a healthy return for just one claim, with many more claims expected to be avoided.

And the benefits are based just on the legal costs allocated to individual claims and do not take into account the additional police administrative burden, including lost time for investigation and testimony, the loss of reputation and potential for a large settlement. Conversely, the costs are just for the purchase and installation of the

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equipment and do not include training and ongoing administrative or maintenance costs, if any.

This simple example illustrates one of the most difficult aspects of cost benefit analysis for risk management: How do you measure the claim that never happens? How do you prove a decrease in risk was due to a particular remedy? Many factors contribute to claims trends, so it is practically impossible to isolate just one of them as the key.

You can look at past and future claim trends to get some idea, but even if claims decrease, correlation is not causation. What if the trend for all police departments is down?

In the police claim example, the best proof comes from documenting complaints that fail to turn into claims once video or audio evidence is produced that contradicts the allegations. Training your personnel to recognize and report successful prevention of claims is a powerful and direct means of proving that a particular risk control method works. And picking risk control techniques that are relatively easy to quantify and show success with is a great way to build credibility and support for other ideas that are less easy to quantify, like the next case study.

COMPLICATED COST/BENEFIT ANALYSIS The U.S. Environmental Protection Agency (EPA) announced in April 2011 that it had reached a settlement with the Tennessee Valley Authority (TVA) to resolve alleged Clean Air Act violations at 11 of its coal-fired plants in Alabama, Kentucky, and Tennessee.

Costs are between $3.5 and $5.5 billion, including: • $3 to $5 billion, estimated, on new and upgraded state-of-the-art pollution controls • $350 million on clean energy projects to reduce pollution and save energy • 300-400 that jobs will be eliminated

CALENDAR OF EVENTS The Public Risk Management Association (PRIMA) hosts or sponsors a wide variety of educational programs for public risk practitioners. These meetings and events provide an optimum forum for public risk professionals to acquire new knowledge or skills, exchange ideas and expand peer networks.

PRIMA’s calendar of events is current at time of publication. For the most up-to-date schedule, visit www.primacentral.org.

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Benefits include as much as $27 billion in annual health benefits that will prevent approximately: • 1,200 to 3,000 premature deaths, • 2,000 heart attacks • 21,000 cases of asthma attacks each year The net benefit is equal to $20 billion+ per year, not including indirect benefits of cleaner air and energy savings. That makes the ROI between 400 and 500 percent, with continuing returns in that range for many subsequent years.

It looks like a great deal, and most people would support cleaning up the air just on principle. But this example illustrates the uncertainty of estimating the costs and benefits of such a large project, with so many variables. There’s a wide range of $3 to $5 billion for the upgrades, and no estimate of the cost of the job losses. The benefits range from up to 150 percent and are based on expected health benefits that are extremely difficult to measure, even with an estimated decrease in pollution.

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This example also illustrates one of the most difficult questions faced by those conducting risk management cost/benefit analyses: What is the value of a human life?

You may think it’s insensitive to even think of such things, but the value of a human life is a key component in the evaluation of many risk control measures. Government agencies

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“Selling” Risk Management routinely make such estimates and use them in complicated models to determine whether or not to implement regulations. Private companies make these calculations as well, as is illustrated in the next case study on the Ford Pinto.

POORLY DONE COST/BENEFIT ANALYSIS The Ford Pinto is an infamous case study in how not to do a cost/benefit analysis. The design flaws that caused the Pinto to catch fire when hit from behind were well known by Ford engineers. They were under enormous pressure, however, to quickly produce a small, inexpensive car to compete with the Japanese auto makers.

Under this pressure, the engineers conducted the following cost/benefit analysis:

Most of all, make sure your target audience understands that to be successful they must commit to dedicating the time, money or other resources it takes to make a change.

At times, risk management ideas won’t pay off, and even when they do, their full impact is difficult to measure.

• $137 million = Cost to re-tool = $11 per car • $49.5 million = Cost of claims, calculated at • 180 burn deaths x $200,000 • 180 burn injuries x $67,000 • 2,100 burned cars x $700 • $87.5 million = Net “benefit” • ROI = 177% With a net “benefit” of $87.5 million, Ford concluded it would be cheaper to pay the claims than to retool the manufacturing process.

This example raises a number of issues, starting with the fact the Ford engineers didn’t do a very good job of estimating the cost of claims. As anyone with experience knows, the value of a burn injury, especially one that leaves lifetime scars or disability, is often higher than the value of a death claim, not less. Seek expert opinion when evaluating options that involve areas of technical expertise outside your own.

