Glossary term
Key Person Dependency
Subject: Risk Management, Operational and Model Risk
Also known as: Key Man Risk, Key Person Risk
Key person dependency is the exposure that arises when a business relies so heavily on one or a few individuals that losing them through illness, exit or death would disrupt operations, client relationships or decisions.
Explanation
The reliance can sit in knowledge, relationships, authority or a single technical skill. A founder who holds every major client contact, an engineer who alone understands a legacy system, and a trader whose book nobody else knows are typical cases. The risk is greater in small firms and in specialist roles. It becomes visible only when the person leaves, which makes it easy to overlook. Organisations manage it through succession plans, cross-training, documenting procedures, sharing client ownership and holding key person insurance, which pays out if the individual dies or is incapacitated. Lenders and investors also ask about it when judging small companies. A new hire can be found in weeks, but knowledge that was never written down takes far longer to rebuild.
Example
One senior developer at a software company maintains the billing engine and has never documented it. When he resigns with one month's notice, no one else can fix a month-end failure. The firm hires a contractor to reconstruct the logic, pays for a rushed handover and starts a rule that each system must have two named engineers.
Not to be confused with
- Succession planning
- Succession planning is one way to reduce the exposure. Key person dependency is the exposure itself.