When risks become events
How can you spot the point where a risk — a thing that could occur — becomes an event that is occurring? I’d argue that you don’t need to identify the specific point of change, and you’ll waste valuable time trying to spot the exact moment of transition. Most importantly, if you wait to see the transition point, your response will be on the back-foot from the get-go.
Phase transitions (I): water to ice or steam
Phase transition is the point where a gas turns into a liquid or a liquid to a solid: it’s the point where the state of matter changes. You probably studied this at some point and watched water freeze into a solid, melt back into a liquid and then boil into a gas.
This change requires a transfer of energy to transform the substance from its normal state into a different form. For example, in most places, water’s normal state is liquid. We need to heat it to change to gas or cool it to solidify it.
However, you’ll probably remember that this change takes time. Even the most powerful burner will take a minute or two to boil water, and making ice can take hours. There’s an obvious difference when you compare things at the start of the experiment (putting a block of ice on the counter) and the end (mopping up a puddle), but in most cases, there’s not a single, observable moment of change.
We can have exceptions. Drop some water into a hot skillet and the transformation seems instantaneous. Similarly, pouring liquid nitrogen over things has an immediate effect. But these are the extremes. Most of the time, the transition occurs over time, and there’s no single moment when the shift occurs.
Phase transitions (II): risks to events
You’ll see the same phenomenon as conditions change and risks are realized, becoming events.
You’ll have a period where the risk exists but controls are in place and are effective. This situation is similar to Stage 2 in the Turner, Toft, and Reynolds model I shared here: things are in equilibrium.
You can think of this as the organization’s normal state.
However, when a catalyst occurs, the controls become stressed, things start to wobble and we move into the transition phase. This is the same as applying heat or cold to water: we begin to change its state.
In an organization, this means that a risk has become realized and an emergency or crisis is brewing. There could be a quick flash or bang, but — like water freezing or boiling — might be some time before the event takes place.
However, here’s the important thing: you’re already in the transition phase. That starts when the controls are overwhelmed, not when the emergency strikes.
Why is this important?
First, you’ll lose valuable time by waiting to see the emergency or crisis occur. This delay robs you of the chance to be proactive.
Second, the effort or energy required to correct the shift increases as time goes on. Water that’s close to boiling needs a lot of cooling to get back to normal. Similarly, an organization that’s on the brink of crisis requires Herculean efforts to prevent the full effects of the crisis from hitting. In contrast, relatively minor measures in the early stages of transition might return things to normality.
Despite this, organizations still often wait until they are sure that an emergency or crisis is underway before they take action.
I’d argue that waiting is reckless, bordering on negligence — the earlier the intervention, the better.
Waiting to be sure that you’re in trouble poses a much more significant challenge.
Phase transitions (III): Schrodinger’s Crisis
As we noted earlier, the transition from one state to another takes time. But there’s also another really interesting phenomenon at play: at the exact moment of transition, you can simultaneously be in two phases at once.
“At the phase transition point (for instance, boiling point) the two phases of a substance, liquid and vapor, have identical free energies and therefore are equally likely to exist…[in the case of boiling water] the water does not instantly turn into vapor, but forms a turbulent mixture of liquid water and vapor bubbles.”
This makes it even more challenging to spot the point where the change takes place because, depending on where you look, you will see very different situations.
You can see this in many organizations where most things are going well, but there’s one big issue building up steam somewhere.
At that stage, the scandal in accounting only affects the CFO. Meanwhile, over in Operations and Logistics, things are just fine.
Like Schrodinger’s cat, the organization is in two states at the same time.
But unless you do something about your financial scandal, everyone is going to become involved.
And you can’t wait until you ‘see’ the transition.
By the time the WSJ carries the story on the front-page, or the SDNY politely invites the CFO to an interview, you’ve passed the transition stage. Now you’re deep into the event and you’re on defense.
There can be occasions when things just move too fast. Genuine Black Swans can occur, but these are few and far between. You might also have inadequate systems in place to identify changes in the situation. That robs you of timely warning that controls are being overwhelmed and things are getting wobbly.
But in the vast majority of cases, the signs of trouble will be observable well in advance. But these get downplayed because everything else is okay or someone decides to wait: ‘let’s wait and be sure that we need to do something.’
So what can you do?
First, understand what ‘normal’ looks like and what can knock you off balance. Your risk assessment will help with this.
Second, put surveillance in place. This helps you identify changes in the external environment and to keep an eye on your controls to see where these become stressed.
Third and most importantly, have a proactive mindset and don’t wait to see the change. That doesn’t mean jumping at shadows and overreacting, but it does mean taking an active role in shaping events instead of hoping that things will work out by themselves.
