Risk Management – Materialisation vs Crystallisation
Risk Management was first made interesting for me by Tom DeMarco and Timothy Lister in Waltzing with Bears. If you want to know more about the subject, that’s a good place to start. But what is the difference between materialisation and crystallisation in the world of risk?
To answer this question we need to build a story from the beginning!
A risk is anything that could happen that will have an impact on your plans. I’m planning on playing some guitar after I write this. My plan to play guitar could be impacted by many different things. Each of these things can be more or less likely to happen, and they can impact my plan to a greater or lesser extent.
For example, my plan could face challenges such as:
- This article could take longer to write than I expect
- My guitar might be stolen
- A string might break
- Multiple strings might break
- All the strings might break
- I might get cramp after all this typing
There will also be risks I can’t imagine yet because they would be outside of my knowledge and experience. They still exist and they are still risks; I just can’t do much to mitigate them until I know what they are.
For the purposes of this article, we’re going to break a guitar string!
Once I have come up with a list of risks, I can think about what I can do to mitigate them. Risk mitigation is choosing to do something in advance to either reduce the chance of a risk happening, or to limit its impact.
Let’s think about the chance of a string breaking on the guitar. I could mitigate this in several ways.
Maintenance. If I take care of my guitar by cleaning the sweat off the strings each time I play, it makes it less likely that a string will break. I could decide that this is enough, or I might do more.
Spare parts. I could spend a small amount of cash to have a spare set of strings available, so I can change a broken string. This doesn’t cost much and limits the impact of a string breaking.
Redundant system. If I am performing in front of an audience, I might spend significantly more money to have a second guitar available in addition to several spare sets of strings. The impact of breaking a string during a live performance is greater than the impact of breaking a string during practice. Switching guitars allows the performance to continue uninterrupted, while my guitar technician fixes the guitar with the broken string.
I could choose to do nothing. After considering the likelihood and impact of the risk, I could decide not to take any action to mitigate the risk. In many cases I can compare the cost of mitigation against the cost of the impact, multiplied by the probability of it happening.
For example, the cost of a set of strings is $10. I break a string every other performance, so there is a probability of 0.5 that I will break a string. If a string breaks and I can’t finish a performance, I could lose my $300 in ticket sales.
So, I calculate
$300 * 0.5 = $150 which is the impact of my risk, and I can see that that this is 15x more than the $10 cost of the mitigation.
Materialisation occurs when the thing we thought was possible actually occurs. For example, if and when the string breaks on my guitar. Once that string snaps, the risk has materialised. The thing we wrote on the risk register has happened. I haven’t yet suffered the consequences, but I know I need to brace myself.
Crystallisation occurs when you take the hit from the risk materialising. What happens next depends largely on what I did to mitigate the risk.
If I purchased spare strings, the crystallisation already occurred as I opted to take the hit before anything happened. I now effectively win my $140 return on this investment as I can change the broken string, finish the gig, and collect my full appearance fee. A bit of stage craft from my bass player given me sufficient cover to fit and tune the string and then we’re back in action.
If I chose not to mitigate the risk, the chances are I’m about to lose that $300 appearance fee. I might be able to negotiate on this, but once this conversation has been had and the agreement is reached, the crystallisation happens. For example, he agrees to pay $200 given the length of the performance, despite the set being back-loaded with some key hits that were kept back for the encore.
Post-materialisation crystallisation can be something of an art form. If I ad-libbed the rest of the songs on the remaining strings, or delivered them with just bass guitar and drums, I might be able to creatively re-shape the risk profile. Equally, I could end up with reputational damage that loses not only the $300 appearance fee, but all future bookings.
In this example, to play the next show I have to purchase new strings in any case, so my $10 saving evaporates, especially when I realise I have to buy from a local supplier to continue the tour and they sell the strings at $20. However, that isn’t to say that every risk must be mitigated (but it does need to be analysed).
So, a risk can be mitigated by taking action up front to reduce the likelihood or impact of the risk materialising. A risk materialises when it happens, and crystallises when you pay the bill.