Top 5 Ways to Mitigate Key Person Risk

Key Person Risk

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AFSL Responsible Manager CPD

The Show must go on 

Like so many issues that had been on the periphery of Australian workplaces, key person risk is yet another challenge that has been dragged into the spotlight. It is inevitable that your business will lose employees over time, but there are ways to minimise the impact to your organisation and staff.

We’ve put together our top five tips for handling key person risk.

Businesses everywhere are struggling with how to manage staff absences due various aspects, but as the old saying goes, the show must go on. In fact, Broadway’s theatres provide a great example of how to carry on even if your lead star goes down.

1. Identify key persons

The first rule of managing key person risk is ‘know who your key people are’. Typically, ‘key person’ is a term that applies to people in senior executive roles (a CEO, compliance manager, senior sales executive, etc). In theatrical terms, they are probably your headline stars, or the title characters.

Reasons why someone might be a key person:

  • significant visibility within the organisation and externally
  • founder/face or name of the business
  • primary revenue generator
  • responsible manager or licensee

However, it is important that you also look for people in the business that are indispensable for reasons other than seniority. For example, a stage manager (the person who runs the backstage area and ensures the actors are ready to go on at the right time) is just as important to the smooth running of a show as it’s stars. In business, a key person may actually be someone with unique skills, or who is responsible for certain customer relationships, or possesses certain knowledge about the business.

The best way to determine whether someone is a key person is to consider whether your business could continue to operate with little or no interruption if they were no longer an employee. If the answer is no, then it is likely that employee is a key person and should be included in your risk mitigation strategy.

2. Document processes and procedures

Actors typically follow a script, which not only includes their dialogue but also the stage directions (when to exit or enter, how to deliver a particular line, etc). If an actor is unavailable to perform, another person can fill in for them by simply reading from the script.

For businesses, understanding what tasks are necessary for operations to continue and who typically performs them means that anyone can step in and follow the same process. Yes, it may take longer to perform those tasks, and resources will have to be diverted from other areas, but by documenting your key processes you reduce the risk to the business of an error or omission being made.

3. Spread knowledge/cross-train

In the theatre, for every major role there is typically an ‘understudy’ or ‘swing’. This is an actor who is already in the cast (as a smaller character or in the ensemble) who also learns the major part so that if the lead actor is sick they can step in with minimal disruption to the show. Even if you don’t have formal understudies, someone who is already in the cast and has been acting alongside the ‘star’ during the entire rehearsal process probably knows the main role well enough to perform it if asked.

This is a great model for businesses to follow as well. Look to your existing employees to step up to fill a key role before outsourcing. It could be a temporary arrangement or a formal succession plan, but it means the core business operations are maintained.

It is also important to take the time to educate and upskill your employees on other areas of the business, even if there is currently no key role that needs to be filled. It will make the transition to a new position easier but also allows you to spread the risk across the business.

4. Communication management

Regular theatre-goers will know that audiences are usually told that an understudy will be performing the lead role prior to the start of the performance. Longer absences are often communicated via press releases. This is important because it alerts the audience to an unexpected change while giving them the confidence that the show will literally go on.

The same courtesy should be paid to your customers and stakeholders if a key person (particularly a very visible role like the CEO) is going to be absent for some time or is leaving the business for good. There are many examples of companies experiencing shareholder fallout because they failed to appropriately communicate key employee departures.

While you may not be able to publicly reveal the reason for the staffing change, you can restore confidence quickly if you explain how their absence will be handled, what succession plans are in place and/or highlight any potential flow-on impacts.

5. Financial mitigation

From time to time a headline actor may have to pull out of a production, and although the theatre has taken steps to ensure the show still goes on, there may still be some ticket holders who are no longer interested in attending the performance. This will have a financial impact on the theatre company, which needs to be taken into account.

In business, the financial impact of a key person’s absence may be less obvious, but nonetheless it should be factored into business planning and forecasts.

Just as you identify the key people and key processes in your business, you should also calculate the financial impact of the loss of a key person.

Some potential losses include:

  • fall in share price due to loss of named partner/CEO/founder
  • revenue fall due to loss of key sales generator
  • production delays due to staffing shortages
  • recruitment and onboarding costs for new hires

If you can predict these losses, you can employ strategies to insure against them or recoup costs.

As you can see, ensuring your business has a plan for managing key person risk is a must have in today’s disrupted work environment. When managed appropriately, risks can be transformed into opportunities and who knows, maybe a new star will be born?

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