Key Account Management

Joel Le Bon, Carl Herman

• Publisher: Business Expert Press
• Year: 2015
• ISBN:
  9781631571756
• Topic: Business
• Subtopic: Sales
• Index: Business

Now more than ever, companies are faced with a critical and challenging truth. Today's customer is demanding more attention, superior service, and the expertise of a dedicated sales team. Suppliers must make dif cult choices to determine how to allocate limited resources, including which customers receive the highest level of service. Increasingly, supply side organizations are working to design and implement key account programs to meet or exceed these expectations. Key account management is a specific business strategy that involves complex sales processes, large-scale negotiations, and the alignment of multiple internal and external stakeholders. This multi-pronged process is anything but straightforward, and the business world is filled with examples of key account programs that have not achieved the expected results. This book addresses the strategic challenges facing top executives and sales leaders as they build strategies to better manage their key accounts. By leveraging up-to-date research, testimonials drawn from interviews with experienced practitioners, best practices of successful companies, along with straightforward practical guide-lines for executives and sales leaders, this book can serve as an instruction manual and toolbox for organizations working to achieve success through their key account strategies to meet the demand of their key customers.

CHAPTER 1

Key Account Management,
Organizational Alignment,
and the Selling Center

In many ways a firm’s most valuable financial asset is its customer base.

—Don Peppers and Martha Rogers

Setting up a key account program and strategy requires a careful analysis of the customers as assets, along with the suppliers’ strengths and weaknesses. Because selling to large customers consists of multiple stakeholders, key account programs should be built upon a clear vision and specific organizational resources which need to be aligned. In this chapter, we specify the criteria that help define key account customers and define selling centers’ structure and behavior. We also provide a framework for aligning the selling center with the key account strategy.

From Treating All Customers Alike to a Key Account Strategy

Customers as Assets and Key Accounts

Workman, Homburg, and Jensen define key account management as “the performance of additional activities and/or designation of special personnel directed at an organization’s most important customers.” They further define key account management effectiveness as “the extent to which an organization achieves better relationship outcomes for key accounts in comparison with average accounts.”¹ Key account management represents a specific business strategy involving complex sales processes, large-scale negotiations, and the alignment of multiple internal and external stakeholders. The decision to implement a key account program stems from two separate conclusions reached by a supplier:

• Our largest and best customers are critical to our success and must be managed differently.

• To ensure our success with these critical clients, we must proactively change our organization.

When it invests in a key account management process—identifying key accounts, gaining an understanding of their business and their needs, and designing a sales effort to meet those needs and then anticipate what’s coming next—the supplier side anticipates the long-term retention and growth of its most valuable client resources. Yet the multi-pronged processes for achieving these outcomes are anything but straightforward, and the business press is filled with sad examples of key account programs that have fallen short of expectations. Therefore, this chapter begins with some suggestions for helping managers in a supplier organization arrive at the two key conclusions.

Multiple factors lead to the company’s ultimate decision to shift its organizational perspective to recognize the primary importance of its most valued accounts. To understand the factors that lead to this shift, this chapter explores both historical customer relationship trends and some persuasive customer management concepts. Taken separately, each element makes a case for a key account focus; taken together, they leave little doubt that making the strategic decision to transition to a key account strategy is determinant of the continued success of most business-to-business (B2B) suppliers.

Historical Trends Supporting a Key Account Strategy

In his 2001 book Key Account Management and Planning, Noel Capon identifies three multi-decade trends that have prompted greater reliance on key account strategies:² (i) increasing account concentration, (ii) the rising importance of procurement, and (iii) changes in the supply chain or the procurement process. To this list, we add (iv) the expanded use of technology to manage key accounts.

Increasing Account Concentration. The consolidation of buying power in the B2B sector over the last decade has increased the importance of key account management.³ There has been a trend since the middle of the 20th century from industries with many small and medium businesses to oligopolistic industries with a small number of very large companies. In 1972, 16 percent of the packaging industry’s revenue came from five customers. By 1996, the industry’s top five customers were responsible for 76 percent of revenue.⁴ Looking at it from another angle, the value of public (large) companies as a percentage of current gross domestic product is two and one-half times what it was in 1980. Further, adjusted for inflation, the 500th largest industrial corporation in 1955 had revenues of $436M; in 1980, $1,242M; and in 2013, $4,955M—more than a 10-fold increase, in today’s dollars, in the size of the 500th largest company.⁵

These rising sizes parallel an oligopolistic trend in many industries, driven by factors such as globalization, size-based efficiencies, and merger and acquisition activity. Thus industries as varied as the financial services, health care, airlines, automotive, and energy sectors all have experienced significant consolidation.

Whatever the reason, suppliers have fewer and larger customers than in the past, which makes each of these huge customers more important. To grow, suppliers must pursue this shrinking customer list, and the financial impact of losing just one customer is substantial.

The Rising Importance of Procurement. Similar to a trend in many business schools, supply chain management is the fastest growing major at the Bauer College of Business at the University of Houston. In Houston, as elsewhere, demand for undergraduate students with a strong educational background in supply chains is intense, driven primarily by the large global companies with operations in the area. Manufacturing and production also are becoming more capital and equipment intensive but less labor intensive. In turn, purchasing expenses, as a percentage of revenue, are increasing, whereas the labor expense ratio is decreasing, which also makes the procurement function more important.

Many companies also are divesting themselves of their non-core businesses, rather than persisting in the previous trend toward vertical integration. The focus on core concentration increases the importance of procurement, because companies now must purchase materials and services that they might have sourced internally in the past.

