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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?
RISK
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.
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!
RISK MITIGATION
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.
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.
RISK MATERIALISATION
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.
RISK CRYSTALLISATION
Crystallisation occurs when you take the hit from the risk materialising. What
happens next depends largely on what I did to mitigate the risk.
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).
SUMMARY
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.
Process