The Recipe For Risk: Risk Appetite Assessment
Recently, Tim Cutshaw did something he normally avoids: He accepted a bad risk.
Along with his team, Mr. Cutshaw, executive vice president at engineering and construction firm Mesa Associates Incorporated, Knoxville, Tennessee, USA, decided to go forward with a project to build a steam production facility for the U.S. government. Despite not having a strong existing relationship with the client—Mr. Cutshaw’s top priority when assessing risk—he felt getting into the government sector was worth the uncertainty.
“If there was an opportunity to get a project in a new market segment, we’d be willing to take on more risk and even lose money,” says Mr. Cutshaw. “I considered it a high risk. We didn’t have a relationship, and our partners didn’t have a lot of experience. But it would get a lot of notoriety, it was a good fit for our technical resources and it was a great opportunity for developing our portfolio and our client base.”
That type of equation is one organizations must constantly weigh to determine their risk appetite—what types of risks they can take on each project in the portfolio.
Mesa went forward with the project, designing elements of the facility. The partner firm completed construction, and the project came through as expected—that is, except for the cost. Now, Mr. Cutshaw
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