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key-man risk can be detrimental to a company's success

 

We’ve all been there. After toiling thanklessly for years, an unnoticed cog in the corporate machine, by accident or good fortune you suddenly find yourself a subject-matter expert, the ‘go-to’ person, for a particularly complex, technical, perhaps rather dull aspect of your team’s work. As you reflect on your new indispensability, you may well wonder how your team and firm could possibly manage without you – until that little voice in your head reminds you: no one is irreplaceable. But while this may be true, any hiring manager will tell you that it is far from the whole story. There is, in fact, such a thing as ‘key-man risk’.

Replacing a key man or woman – an individual with extensive knowledge, skills and experience – can be costly, as well as time consuming; according to the Hays UK Salary and Recruiting Trends Report 2017, 35% of employers are unable to access the talent they need and 77% of employers name their top challenge as a lack of suitable applicants. The risk that a firm incurs losses because a ‘key person’ has either left or is unable to work is known as ‘key-man risk’.

Loss leaders

Besides the inconvenience, losing a key man can lead to financial losses as business continuity (loss of knowledge or skill) or profitability (loss of leader or income generator) take a hit. The impact of a well-known income generator’s fall from grace or the resignation of a respected CEO can often make the headlines, and reputational damage is notoriously difficult to repair. Nowhere is this truer than in financial services, where a firm’s success depends on its ability to win and retain clients’ trust and confidence. Within investment management, perhaps the greatest risk is posed by ‘star fund managers’ whose actions or departures can have a disproportionate impact upon a firm’s reputation and share price.

The fate of investment manager Gartmore serves as a cautionary tale. Caught in a perfect storm of key-man risks, the firm’s share price more than halved within two years of being floated on the stock exchange, following the then FSA’s investigation into one of its key traders – who later resigned. Gartmore was sold in 2011 to Henderson Global Investors, after the simultaneous resignation of its leading fund manager and retirement of its chief investment officer.

Sharing economics

You may be thinking, “So what? These risks don’t apply to my business!” Wrong! Key-man dependency exists in all businesses and sectors, at all levels of seniority. Both human error and cost cutting were blamed for the recent British Airways IT system failure, but when firms fail to assess and mitigate their exposure to key-man risk, they can find their business continuity threatened by the absence, even for a short period of time, of a key man or small number of key staff.

Increasing cost pressures in financial-services firms mean that many marketing and communications departments have suffered cuts. When teams shrink, workloads grow, and the breadth and depth of knowledge can suffer as a result, especially when it comes to complex areas such as regulatory expertise. Over time, the knowledge required to maintain business continuity can become concentrated among a small number of junior team members, who can themselves then pose key-man risks in terms of business continuity, especially as they are generally on the shortest notice periods.

Unsurprisingly, employees occupying key-man roles in firms that do not recognise or mitigate the risks are more likely to suffer from stress, be reluctant to take annual leave and have a poorer work/life balance. When responsibility is not appropriately spread, individuals are denied the opportunity to grow professionally. The more embedded this culture becomes, the greater the likelihood that each individual will further specialise within the confines of his or her own job descriptions, thereby increasing overall key-man risk.

 

Keep key-man risk down to ensure your employees have a healthy work/life balance

Concentration? Mitigation!

This is by no means an uncommon scenario; most firms have little awareness of their exposure to key-man-dependency risk or the dramatic impact it can have upon their reputations and employees. The good news is that there are four simple measures to help address this risk.

1. Cross training

No, not an exercise at the gym, but an easy win in key-man-dependency risk management! Cross training your team maximises collaboration and innovation. Moreover, a fresh pair of eyes on a task will often discover ways to improve a process or spot risks in a current practice. A cross-trained team can provide seamless cover for each other, quality control one another’s output and are more likely to feel challenged and stimulated by acquiring new skills and experience. But the process should be ongoing: this can be achieved by rotating regular tasks around the team and ensuring more than one team member is involved in all ad-hoc project work.

2. Systemisation

I won’t lie: this one can be unpopular. In practice, this means getting employees to write guides, handbooks, processes and procedures on the activities that comprise their day job in sufficient detail that another person could pick them up should they fall under the proverbial bus. Some gentle incentivisation can help, especially when it comes to those individuals (you know who you are) who prefer not to share hard-won knowledge of the idiosyncrasies of their job. However, done well, systemisation is an invaluable way to mitigate key-man risk, to ensure you have procedures (compliance will love you) and that they remain up to date. Once documented, processes can be reviewed more easily and dispassionately, and any risks or inefficiencies that may have previously remained hidden can be addressed.

3. Succession

Though a common method for addressing key-man risk (indeed, it’s a regulatory requirement for certain roles), succession planning frequently concerns only the most senior positions in the firm, with little or no thought given to other roles. However, team or departmental managers can still undertake their own informal succession planning by being aware of their team’s skills, preferences and potential career trajectories and by ensuring, where appropriate, that junior employees are gaining the right experience and training to prepare them to replace more senior employees in due course.

4. Updating job descriptions

Another unpopular initiative! Team members (managers included) should update their job at least once a year or following any significant change. Tied in with an annual review, this helps capture any overt change or ‘role creep’ that has taken place over the year, giving managers the opportunity to document and recognise an individual’s progression. By including shared or rotating tasks in job descriptions, managers remain aware of coverage levels across the team, and can shuffle tasks or plug any gaps as necessary. Critically, up-to-date job descriptions help to identify the key men and women in the team, facilitating ongoing risk mitigation and succession planning.

Conclusion: stand by your key (wo)man and you might just keep them!

Obviously, your employees adore their jobs, love their manager, are entirely fulfilled by working at your firm and will never leave. But by engaging with your firm’s key-man risk exposure and using these mitigation tactics, your employees can benefit from better a work/life balance, less stress and a collegiate, collaborative working environment. Key-man risk mitigation is an easy and effective way to enhance employee satisfaction. And it’s no secret that happy employees, including key ones, are more likely to stay.

Reducing key-man risk can make your company a happier place to work

Use these tips to ensure a happy working environment!

Joanna Murphy

Joanna Murphy

Jo joined Copylab in November 2016. She read Hispanic studies and Russian at Nottingham University and holds a master’s degree in Translation and Editing from Bath.
Joanna Murphy

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