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Why risk management for development organisations is important

Created: 01 February 2013

A variety of uncertainties are challenging development interventions on a daily basis. The necessity and demand for increased effectiveness and efficiency of these interventions is greater than ever. This article argues that the success of development interventions depends to a large extent on the ability of development organisations to face uncertainties and manage risks.

The outcomes of development interventions are not pre-determined, they are uncertain. A highly dynamic development context is also uncertain because what we know about it is very much limited and fragmented. Understandably, it has become increasingly difficult for development organisations to define the optimum pathway towards the desired development results. The truth is that we simply don’t fully know what works and what doesn’t, how the context will respond to interventions and what changes in the context could hinder or facilitate achieving certain objectives.

So how can we address uncertainties and increase the effectiveness of development interventions? Of course, from the perspective of a development organisation not all uncertainties matter but only those, which might have an impact, either positive or negative, on achieving the development objectives. By analyzing uncertainty from the perspective of its likelihood of happening and the range of possible impacts, random uncertainties can be turned into probable events – or risks. We cannot manage uncertainties but we can manage risks by tackling either the likelihood of their happening or the impact of such on the organisation. For instance, if the security situation in a fragile state deteriorates, the development organisation promoting polio vaccination might suspend its operations in that country.

Conversely, if the government manages to secure the project area from rebels, the development organisation could consider expanding its polio vaccination campaign. It would be unjustifiable to endanger the lives of development workers in the first example and miss opportunities in the second should project staff turn a blind eye to changes in the project context. Therefore, the question should be: how can the risks facing development interventions be managed and thus improve the effectiveness of the interventions? The answer lies in two mutually dependent dimensions: the proactive and systematic consideration of risks and greater responsiveness in development interventions, accordingly.

What is risk management?
Managing risks means to understand, evaluate and take the necessary steps to increase the probability of success and reduce the likelihood of failure. 1  Risk management specifically deals with the uncertainties inherent in any development intervention. By identifying and evaluating these uncertainties development organisations are better placed to be able to make informed decisions and this will lead to fewer losses and more gains. For example, changing local tax requirements, climate change and climate induced disasters, change in the local political landscape, social and political turbulence and dynamics in the demographic structure of the population, and many more things can influence the performance of any development organisation.

Seemingly simple steps like being alert to risks, avoiding threats and maximizing opportunities, and feeding the learning back into the implementation – requires a fundamental change in the way we think and work in the development sector.

Why is risk management a challenge for development organisations and what can we do about it?
There are three fundamental challenges in mainstream risk management for development organisations: a culture of blame, lack of adaptive capacity on the part of development organisations and the lack of a shared concept of risk management.

Quite often the manifestation of risks is associated with failure, which subsequently leads to blame. This in turn hinders proactive risk-taking behavior among development organisations and limits their performance. Often we forget that only by failing can we learn to succeed. From this perspective, I very much welcome initiatives like that of The Institute of Brilliant Failures 2 supported by ABN AMRO bank, which promotes a positive view of failure and encourages organisations to be open about what doesn’t work, share their experience and learn from one another. Through such a process, failures become building blocks towards success. Interesting parallels can be drawn with the concept of high reliability organisations (HRO) that implies that high risk and high effectiveness can co-exist.

At the same time, there are also failures that are unnecessary and avoidable if risks are systematically taken into account. Failing to prevent recurrent crises, for example, is unjustified. Recurring drought and hunger are not typical of the Horn of Africa as a geographical region.

They are signs of continuing failure on the part of local governments and the international community to address the risks of drought and hunger, which then results in recurrent crises. It should also be noted that the international community is becoming more open in acknowledging this failure by encouraging efforts to assess such risks and take appropriate response measures. In 2012 USAID launched its Resilience Policy, for example, which focuses on avoiding recurrent crisis risks such as chronic poverty and acute malnutrition in the Horn of Africa and the Sahel 3.  The priority is to improve the ability to address risks and increase adaptive capacities.

Another reason why risk management is still in its infancy is that development organisations lack the capacity to respond or adapt. The assumptions about cause and effect relationships built into the design of development interventions often become obsolete during the course of their implementation. In constantly evolving development situations it is essential to ensure fast – virtually real-time – learning, enabling a speedy withdrawal from activities that are failing and a scaling up to support activities that get the expected traction.

This requires a certain degree of flexibility in development interventions and adaptive capacities on the part of organisations which are not yet there.

The introduction of risk management facilitates such flexibility through structured consideration of the significant contextual changes, i.e. through early detection of potentially threatening or beneficial events for any development initiative. For instance, there may be a risk that a population exposed to malaria in certain communities in Africa could use the bed nets provided as fishing nets. Ideally, neither the development organisation nor policy-makers would embark on time and resource-consuming social experiments to try to understand which factors might cause such behavior.

Especially if this is only one element of a more complex program on communicable diseases. Instead the organisation could engage local communities in a dialogue to understand their threats and opportunities and adjust its program accordingly to ensure that bed nets are used for that purpose. The highly dynamic nature of threats and opportunities requires rapid learning and responsiveness on the part of development organisations as the risks change.
Another fundamental challenge to mainstream risk management, which I would like to mention here is that the concept of risk management has yet to be defined and agreed upon in the development sector.

There is, however, a growing understanding of the importance of risk-based decision-making and risk-based programming. EC 4 , OECD 5  and UNDP 6 , for example, address risks in fragile states and the risks of natural hazards. UNECE 7  has developed a concept of regulatory risk management.

