Professor Malcolm McDonald provides an insight into how to sense and profitably manage the needs of key accounts with an extract from his new co-authored book.

Managing powerful customers profitably is perhaps the biggest issue facing suppliers today, as markets, particularly in Western Europe and America mature and as inexpensive versions of goods which were hitherto only supplied by the West flood into their markets from lower cost countries such as China.  One major response from most organisations it to put pressure on their suppliers because, as can be seen from figure 1 below, the easiest and quickest way to increase margins which are under pressure is to cut the price paid for external goods and services.

The problem with this approach, however, is that price cutting is finite (how many pence can be cut from a pound, cents from a euro or a dollar? etc), whereas value creation is infinite and is limited only by our creativity and imagination. 

So increasingly, purchasing directors are beginning to take account of the potential benefits of fostering a small number of truly strategic relationships with a privileged group of suppliers.  Such relationships however, are few and far between, because no organisation has the time or the resources to align their R and D, purchasing, manufacturing, logistics, IT, finance, service and other functions with the equivalent functions in their customers’ businesses in anything other than a few, special cases.
When it happens, however, our research at Cranfield has shown that such relationships are the well spring of profitability for both parties and totally justify the effort.

Key Account Management (KAM), then, is without doubt the major challenge facing business today and is fraught with difficulties in conceiving, planning and implementing it, involving, as it does, organisational change.

With over ten years experience at Cranfield of researching buyer/seller global best practice, we know what the requirements are for successful KAM. 

Without doubt, one of the biggest problems faced by organisations trying to improve relationships with major customers is how to understand their needs.

An overview of the total process, which we have called the business partnership process, is given in Figure 2

Figure 2
Business partnership process

Steps 1 to 2 should ideally be carried out by “headquarters” personnel otherwise there is the danger of several key account managers all duplicating the same tasks.

From step 3, it ought to be relatively easy to understand the customer’s position in its markets vis á vis its competitors (step 4)

It is always possible to extract valuable information from Annual Reports and other publicly available reports (step 5) which can be used in helping a supplier understand how their organization might be of assistance.   This information can now be put alongside the information gleaned from the previous objectives analysis summary in step 4.

From the same reports, it is often also possible to gather the following financial analysis for the customer.

Current Ratio  Measures the liquidity of a company – does it have enough money to pay bills?

Net Profit Margin       Measures the overall profitability of a company by showing the percentage of sales retained as profit after taxes have been paid.  If this ratio is acceptable, there probably is no need to calculate the Gross Profit of Operating Profit Margins
Return on Assets      Evaluate how effectively a company is managed by comparing the profitability of a company and its investments
Collection Period       Measures the activity of debtors.  Prolonged collection period means that a company’s funds are financing customers and not contributing to cash flow on the company
Stock Turnover        Evaluate how fast funds are flowing through Cost of Goods sold to produce profits.  If stock turns over, it is not in the plant as long before it is saleable as a product

The purpose of this analysis is to make the supplier acutely aware of the financial issues faced by the customer and to encourage the explanation of whether any of the supplier’s products and services could improve any of these ratios.

It will be obvious that any supplier who has taken the trouble to work out what impact its products and services have on the customer’s bottom line will be preferred to a potential supplier who focuses only on product features.

Step 6 involves using Porter’s Value Chain to investigate how a major account actually manages their core activities and can be a substantial task for a key account team, involving, as it does, an in-depth understanding of the detailed processes of the customer.  This could include, for example, understanding what happens when a supplier’s goods and services are delivered, where they are stored, how they are handled, how they are moved, how they are unpacked, how they are used and so forth.  The purpose of such detailed analysis is to explore what issues and problems are faced by the customer with a view to resolving them through improvements and innovations.

Selling to an organization can be a complex process because it is possible for a number of different people to become involved at the customer end.  Although theoretically only one of these is the buyer, in practice he or she might not be allowed to make a decision to purchase until others with technical expertise or hierarchical responsibility have given their approval.  Step 6 entails a detailed analysis of the customer’s influences, gatekeepers, users, buyers and decides across the buying process as a way of ensuring the right information is provided to the right people at the right time.

Steps 8 and 9 involve an analysis of the supplier’s history with the customer an the customer’s history with the supplier’s competitors.

Next steps

The painstaking key account analysis is now compete and a number of customer critical success factors (CSFs) will have been accumulated, together with specific ways in which the supplier’s products or services and processes can help.

Figure 3 describes a useful way of categorizing the supplier’s business solutions and approaches to the customer prior to producing a strategic marketing plan for the customer. 

The applications portfolio comprises four quadrants.  The quadrants at the bottom left and right are labeled “Avoiding Disadvantage”.  While the meaning of this label might be self-evident, it is nonetheless worth providing an example of this category.

Take, for instance, a bank considering buying automatic teller machines (ATMs) for use by customers outside bank opening hours.  Not having ATMs would clearly place the bank at a disadvantage.  However, having them does not give the bank any advantage either.  The majority of commercial transactions fall into this category.
The bottom left quadrant represents key operational activities, such as basic accounting, manufacturing and distribution systems.  The bottom right quadrant might include activities such as producing PowerPoint slides for internal presentations.

In contrast, the top two quadrants represent a real opportunity for differentiating a supplier’s offer by creating advantage for the customer.  The top right quadrant might be beta testing a product, service or process prior to making a major investment in launching it for the customer.

This latter point cannot be stressed enough.  The whole point of gathering so much information about the key account is to work out ways in which the supplier can create advantage for the customer.  Anything else is likely to be decided on price.

Figure 3
The applications portfolio

The reality of commercial life is that most of what any organization does falls into the avoiding disadvantage category.  However, leading companies adopt a proactive business approach.  They work hard at developing products, services and processes designed to deliver advantage for their major accounts, for it is clear that creative customer-focused suppliers will always be preferred over those who merely offer ‘me too’ products and trade only on price.

The KAM Best Practice Research Club at Cranfield has strong evidence to suggest that, once such an audit on a key account has been completed, if it is presented formally to senior managers in the account, the response is extremely favourable and, further, that additional confidential information is likely to be provided by the customer to enable the supplier to prepare a strategic plan for the key account.

The above is an extract from “Key Account Management: the definitive guide”, by Malcolm McDonald and Diana Woodburn (Butterworth-Heinemann, Oxford 2006)

Email: m.mcdonald@Cranfield.ac.uk
Web: http://www.cranfield.ac.uk 
Tel: +44 (0)1234751122