Feature

posted 27 Aug 2003 in Volume 6 Issue 4

Key account management: The cutting edge of business-to-business client development

Consolidation in the marketplace has created a fierce battlefield for firms competing for the biggest clients. For those who fail to think ahead, it will be a long-term struggle for short-term survival, and many will fall by the wayside along the way. Professor Malcolm McDonald, professor of marketing and deputy director at the Cranfield School of Management, argues the case for key account management in this difficult landscape, explaining how it can turn hardship into opportunity and profit.

Consider the plight of many business-to-business companies. Their big clients are growing, going global, snapping up competitors large and small, and morphing into muscle-flexing monsters. A very few large clients typically contribute 60 to 80 per cent of turnover for these companies. Greater market concentration means that any one of these clients would be very hard to replace. Needless to say, suppliers are responding with extra special treatment for them.

On the positive side, the potential opportunities are extremely exciting, provided that suppliers can deliver to these clients exactly what they need. For example: suppliers can grow as the client’s own volume expands; new areas of business become accessible; and substantial cost savings are possible for both sides. However, this Garden of Eden does contain a few snakes:

Very demanding clients;
Understanding these huge clients is complex and requires exceptional skills;
Delivering promises of tailored solutions is an organisation-wide activity that is hard to manage;
Suppliers have a limited capacity for intimacy and can only select a handful of clients with whom to develop high-involvement relationships;
Competition is fierce, even desperate.

Key account management (KAM) is the process by which the supplier aims to deal with these issues. Clearly, KAM is much more than a selling process, and involves the development of a relationship with the client that consists of more than ad-hoc transactions.

Large-buying companies expect special treatment. They themselves face fierce competition, and must seek new routes to competitive advantage and value for their clients. Today, buyers naturally look to their suppliers to help them achieve their aspirations. Whether they are directly or indirectly involved, companies in a modern supply chain are more closely connected than ever before.

As buying companies, like selling companies, can only handle a limited number of close relationships with suppliers, they must be the key suppliers who are important to the fulfilment of their objectives. At the same time, the supplier should decide what this client could contribute to its own strategic objectives. Its limited capacity for intimacy must not be squandered on the wrong clients.

First of all, a supplying company needs to understand whether it has the opportunity to be one of the client’s key suppliers. The chances are small if it is one of many competitors, is in a weak position relative to the client or supplies a service that does not contribute to the client’s strategic critical path. If and, generally speaking, only if buyer and seller positions and strategies are complementary, will it be possible to develop the relationship beyond a fairly simple level.

KAM has evolved gradually. It has its roots in various developments and breakthroughs in fields such as industrial marketing, sales and purchasing management, the psychology of client behaviour, and relationship marketing.

As the relationship develops, and the role of the client evolves from anonymous buyer to something approaching a business partner, the level of involvement becomes correspondingly more complex. There are some characteristic positions along the evolutionary path: exploratory KAM, basic KAM, co-operative KAM, interdependent KAM and integrated KAM. Each of these development stages is distinct because of the particular issues impacting on the relationship at the time.

As with personal relationships, the business relationship can founder on a number of scores, ranging from a relatively minor misunderstanding to a massive breach of trust. Also, over time, the market position and priorities of both partners may change, obviating the strategic need for a close relationship. Nonetheless, if all mishaps are avoided, KAM will create an ever-upward, positively developing relationship.

Exploratory KAM could be described as the “scanning and attraction” stage: seller and buyer send out signals and exchange messages before deciding to get together.

Broadly speaking, both parties are interested in reducing costs. The supplier wants clients with a high standing in their respective markets, as these offer the prospect of high-volume sales over a lengthy period. The buying company wants to safeguard the quantity and quality of its supplies. Both parties instinctively recognise the advantages of a lasting commitment over ad-hoc, tentative arrangements. To this end, commercial issues such as product quality and organisational capability are more important than establishing social bonds, and selling skills are paramount in the inevitable discussions that take place about price.

As in the early stages of any relationship, neither party is likely to disclose confidential information at this point. Trust is a delicate plant and must be cultivated with care.

At the basic KAM stage, transactions have begun and the supplier’s emphasis shifts to identifying opportunities for account penetration.

This means the key account manager will need a great understanding of the client and the markets in which it competes. The buying company will still be market testing other suppliers for price in its quest for value for money. It is essential, therefore, that the selling company concentrates on the core product and its surroundings, including all the intangibles, to tailor-make a client-specific package. One of the early things the seller should do is simplify its systems to make them more client-friendly.