Finally, demand for lean manufacturing techniques, which prioritize the speed and accuracy of the supply chain, makes procurement capabilities even more important. As Dave Schneider, Continuous Improvement Manager at Dell America, notes, “our close relationships with customers and suppliers allow us to know what we must be able to supply in real time, and then very quickly and precisely meet that demand while maintaining low inventory.”⁶

Changes in the Supply Chain or the Procurement Process. As Dan Domeracki stated when he was Vice President of Government and Industry Relations and former Director of Global Accounts at Schlumberger International, “in the last three years, our largest, most important global accounts have implemented strategic sourcing and strategic procurement practices.”⁷

In the late 1990s, Chevron rationalized its global supplier list by reducing its total number of suppliers by 80 percent, then segmenting the remaining 20 percent into five categories. The top two segments were designated “strategic,” and suppliers in these two top tiers were essentially required to create a key account program for Chevron. Between the late 1980s and mid-1990s, General Motors reduced its suppliers by 45 percent, from 10,000 to 5,500; in a similar period, Motorola instituted a 90 percent reduction, from 5,000 to just 500 suppliers.⁸

Even as procurement has become more centralized, it has gone global. In a recent project the authors of this book undertook, we provided services to a Fortune 100 industrial services firm. After signing the contract in Houston, we delivered the services throughout Texas and the Midwest, but the client’s procurement functions had been centralized in Manila. Such simultaneous centralization and globalization of procurement can strain existing seller–buyer relationships in many companies, which may be the intended goal. By minimizing the significance of these relationships, a greater emphasis can be placed on price and procurement terms.

The supply chain and procurement functions have become much more strategic at many companies. It is a competitive differentiator for such diverse companies as Dell, Apple, Southwest Airlines, BP, Procter and Gamble, and Wal-Mart. As supply chain management becomes a more critical component of a firm’s overall strategy, the supply chain function and management become more important in the organization, often becoming a member of the C-Suite reporting directly to the President or CEO. This is the reality that Dan Domeracki at Schlumberger referred to above. Today, the Schlumberger global account directors that work with Schlumberger’s largest customers, such as Exxon, BP and Chevron, work with senior supply chain executives that report to the President or other members of the C-Suite. Just a few years ago their relationships were with mid-level procurement managers in each of their customer’s business units.

The Expanded Use of Technology to Manage Key Accounts. Since Capon’s seminal work, changes in technology have had a profound effect on a supplier’s relationship with all its customers. The impact on a supplier’s most important customers can be a positive one, increasing the mutual value of the relationship, or a negative one making it easier for a customer to switch suppliers. We will discuss four major changes in key account relationships caused by recent technology innovations:

1. Supply chain integration

2. Collaboration and communication

3. Innovation and co-creation

4. The impact on the cost to switch suppliers

One of the most important technology innovations of the last few years is the integration of a customer’s complex supply chain among multiple suppliers. In many cases today’s largest customers require this integration from their suppliers. One well known example is Procter and Gamble’s (P&G) integration with Wal-Mart. P&G monitors inventory levels for its products at Wal-Mart stores and is responsible for delivering the right amount of product to the right stores at the right time. This is an example of the integration of the buying and selling process within the supply chain. Another example from the B2B sales world would be the integration of the request for information (RFI) to payment process. In this case communications and information technology solutions integrate the RFI to request for proposal (RFP) to procurement process; then the procurement to delivery process; then the delivery to invoice to payment process. Leaders in the IT industry have this integration with their customers today. IBM, Microsoft, Dell, and Apple all provide direct supply chain and payment integration through their websites with their best customers’ procurement organizations. They also provide a level of direct, project-related support using today’s available technology. Grainger, a multi-national supplier of commercial and industrial operating products, uses information technology to seamlessly integrate their maintenance and repair (M&R) supplies system with their best customers’ stores inventory, contractually allowing Grainger to automatically place orders as needed. This use of technology significantly increases the competitive barrier to Grainger’s competitors and helps reinforce Grainger’s importance to its most valued customers.

Technology has also been the catalyst for sales organizations to adopt a leading-edge use of collaboration and communication technology, which can increase the value and “stickiness” of a company’s key account relationships. Today’s technology includes the ability to easily collaborate and communicate. This means geographically and functionally dispersed buying centers collaborate on significant procurements. Equally globally and functionally dispersed selling centers collaborate on significant sales opportunities. And, in the key account environment, buying centers and selling centers all geographically and functionally dispersed collaborate together increasing efficiency and, for the selling center, creating a potential barrier to competition. The selling center is described later in this chapter, the buying center is discussed in Chapter 2, and the ability for all these groups to communicate and collaborate is described in Chapter 3 when we discuss customer relationship management (CRM).

Looking only slightly forward into the future the impact of technology includes the ability to integrate the product development and innovation processes into co-creation opportunities. In fact, a willingness to collaborate on design and development was a requirement for many suppliers bidding to become part of the Boeing 787 Dreamliner team.

Switching-costs, the cost a customer company incurs when switching from one supplier to another, have major implications for a company’s relationship with its most important customers. In the past, suppliers had the small comfort of knowing that, in order to coax a customer away, a competitor would need a truly significant advantage, since minor discounts or slight differences in quality and service often did not warrant the cost the customer would incur during the process of switching suppliers. In short, it was expensive to change vendors and products. Suppliers had that knowledge and felt a little more secure in their customer relationships because of it.

Because of technology, the tasks of researching, negotiating, purchasing, and learning to use new products and services are commonplace outside the customer’s organization. Just a fe...