How key is a key person?
Ken Cook
Every business has key individuals who are important to the company's success. In a small company, it starts with the founder. A successful salesperson is important; the head of production or operations is important. As businesses grow, the number of people critical to ongoing success increases.
The loss of key people is a great vulnerability that can wake up senior leadership at 4 a.m. If you can't get back to sleep, then maybe take advantage of the extra hours by thinking through these seven factors. Understanding these issues should help you sleep better.
1. Is the person replaceable? The answer to this question lies with the level of proprietary knowledge a person has, and the skills they bring to the business. The more unique the knowledge or skills, the more difficult to replace them.
2. What would it cost to replace this person? Recruiter fees; attractive compensation packages; signing bonuses. Consider the time, not only interview time, but the time it takes for someone new to be fully effective. In some instances, we're talking years here, not months.
3. What's the loss if s/he is not replaceable? This should be a measurable variable. For example, if a manufacturer loses legacy knowledge with a retiring employee, and that knowledge has not been passed on, then it is lost. What is that knowledge worth? In terms of production capability? In terms of client impact? In terms of client relationships?
4. Is there a community/sphere of influence impact if this person is lost? For example, a key salesperson is a board member for the industry association. Or, they own the relationship with the top source of referrals for the firm. Will there be a negative perception in the industry? Will the referrals slow down or stop?
5. What is the internal impact if a key person leaves? Would other people leave if this person left the company? Do other employees look to a key person for information, support, morale boosts, leadership, etc.? Even if other people don't leave, what would the ongoing negative impact be if a key person left?
6. What revenues would be lost? This is a direct measurement of client impact. In almost every instance where a key person leaves a company, there are clients who react negatively. Some may leave immediately because their relationship with the company was tied to that person. Others may not leave right away, but would open the door for competitors to bid for their business.
7. What business relationships would be lost? Some relationships are direct revenue relationships. The previous question addressed this concern. There are also indirect revenue relationships. In this instance, we're talking about sources of business/referrals, industry influencers, media and partners to name a few. An exact measurement is difficult with these relationships since they are indirect and usually not consistent in their impact. However, it is worth thinking through this factor.
You've taken the time to think through these issues and questions, and develop solid data and quantitative assessments. It's time to head into the office. What do you do with this information and data?
First, ensure that key personnel are satisfied employees. If there are points of discontent, address them within reasonable bounds. But, don't be held hostage.
Second, for key people who are on the verge of retirement, make sure their legacy is retained in the firm. Figure out how to codify their unique knowledge.
Third, protect the firm. Doug McClure, President of Global Investment Strategies, is my go-to person for complex insurance issues. As is almost always the case, Doug took this complex question about key people and streamlined it to a clear solution. Doug's advice? Investigate key man insurance policies on the critical personnel who would have profound and lasting negative impacts on the firm if they left or retired.
As Doug shared, a business insures the trucks, buildings, equipment, etc. needed to keep the company going. If people are truly the most important asset a company has, then it only makes sense to insure the key people in that asset pool. Doing otherwise is fiduciarily irresponsible.
Ken Cook is the co-founder of How to Who, a program on how to build strong relationships and how to build business through those relationships. Learn more at www.howtowho.com.
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