Do you ever get involved in risk sharing conversations, either as the buyer or the seller, but don’t quite know how to construct a reasonable risk sharing model? I’m going to provide you with a template for risk sharing, and I’ll explain why it needs to be deconstructed from price and value.
How to build equitable risk sharing
The following 6 steps outline a process for reaching an equitable arrangement on risk sharing between you and a client.
- Make sure that the value you are delivering is excellent.
- Make sure that your price for that value is fair. This is to ensure discounting and risk sharing are not confused.
- Make sure the case for change has been well established.
- Make sure that your value has been clearly explained
- Assess your own appetite for risk.
- Sell that risk multiplier.
Template for risk sharing
In order to calculate the risk multiplier we first need to assess the risks, examples of this include:
- Our own execution under-delivers (20%).
- Sales executes poorly (50%).
- Other execution failures (30%).
- Market appetite is too low (50%).
- Product doesn’t meet the market need (50%).
These factors and percentages lead to:
- 200% factor for risk
- Risk multiplier = 2.0
- Upside return (derisked) = 50%
- Risk appetite (positive or negative) = -20%
- Total risk sharing multiplier = 4.0
Note: The percentages above are an assessment based on this example, they will differ across varied situations.
I hope you got value from that. There is a copy of the template in the reference notes, so you can use it yourself. Lots more lined up for next week.
Link to Risk Sharing Template