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Becoming Succession Ready: Key Person Reliance

When contemplating your practice succession, it is essential to consider the potential risks in your business and how your successor will view them. Key person reliance is a risk that can considerably negatively impact your practice succession.

Key person reliance in a professional service firm refers to the firm's dependence on one or a few key individuals for its operations, revenue, and/or reputation. These key people are often the owners, partners or key employees with specialised knowledge, skills, or relationships critical to the firm's success. Their absence or departure can significantly impact the firm's ability to operate, generate revenue, and maintain client relationships. Key person reliance can also limit the firm's ability to scale, diversify, and respond to changes in the market. This can create a risk to the firm's continuity and succession and may affect the motivation and engagement of other employees. Key person reliance will be viewed negatively by a potential successor and will likely impact the value of your practice.

Key person reliance can present several challenges, including:

  • Difficulty in replacing key personnel: If a key person leaves the firm, finding and training a suitable replacement can be challenging, especially if that person has specialised knowledge or skills

  • Dependence on a single individual: If a key person is responsible for a significant portion of the firm's revenue, the firm may struggle if that person is unavailable or leaves the firm

  • Limited scalability: A firm heavily reliant on a key person may find it challenging to grow or expand the business without increasing the risk of losing that person

  • Lack of employee engagement and motivation: When a firm relies on a key person, other employees may feel undervalued and demotivated, leading to a high turnover rate and a lack of commitment to the firm

  • Reduced competitiveness: Reliance on a key person can make a firm less adaptable to changes in the market, less able to respond to client needs, and less able to innovate

  • Business continuity risk: If a key person is unavailable, it can disrupt the smooth operation of the firm and lead to delays, errors and lost revenue

  • Succession risk: With a proper plan in place, it can be easier for the firm to continue its operation if a key person can no longer fulfil their role, which will harm the value of the business.

The immediate solution to key person dependency risk is to identify and document the organisation's critical knowledge and remove the dependency on the key individual.

By following the following steps, you can minimise the impact of key person reliance on the business and ensure continuity of service to clients.

  • Cross-training employees: Encourage employees to learn and understand their colleagues' tasks and responsibilities to step in if a key person is unavailable. This also includes building relationships with clients across multiple team members, so clients have different contact points within the firm

  • Documenting procedures: Ensure that all essential functions and processes are well-documented and easy to follow so that anyone can quickly pick up where a key person left off

  • Maintaining client dossiers: Document all internal knowledge about clients so that necessary client knowledge is preserved if a key person were to leave the firm. This process should be completed annually to ensure critical client knowledge is up-to-date and documented

  • Developing a continuity plan: Identify key roles in the firm and actively evolve the required skills and knowledge across the team so multiple resources can take on more responsibility if needed

  • Building a solid team: Encourage collaboration and teamwork within the firm so that employees feel comfortable relying on their colleagues for support and assistance

  • Outsourcing: Consider outsourcing specific tasks or services to reduce reliance on key personnel or to provide backup support in case of absence

  • Building a network of experts: Establish a network of experts, partners or other firms that can help when key personnel are unavailable or specific expertise is needed

  • Leveraging technology: Invest in technology to automate repetitive tasks and provide remote access to critical data and systems so that employees can work more efficiently and effectively.

Addressing the risk of key person reliance will have a considerable positive impact on protecting your business's future value as you progress forward with your succession plans.


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