By the co-operative KAM stage, trust has developed and the selling company may be a preferred supplier. However, the buying company may not be prepared to put all its eggs into the one basket and will test the market to check alternative sources of supply.

Growing trust is accompanied by a greater willingness to share information about markets, short-term plans and schedules, and internal operating systems. This means that staff in both companies will communicate with each other, forging links at all levels from operations to the boardroom.

Companies reaching this stage of co-operation realise that client service operates at many levels and is driven by a desire not to let down personal contacts. It is this that gets results, not the patronising “statements of intent” or “client charters” sometimes favoured by companies.

But this is also a dangerous wobble stage, as people in the supplying company come and go. Also, it is not a highly organised relationship, so there are many things that can go badly wrong.

By the time interdependent KAM is reached, the buying company sees the selling company as a strategic external resource – the two will be sharing sensitive information and solving problems together.

Such is the level of maturity of both parties at this stage, that each will allow the other to profit from their relationship. To that end, pricing will be long-term, perhaps even fixed.

There is also a tacit understanding that expertise will be shared. Much of this will be directed into product improvement or simplifying the administrative systems that underpin all the commercial transactions.

At this level, the various functions of the buyer and seller company communicate directly. The role of the key account manager and the main buyer is to oversee the interfaces and ensure that nothing happens to discredit the partnership.

Partnership agreements will be long-term, some as long as three or four years. For some there are no limits. Even so, partnership agreements normally contain strict performance criteria, which, in the spirit of partnership, the selling company must meet consistently and to the highest possible standards.

The seller/buyer relationship can extend beyond partnership. Integrated KAM is where the two sides come together to create value in the marketplace greater than either could create individually. The two companies operate as an integrated whole, though they still maintain their separate identities.

The interfaces at all levels now function independently of the key account manager. The role is not redundant, but the incumbent can take a far more strategic approach.

The borders between the buyer and seller are now blurred. Focus teams, made up of personnel from both companies, generate creative ideas and overcome problems. The key account manager and the main buyer contact merely co-ordinate their efforts.

Nothing is allowed to get in the way of creative outcomes. Electronic data systems are integrated, information flow is streamlined, business plans are linked and the once unthinkable is now willingly explored.

About the only issue that remains sacrosanct for the selling company is its brand. It should reject any requests from the buying company that could undermine this.

Personal relationships provide a guide for companies that need to decide which relationship is appropriate for any given client. Most people have a lot of passing acquaintances, where the relationship hardly extends beyond a nodding “good morning”. At the other end of the scale are warm and intimate relationships with family and friends.

If we reversed our behaviour towards these two groups, we would be seen as mad. Nor would we want the kind of intense relationship we have with our best friends with everybody we meet. Not only would it be inappropriate, but we would also lack the emotional resources to handle it.

Likewise, organisations lack the resources to run all their KAM relationships at the integrated level, even if it was appropriate to do so. Like us, they too have a spread of relationships and they can decide which relationships they would like to improve, stay the same or cool.

Unlike us, however, organisations should not be ruled entirely by the heart. All their relationship decisions should be guided by strategic considerations based on the business potential to be gained from each client. This is because the investment in time, people and resources made in the relationship must be justified.

Relationships tend to evolve and the speed of progress is largely determined by the rate at which the buyer and seller can develop the necessary levels of trust. Therefore, companies may well have key accounts at a number of different levels.

Most readers ought to be able to recognise their own KAM relationships in these descriptions, because they all appear to go through these stages, even if they “stick” at one particular level for a long time. The evolutionary nature of development also makes it possible for a particular relationship to be in a transitional phase, somewhere between any of the two stages described above.

Identifying where relationships are now is a helpful indicator of what lies ahead and its implications for the organisation and staffing. Here, the role of key account manager will be a critical ingredient of success.

A little thought will expose the inadequacies of systems that classify key accounts into simple categories such as A, B and C. Most companies are judged by profit, so clearly key accounts should be classified according to the potential of each for growth in profits over, say, a three-year period. Cranfield research shows that the four most popular criteria used to do this are:

Available size of spend;
Margins available;
Growth rate;
Purchasing criteria and processes.

Each of these is weighted and scored, so that each key account appears on a kind of barometer, which ranges from low to high, according to each account’s profit-growth potential.

