Risk Sharing: Definition, Strategies & Examples

Lesson Transcript
Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Both project managers and business leaders face risk on a daily basis, but they don't have to face it alone. This lesson discusses the definition of risk and provides ways that it can be shared among other associated entities. Updated: 09/08/2020

Risk & Risk Sharing Definition

Did you know that, dozens of times every day, you share risk? Risk is the probability of an event occurring in a given time period. It's important to remember from the outset that, in this context, risk refers only to an occurrence and not necessarily an adverse event. With that in mind, risk sharing doesn't mean pushing the threat of bad outcomes off on someone else. Rather, it means reducing the likelihood and impact of uncertainty.

Here are a few examples of how you regularly share risk:

  • Auto, home, or life insurance, shares risk with other people who do the same.
  • Taxes share risk with others so that all can enjoy police, fire, and military protection.
  • Retirement funds and Social Security share risk by spreading out investments.

Whether you're a project manager or a small business leader, properly managing risk can be the difference between success and failure.

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  • 0:04 Risk & Risk Sharing Definition
  • 0:59 Strategies for Sharing Risk
  • 2:08 Examples of Risk Sharing
  • 5:48 Lesson Summary
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Strategies for Sharing Risk

With only a few exceptions, business leaders and project managers should share risk whenever possible. Most of the time, sharing risk is a win-win scenario where stability is increased for all parties. We'll look at some real-world examples in a minute, but first we should look at some broad strategies.

One strategy for sharing risk is to diversify. To an investor, diversify means to put a little money in a lot of places so that the demise of one investment doesn't wipe out the investor. That strategy has a direct corollary in business risk. In this strategy, a business or project leader allocates resources so that a problem or disruption has minimal impact on other aspects of the business.

A second common strategy for risk sharing is outsourcing. Outsourcing means taking the business unit or function, removing it from the organization itself, and subsequently contracting another entity to do the work. In many cases, when you outsource services, you are also outsourcing risk. This is especially true when the outsourced function is already far outside the businesses core competency and primary mission.

Examples of Risk Sharing

During a project, risk can be shared with other project participants and resources. Organizations share project risks when everyone understands deliverables and expectations clearly. In business, risk can often be shared by working closely with other business partners in a mutually beneficial partnership. Here are a few real-world examples of risk-sharing through diversity and outsourcing.

When an airline faces unforeseen cancellations that exceed their capacity, they use their contractual arrangements with other diverse competitors. The airline with cancelled customers pays an agreed-upon rate so that a single flight cancellation doesn't strand all passengers at the airport. This mitigates both the risk of losing a customer and the risk of uncertainty associated with another airline's ticket pricing.

Many governments and nonprofits diversify their revenue streams to reduce the risk of sharp declines in revenue. In the government arena, the risk of plummeting tax revenue is mitigated by collecting taxes through income, property, and sales tax. Although it will still cause the government entity to suffer, the plummeting revenue will not be nearly as detrimental as having only a single revenue stream. Likewise, nonprofits that rely on donations reduce risk by maintaining a diversity of donors and donor categories.

A few industries rely on a very unique way of sharing risk through diversification. Many agricultural businesses and energy companies share risk by purchasing through a cooperative. In cooperatives, many small entities pool their resources to purchase bulk goods like coal or livestock feed. By doing this, they pay much lower prices since they can buy in bulk. This shares the risk of being forced to pay higher prices than much larger competitors.

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