The biggest problem with this analysis, however, was a common cause of catastrophic events—myopia. The Ford team was so focused on the pressure of producing a competitive economy car that they cut corners and rushed through completion, giving little thought to what a jury would later think of their actions (awarding punitive damages), much less the enterprise risks we now recognize as critical for strategic planning, including risks to your image, reputation and brand. The result was catastrophic injury and death to passengers and major financial losses and loss of reputation to the Ford Motor Company, It is where cost/benefit analysis meets enterprise risks, the risks of catastrophic events that could cripple or kill your organization, where things really start getting hard to

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measure. Simply put, the value proposition for Enterprise Risk Management (ERM) is hard to quantify, largely due to the fact that we all look at risk differently.

What is the value of your reputation? Is it goodwill or other accounting measures of worth? Is it the sum of your parts?

The cost it would take to rebuild it?

Is it worth any cost to save your organization? Surely there must be a limit. What cost is too high? What risks are the most critical? At what point does the cure become the harm?

With increasingly subjective costs and benefits, limited resources and an almost limitless supply of risks, what’s a risk manager to do?

Prioritizing the risks by their likelihood is critical. Even if the costs and benefits are imprecise, measure them.

Include them in your analyses and provide a range or ranking for the harder-to-define areas. Too often we skip these factors because they’re considered too subjective or hard to quantify.

TARGETING YOUR AUDIENCE From a business perspective, risk management means better allocation of scarce resources. You should always try to frame your business case in those terms, but be aware of the need to target the message to your audience.

At the board or CEO level, it’s about greater ability to set and achieve strategic objectives. At the CFO or accounting level, it’s about lowering your cost of risk and return on investment. At the COO or operations level, it’s about delivering products and services faster and more efficiently, preventing problems and better addressing competing demands.

Most of all, make sure your target audience understands that to be successful, they must commit to dedicating the time, money or other resources it takes to make a change. At times, risk management ideas won’t pay off, and even when they do, their full impact is difficult to measure. A big part of selling the technical side is then also selling the concept of risk management as an ideal that is worth pursuing to make your organization stronger. That’s where more of the emotional side of risk management kicks in, a topic to be addressed in part two of this article, in the October edition of Public Risk.

Marcus Beverly is client service director for York Risk Services, Inc. in Roseville, Calif., specializing in public entity risk management.

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Has your entity launched a successful program? An innovative solution to a common problem? A money-saving idea that kept a program underbudget? Each month, Public Risk features articles from practitioners like you. Share your successes with your colleagues by writing for Public Risk magazine! For more information, or to submit an article, contact Jennifer Ackerman at jackerman@primacentral.org or 703.253.1267.

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Member Spotlight

FLORIDA POOL USES ROUNDTABLE TO SOLVE RISK MANAGEMENT PROBLEMS Each month, Public Risk features a member who has gone above and beyond in a feature column titled “Member Spotlight.” Do you know someone who deserves recognition, has made a contribution or excelled in their profession?

If so, we’d like to hear from you for this exciting column, as PRIMA shines the

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hen faced with rising employment liability costs, the Florida Association of Counties Trust (FACT) decided to harness the brain power of its members to come up with ways to reduce expenditures. The result? The FACT Roundtable, a quarterly meeting of the pool’s personnel directors and risk managers.

The roundtable setup allows members to network while addressing real issues in their entities.

“Our goal for our working lunch is to dissect one employment liability topic,” said Marcella Bridier, risk manager for FACT. “We share policies and procedures with the primary focus of reducing the frequency and severity of employment liability issues for the entire pool.”

spotlight on its members.

To be considered for the Member Spotlight column, contact Jennifer Ackerman at jackerman@primacentral.org or 703.253.1267.

For the purposes of the roundtable, FACT has a west Florida and an east Florida meeting, each held at a member entity. FACT pays for the cost of the lunch, but other costs are minimal—just the cost of gas to get to the location and a few hours away from the office. There are no overnight stays required or per diem paid by the counties.

FACT members find the roundtable particularly helpful when they want to roll out a new program.

“Usually the first question county administers ask when a staff member tries to implement a new risk management policy is ‘How do other counties address the same situation?’” said Bridier. “The roundtable enables the staff member to have the answer before they present their risk solutions.”

“Any risk pool, local county, school board or municipality could meet for a professional networking luncheon like ours,” said Bridier. “Someone just needs to take the initiative to start one. Other entities could benefit from the learning and sharing the roundtable affords.”

Bridier points out that employment liability claims cost FACT seven times more than any other general liabilitytype claim, mainly because federal employment claims are not covered under State Sovereign Liability Limits and defending them is costly.

“When members in our pool reduce their claims, all the members get to share in rate reductions and save tax dollars,” Bridier said. “The roundtable gives our members a chance to share ideas and hopefully further reduce claims burden.”

For more information, contact Marcella Bridier at mbridier@blissmcknight.com.

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