Whether you realise it or not, risk management - a subject hardly mentioned by college managers - is at the heart of effective planning and decision-making. "When risk management is successful, you tend not to hear about it," says Richard Allanach, an assistant director at the Further Education Funding Council.
But when things go badly wrong - as they have done famously at a minority of colleges during the past two years - it might be concluded that managers took risks which, with hindsight, turned out to be foolish. Why, for example, did governors at Halton College decide to invest in a loss-making multimedia company or rely so much on income from franchising contracts? The Cheshire college, which incorrectly claimed pound;6.4 million from the funding council, was later heavily criticised by the National Audit Office and House of Commons Public Accounts Committee for financial irregularities and ineffective audit arrangements.
According to Mr Allanach, proper risk management should have identified the extent to which the college was exposed to national franchising agreements with employers. "If it had adopted a portfolio approach and spread the risk, it could have reduced that exposure," he explains.
Like much of the public sector, FE has been slow to recognise the need for risk management. It is normally seen as the responsibility of the finance director, but the chances of finding a risk management group within a college is practically zero.
The same used to be true of universities, where finance departments are much larger. Yet while risk managers are still rare in higher education, about one in five universities now have risk management groups, normally reporting to the director of finance. The Higher Education Funding Council is due to publish a practical manual on risk management next month.
Put baldly, risk is the chance of things going wrong. Some common risks, such as fire or accidents that injure people, can be covered by insurance. In the private sector, however, risk managers spend much of their time dealing with uninsurable risks, such as the damaging effect that bad publicity may have on business.
Colleges and universities cannot insure against their largest risk - a fall in students and subsequent drop in income. For most universities, up to 60 per cent of their grant income is based on enrolments while, in the case of colleges, student numbers can easily account for 90 per cent of the money claimed from the funding council.
As well as guarding against bad publicity, effective risk management might include analysing which courses are struggling to attract students and which are over-subscribed.
"Risk management is not about guarantees. It's about having strategies in place to meet targets as best as we can," says John Sandbach, director of finance at Liverpool University, and chairman of the Chartered Institute of Public Finance and Accountancy's FE and HE panel, which produced its own checklist guide to risk management in colleges and universities last year.* Risk management was a priority of a planning group set up by New College, Nottingham, and the developers Morrison Construction prior to converting a 19th century lace warehouse ito a new teaching and conference centre. The pound;17.5 million private finance initiative project involved estimating the cost of making special bricks and importing Polish grass. The planning was done 18 months ago, before the college knew whether it had sufficient funding to convert its listed Adams building.
Richard Allanach points to three main areas where colleges might adopt a risk management approach: capital projects, staffing changes and funding arrangements once the new Learning and Skills Council replaces the FEFC.
Some colleges planning to employ fewer part-time staff have found, once teaching programmes are under way, that they need to revert to part-timers. LSC funding is still uncertain, but it could make a difference to how easily colleges meet targets. "Most colleges rise to these challenges and meet them but they can be areas of high risk for which you expect to see mitigation strategies in place," he says.
Joe West, principal of St Helen's College and president of the Association of Principals of Colleges, believes colleges are aware of what constitute large risks and cover themselves accordingly. Yet last year, after being seconded to Wirral College as acting principal after it had run up debts of more than pound;9 million, he came across a situation where better risk management might have alerted governors to problems.
The college spent pound;5 million on a new business and management centre in Birkenhead which is now only worth an estimated pound;2.7 million. "It seems to me that, by adopting risk management criteria, the college could have taken a more measured view," says Mr West.
Ray Dowd, the new principal at Wirral, accepts that no proper assessment was carried out before the centre was built. Only a quarter of the building is suitable for teaching FE and total running costs per metre, including staffing, are double that of elsewhere in the college. Wirral also became over dependent on cash from the European Social Fund. To ensure that similar mistakes are not made again, the college has increased reporting between senior managers and governors, who hold full board meetings once every month and assess the college's strengths and weaknesses.
But Mr Dowd believes establishing a separate risk management group would be a retrograde step. "The important thing is to get students through the door by getting your quality right," he says. "That's the best risk management strategy you can have."
* 'An Introductory Guide to Risk Management in Further and Higher Education' pound;39.50 (inc pamp;p), available from CIPFA's publications unit on 0171 543 5602
AIMS OF RISK MANAGEMENT
* to secure assets
* secure earning capacity
* reduce total costs
* reduce insurance premiums
* avoid prosecution
* promote good corporate governance
* drop in total student numbers
* fall in overseas recruitment
* problems recruiting teaching staff
* disputes over ownership of intellectual property
* maintenance of buildings
* capital projects overrunning
* cost of complying with health and safety regulations
* recruitment and retention of support staff
* financial crisis caused by fraud or insolvency
Source: CIPFA introductory guide to risk management in FE amp; HE