One of the outcomes of the Fourth High Level Forum on Aid Effectiveness in Bussan, Korea, in 2011 was to strengthen the capacities of developing countries in managing their risks through the development of joint risk management framework 8.  WB 9  has put risk management in the spotlight by dedicating its World Development Report 2014 to risk management. In 2012 UNDP developed the concept of risk management for its Capacity Development (CD) Facilities 10,  which implies that risk management must become an indivisible part of the management processes in CD Facilities at all levels: strategic, tactical and operational. This initiative emphasizes the importance of risk consideration at organisational level 11.

Understanding of the importance of systematic and consistent risk consideration is also growing in the Dutch charity sector (i.e. charity, development and humanitarian/relief organisations). A strategic partnership was established in 2012 between Partos, Vereniging Fondsenwervenden Instellingen (VFI), and Nederlands Adviesbureau Riscomanagement (NAR). The purpose is, first of all, to determine the level of risk maturity in the Dutch charity sector and identify gaps and needs. Also, a series of training programs  to develop capacities of these organisations to become more aware of their risks, to help them to base their programming and decisions on a proper consideration of the threats and opportunities and thereby increase the overall effectiveness of the sector.

As shown above, an increasing number of leading development organisations have started addressing risks from various perspectives. I believe that the concept of risk management in the development sector should embrace two important dimensions: systemic risk consideration while shaping development agendas, and organisational risk consideration to ensure effective, efficient and relevant delivery of development results. From the organisational perspective, I think that monitoring and evaluation (M&E) is the domain that can embrace risk management and thereby enrich and extend its focus.

How can development organisations implement risk management?

The practice of risk consideration in development organisations often goes no further than a consideration of the risks known at the time when a project or programme is designed, which in turn shapes the whole ‘theory of change’ i.e., which activities to implement and what results to expect. Accordingly, the prioritization of project and programme monitoring is often focused on monitoring the progress and signaling any significant deviations from the activities planned or the (intermediate) results expected. In this sense, the traditional form of progress monitoring implies a retrospective analysis of what has already happened with little possibility of anticipating the future dynamic.

The introduction of risk management instead can enrich and extend the approach to monitoring in two ways:

1. Start with a forward-looking view. Risk management helps to look one step ahead and to ‘anticipate’ or ‘envisage’ events that, if they occur, could influence an organisation or its interventions. From this perspective, risk management breaks the vicious cycle of rigidity imprinted by LogFrames. It introduces flexibility into development activities through systematic and structured consideration of potentially threatening or potentially beneficial events. To fully embrace the complexity of any development context it is important to proactively consider various scenarios for future events (both negative and positive) and plan to respond to the most significant ones.

Broadening the focus of monitoring towards more ‘anticipation’ beyond the threat-related mentality, will significantly help to improve the planning and implementation processes and highlight problem areas and opportunities in development initiatives at any given time. Monitoring the likelihood, magnitude and potential (financial) impact of such scenarios is crucial to ensuring that the development organisation is able to respond to emerging changes. Subsequently, proper planning of response measures will help to increase the resilience of any development intervention, as well as the ability to adapt to the constantly changing context.

2. Implement a broader scope. Risk management takes a broader focus not only in terms of threats but also in relation to opportunities that could facilitate the implementation of the activities or achievement of the results. Thus, risk management implies purposeful scanning of the environment for newly emerging threats and opportunities that could influence the realization of the objectives (in either a positive or negative sense). This is especially important for innovative initiatives. Such a perspective broadens the scope of a traditional M&E approach to encompass the domain of new possibilities and opportunities. As a result the whole notion of accountability needs to be revisited: should accountability be applied only to the threats minimized, or to the opportunities seized/missed as well?

In other words, this approach explicitly recognizes that accountability is not only about answering for realized results and minimized deviations with hindsight. It is also about which measures and structures have been put in place to appropriately identify and seize the opportunities and thereby to maximize the benefits of any development intervention. Only then can we talk about increased effectiveness of development sector as a whole.

In a nutshell, it is vitally important for development organisations to address the uncertainties they face on daily basis and manage their risks. Development organisations need to embrace this thinking and adopt a new way of working, otherwise we will continue to be surprised by recurrent crises and development efforts which turn out to be far from effective. Managing risks should become the new mantra if we want to increase the effectiveness, efficiency and relevance of development interventions.

Photo credit main picture: Reuters/ Akram Shahid

1. Based on the definition of risk management proposed by The Institute of Risk Management (IRM).
2. See: Briljante Mislukkingen.
3. Building Resilience to Recurrent Crisis: USAID Policy and Program Guidance, 2012
4. The EU approach to resilience Learning from food security crises, com (2012) 586
5. Aid Risks in Fragile and Transitional Context: Improving Donor Behavior, OECD, 2010
6. See: Grip Web.
7. Risk Management in Regulatory Frameworks: Towards a better management of risks, UNECE, 2012
8. Busan Partnership for Effective Development Co-operation, Fourth High Level Forum on Aid Effectiveness, Bussan, Korea, 29 November – 1 December 2011
9. World Development Report 2014, Managing Risk for Development, Concept paper, 2011
10. See: The Capacity Development Facility.
11. This article is based on the ideas proposed in the Risk Management Concept for CD Facilities