What is Key person dependency?
Key man dependency or person dependency is a business risk where a company becomes over reliant on one or a few individuals for critical knowledge, skills or business relationships, which can lead to significant disruption if and when that person leaves the organisation.
Many organisations rely heavily on their Human capital as their greatest asset. But if you have one or more people that you rely too heavily on, you would be setting yourself up, as a SME business owner for a real problem, if you want to sell, obtain investment or grow your business in the future.
Who are key people within a business, how do you identify a dependency?
You may have someone within the business, who has a lot of legacy knowledge about clients or the technology; they may be a long-standing senior employee or founder of the company. They may have the client relationships, or key skills that others do not have within the business. If they left, would they pose a risk to the health and viability of the business?
Why does key person dependency pose a risk to SME?
There are many risks to a small team, who maybe all have their ‘specialisms or client relationships’. The key person dependency should be regularly assessed to ensure that no one person can damage the business’ future by leaving and taking a significant amount of information/experience and potentially clients with them.
Which situations should we be mindful of for key person dependency?
Mergers and acquisition, the sale of a business, can be affected if there is deemed to be one person who is key to the business… perhaps that person is close to retirement age? Perhaps if they left the value of the business would be less. If the founder/owner is the main person to foster the client relationships that generate business, what would happen following the sale?
How would a small business mitigate for key person dependency? What can they do to avoid key person dependency
- Ensure contractual documentation is valid and signed.
Ensure your contracts of employment or service agreements are clear on contractual terms and clauses relating to intellectual property (IP) and who owns the IP.
We work with a tier one law firm, also Personnel Today’s Law firm of the year, who can assist with reviewing of service agreements and shareholder agreements ensuring that the clauses in your contracts are fit for purpose.
- Share options and the sale of a business
Ensure that the company’s share arrangements do not allow long-serving or key people within the business to use an exit event as an opportunity to liquidate their shares and leave the company.
- Ensure knowledge sharing via appraisals and training.
Knowledge sharing between other team members is especially important for family leave situations, flexible working requests and when a member of the team leaves for pastures new. By ensuring that others have shared the knowledge you mitigate the risk to the business, resulting in appropriate cover for that person, to ensure the business can succeed in the key person’s absence, for whatever the reason.
- Operations Manuals and training
Developing operations manuals and ensuring that others receive training in how to cover tasks and roles is an excellent way of protecting the business. Targets and key performance indicators can be allocated to those within the business who have the knowledge, so that it can be shared with others. Development of material to be shared, and the learning of the new tasks will cover most target setting dilemmas within the business, and assist greatly with de risking the business.
- Redundancies and downsizing
Be mindful that in these uncertain times of running a business, it may be prudent to ensure that knowledge sharing is part of your day-to-day activity, that not one person becomes indispensable. If you need to cut headcount, it may be easier to make the right decisions if you have in depth knowledge of the key responsibilities of your team.
- Succession Planning
These should follow on from the appraisal discussions and can form a training plan where key man dependency is mitigated with training programs that ensure key skills are retained within the business should your long serving employees leave.
Your organisation will undoubtably suffer unless you’ve taken the necessary measures to prepare for such a loss. We can help to assess and mitigate the risk, contact us for a no obligation discussion on how we can assist to ensure you retain the knowledge in the business you require to build and grow your business.
- Staff retention and employee engagement surveys
We provide employee engagement surveys and can interpret these and recommend remedial action based on the output. If your team are not content, and they mainly consist of key people with the relevant skillsets, we can assist with HR solutions and initiatives that retain them for the longer term.
- Benefits and salary benchmarking
Salary sacrifice is a great way of saving money for the business and your team members. If you have not benchmarked salaries recently, we recommend doing this. There are various benefit packages that can also assist with staff retention, many of these are dependent on budget available, but can also be a fantastic retention tool.
For specific advice on how to retain your key people, please contact us for a no obligation discussion about how we may be able to help.
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