Setting objectives and strategies for each account

Accounts with low potential/high strengths: Common sense would dictate retention strategies, as these accounts are likely to continue to deliver excellent revenues for some considerable time, even though some of them may be in static or declining markets. This is especially possible because the company is already enjoying good relationships with the account, which should be preserved.

Prudence, vigilance and motivation are essential here. Crucially, companies should be seeking a good return on their previous investments, and any financial investment should be mainly of the maintenance kind. This way, it should free-up cash and resources for investing in key accounts with greater growth potential.

Accounts with high potential/high strengths: This is where companies will derive most of their profit and sales growth. Here, an aggressive investment approach is called for, providing the returns justify it. It is probably appropriate to use net-present-value (NPV) calculations as a basis for evaluating these returns, using a discount rate higher than the cost of capital to reflect the additional risks involved. Any investment here will probably go on developing joint information systems and relationships.

Accounts with high potential/low strengths: These pose a problem, for few organisations have sufficient resources to invest in building better relationships with all accounts falling in these boxes. Therefore, for each account, net revenue streams should be forecast for three years and discounted at the cost of capital (plus a considerable percentage to reflect the high risk involved) in order to evaluate which ones justify investment. Having done this, and selected those to invest in, under no circumstances should financial-account measures such as NPV be used to control them – it would be like pulling up a new plant every few weeks to see if it had grown.

Measures such as sales volume, value, “share of wallet” and the quality of the relationship should be set as objectives. Selected accounts then move gradually towards interdependent and integrated relationships, when it will be appropriate to measure profitability as a control procedure.

Accounts with low potential/low strengths: These should not occupy too much of a company’s resources. Some can be handed over to third parties, while some can be handled by an organisation’s own personnel, providing all transactions are profitable and deliver net-free cash flow. If some of these accounts are big and demand low prices, it is probably worth giving them discounts for the volume, but service levels should be commensurate with the low margins enjoyed.

All other company functions and activities should be consistent with the goals set for key accounts according to this broad categorisation. For example, some key account managers will be extremely good at managing accounts in the exploratory, basic and co-operative KAM stages, where selling and negotiating skills are paramount. Others, meanwhile, will be better suited to managing the more complex business and managerial issues surrounding interdependent and integrated relationships.

All companies in the Cranfield research rated selling and negotiating skills as a prime requirement for key account managers, whereas all buying companies rated trust and the ability to make strategic decisions as most important. Indeed, many will not even allow a salesperson to lead the key account team. The key task in key account management is matching the person to the key account. At the interdependent and integrated stages, general management skills will be required of the key account manager.

Observation suggests that the incidence of each type of relationship declines as the degree of sophistication and involvement increases. There are very few integrated relationships to be found, and even interdependent ones are limited in number. In fact, our research shows that suppliers tend to over-estimate the stage of relationship they have reached: clients often do not view it in the same way. Indeed, some suppliers are reluctant to admit that their capacity for intimacy is restricted. We have even come across companies that have allocated 50 or 60 key accounts per key account manager, which is patently silly.

Clearly, the nature of the relationship between the buying company and the selling company has a strong influence on what can be achieved with a client. To begin with, a supplier in close communication with its client is in a good position to gain the deep understanding required to develop creatively tailored offers. However, a supplier with a basic or a co-operative relationship, even where the client is quite positive towards the supplier, is not sufficiently close to the buyer to have enough information on which to base better-targeted offers.

For example, compared with a supplier in a co-operative relationship, a company with an interdependent relationship is more likely to be admitted to new product-development projects. This alone potentially offers a major advantage over competitors. Suppliers with basic or co-operative relationships are largely “out in the cold” and, therefore, “in the dark”. Breaking out of this self-perpetuating cycle is not easy. Effective KAM is based on a deceptively simple three-step process:

Acquire a deep understanding of the client’s environment, its drivers and its objectives;
Discover or deduce the client’s strategic response to its markets and how it relates to suppliers;
Develop the relationship with the client in order to devise solutions to match its specific strategy and needs.

KAM requires a special form of client-relationship management, which differs in that it is based on a ratio of one supplier to a few, select buyers. This ensures relationships that are exclusive rather than inclusive and deep rather than wide.

Reference:

Adapted from a model developed by Millman, A.F and Wilson, K.J., “From key account selling to key account management” (1994)

Professor Malcolm McDonald is professor of marketing and deputy director at the Cranfield School of Management. He can be contacted at: m.mcdonald@cranfield.ac.uk.