The enterprise risk management department at RTI International, a not-for-profit that provides research services to government and commercial clients, was charged with developing a risk tolerance matrix for the organization. And because RTI was seeing a change in the type of work it was getting, the matrix would encompass not only critical indicators such as loss of life, loss of business or negative impacts exceeding $5 million, but also factors related to the effect projects could have on the company’s overall financial position.
“What we have seen recently, certainly in the last three years, is a shift from fee-bearing work to non-fee bearing work—grants and cooperative agreements,” says E. Ward Sax, RTI’s treasurer and chief risk officer. “RTI has had to respond to that business model in terms of understanding what those terms.”
While historically 16% to 20% of RTI’s revenue was generated by arrangements like grants and cooperative agreements, which include no profit for the organization, that type of work now makes up more than 30% of revenue, Sax says. That poses a challenge since it could limit the free cash flow that RTI depends on to invest in the company, he says. “So one element of this risk tolerance was to get our arms around this nutritious vs. non-nutritious portfolio.”
RTI was also entering into more cooperative agreements, which typically involve a cost-share, in which RTI or companies that it partners with agree to donate services or materials needed for the project. While RTI’s risk management committee had always reviewed “very large projects or novel projects,” there had not been a lot of discussion about cost-share, Sax says. But if RTI entered into a cooperative agreement and then wasn’t able to find a partner to contribute the services or materials needed for the cost-share, the impact could have been considerable.
In the end, RTI decided that questions about whether projects provided sufficient overhead or whether non-fee bearing projects would erode the company’s cash flow were more appropriately dealt with through another process. The risk tolerance matrix considers cost-share requirements, negative financial impact, and legal or regulatory liability and injury or loss of life. RTI established dollar limits for each factor, and if the limits are exceeded, that triggers a review.
RTI’s research showed that outside of the financial industry, there wasn’t a lot of information about what risk tolerance policies should look like, Sax says. “It was not an easy journey trying to create a policy for an organization like RTI, whose revenue is based on our business know how, our intellectual property, our individuals engaged in scientific inquiries. It was hard to put dollar figures around that.”