Reducing Key Person Risk

Many business professionals want to reduce the amount of time that they spend working on their businesses but their businesses depend on them or some other significant person. Generally speaking, this is referred to as key person risk. It is a risk to the business (and, such as with investment management firms, to the consumer) because if one of the key persons leave for some reason (departure, illness, etc) then the business will experience significant operational burdens, which can reduce business performance or enable competitors to take additional market share.

It becomes quite important to deal with this risk, especially as a company scales. For startup businesses this is often an inherent part of operations, at least until the financing is together. Business owners should still strive to have staffing arrangements and systems in place to reduce the need for them to be present at their projects.

There are a number of reasons why businesses develop key person risk:

• Knowledge concentration; a select few people know how to do key tasks. This tends to be the biggest driver of key person risk in most businesses. There are generally 3 ways of handling this: detailed checklists, knowledge management tools, and staff training procedures.

• Client and relationship dependencies: a single person manages clients or vendors. Its important to have CRMs in place, systematic communications, and try to have rotating points of contact, as some ways to help deal with this.

• Financial concentrations: one person has access to the bank accounts and financials. You can use dual-authorization or cloud based tools, and document all relationships.

There are other ways this can manifest but ultimately, the overarching principle to reduce key person risk is with knowledge sharing and standardized operating procedures. For example, our company has checklists for conducting business valuations that is uploaded to a centralized cloud. That doesn't mean that anyone can do them, but it does provide them with a list of things to consider when conducting a valuation, and it makes it significantly more streamlined after those people have received training and a certain amount of time studying the markets.

So, effectively, you need some combination of at least two things to relieve your business of key person risk: time and additional staff. Invest your time in your staff.

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