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Can SME Owners turn Key Man Risk to an Advantage?

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Business owner concerns over staff retention are not uncommon. Beneath the surface, those concerns are often linked to retaining one or more key persons. What’s the impact of losing a key person, and how can Key Man Risk or Key Person Risk be turned into an advantage?

What is a Key Person?

A Key Person is anyone needed for the continued success of the business. An often over looked key person, is the owner themselves. In fact, it could be any person that’s a vital part of the on-going business success.

 What is Key Man Risk?

Key man risk or key person risk is simply the business risk of losing a key person. Owners are often so busy with the day to day, that they find it easy to overlook the risk. See Owner Overwhelmed with Work. Accidents happen, and people can become seriously ill. Illness could be mental as well as physical. A surprising number of people suffer from stress, anxiety, depression and trauma.  It’s not only the person themselves, it could also be illness or a frail family member that changes priorities. The reality is that owners can’t control the trigger, they can only manage how the business responds.

What’s the Impact?

When a small business loses a key person, it can have a huge impact. The business can’t function as it did before. That person might be the driving force for the business. Loss might affect financials, investment, confidence or image. When the owner is the managing director, then key person risk will need to be addressed to secure the long-term future. Many owners may not consider how much the business future is linked to them until a crisis, or perhaps when planning an exit.

The Challenge

Once key persons have been identified, potential impacts and risks can be assessed. These risks can be largely reduced by design, yet these risks are common place in many businesses. Here we explore the challenges of six key areas for managing key man risk:

 Governance

The board of a small business is often involved in day to day work. They may struggle to separate working “on” rather than “in” the business, finding it hard to draw the line between “on” and “in” without clear responsibilities for oversight and approvals.  As a result, leaders may not have a clear picture of the overall situation. Control and decision-making may become more difficult. Overlaps and inconsistencies can cause friction and create risk.  Key people may need to be involved in more handholding, planning and decisions. Instead of organised control, key people plug the gaps.

Organisation

It’s not only about keeping control; design issues can create other failures. Causes range from inconsistencies to fiefdoms.  Inconsistencies may result in things “falling between the gap”, or more likely the need for a key person to deal with an emergency which should never have happened in the first place. Of course, there can also be problems with internal politics caused by a power vacuum or silos competing against each other. When there are inconsistencies, gaps and internal friction then time, cash and resources are wasted. The work place can become stressful and unproductive with staff less likely to stay. Worst still, it can impact customers through errors and delays.

Processes

Processes are simply a sequence of steps that delivers a result. They might not be called processes, yet every business has them. They may evolve with know-how and work-arounds over time. Undocumented processes are not uncommon and are the tribal knowledge for a select few. When a process is in someone’s head, it’s unlikely to meet the needs of the growing business. Those needs might be for better planning, improved quality and for accurate reporting. Key people must hold everything together if there’s no designed process. Staff may find this particularly stressful, increasing the risk of loss.

Skills

Skills transfer is how staff gain know how. There’s a problem if skills and skill levels are not mapped out. When a key person is lost, the business may lose much of their knowledge overnight. Senior leaders may not even be aware of all the different activities performed by a key person. Skills might involve techniques and methods of great value to the business. After a key person loss, senior leaders must pick up the pieces which is made much easier if skills and knowledge are recorded. Better still, if they know that other staff can “cover” skills until the key person is replaced.

Information

One of the risks is the information loss caused by a key person leaving. They may have exclusive information about the best way to work with a customer or supplier. A key person may know how to get the best from a product, or when it should or shouldn’t be used. They might also know how to achieve success, for example in sales or marketing. Inflight work is often the most difficult to deal with, perhaps in the sales or delivery pipeline. Then there is the information for planning or decisions. The range of information is far reaching, and the thought of that disappearing is sobering. It’s essential to secure critical information, however useful information is also an asset.

 Systems

Key people may also plug gaps in the business systems. Business investment in systems can be hit or miss resulting in gaps here and there. As a result, staff must bridge the gap in systems for everything to work. In effect staff are part of the system instead of solely running the system. As growth increases the stress on systems, people and their knowledge are also put under strain. When a person goes, the risk that systems won’t work is to be avoided. Ideally a prioritised roadmap to plug system gaps to minimise disruption.

Advantage of Tackling Key Man Risk Early

The nature of risk is that it may or may not happen. Creating systems and retaining information and knowledge reduces many of the risks linked to losing a key person. Losing a key person will still hurt, however it will be easier recover with the right systems in place. That means that there is an advantage of tackling key person risk early, as the business will become more resilient and scalable.

We’ve explored six areas from governance to systems to manage key person risk. Once risks have been identified, a plan to address issues can strengthen a business. Taking early and incremental steps improves the business and reduces bigger problems further down the road.

 For those that want to grow and scale, addressing key person risk is likely to be closely aligned with business goals. Developing governance, organisation, processes, skills, information stores and systems are part of building a growing business. Key person risk is a good starting point as it looks at building a foundation around key activities.

Why not take the first step and download the KR5 Key Person Risk Checklist to assess your own business?

If you found this article resonated and you’d like to have a chat to explore your specific challenges, then please reach out to me either on LinkedIn or via email rhounsell@kr5consulting.com.


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