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Key Account Management

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Key Account Management

The Definitive Guide

Third edition

Diana Woodburn and Malcolm McDonald

A John Wiley & Sons, Ltd, Publication

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This edition first published in 2011 Copyright# 2011 Diana Woodburn and MalcolmMcDonald

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Designations used by companies to distinguish their products are often claimed as trade- marks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject mat- ter covered. It is sold on the understanding that the publisher is not engaged in render- ing professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought.

Library of Congress Cataloging-in-Publication Data McDonald, Malcolm.

Key account management : the definitive guide / MalcolmMcDonald, Diana Woodburn. — 3rd ed.

p. cm. Includes bibliographical references and index. ISBN 978-0-470-97415-5 (pbk.) 1. Selling—Key accounts. 2. Marketing—Key accounts. I. Woodburn, Diana.

II. Title. HF5438.8.K48M35 2011 658.8004—dc22

2010045341

ISBN 978-0-470-97415-5 (paperback), ISBN 978-0-470-97475-9 (ebk), ISBN 978-0-470-97473-5 (ebk), ISBN 978-0-470-97472-8 (ebk)

A catalogue record for this book is available from the British Library.

Typeset in 10/12pt Palatino Roman by Thomson Digital, Noida, India. Printed in Great Britain by TJ International Ltd, Padstow, Cornwall, UK

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Contents

Foreword by Martin Lamb vii Acknowledgements ix The purpose of this book x Before you read this book! xiv List of figures and tables xvi

1 The crucial role of key account management 1

2 Selecting and categorizing key customers 25

3 Relationship stages 53

4 Developing key relationships 87

5 The buyer perspective 113

6 Key account profitability 145

7 Key account analysis 173

8 Planning for key accounts 207

9 Processes – making key account management work 257

10 The role and requirements of key account managers 291

11 Performance and rewards in KAM 323

12 Organizing for key account management 363

13 Transitioning to KAM 391

Further reading 417 Integrated fast track 421 Mini-cases 443 Index 467

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Foreword

I find it truly amazing that it is only in the past decade that key account management (KAM) has emerged as a major discipline in its own right. Even more surprising is that most business schools resolutely refuse to include it in their curriculum, preferring to stick with the perennial four ‘Ps of marketing’, which, while still relevant, are totally dependent on getting the strategy right for the new breed of powerful, global customers, who now demand seamless service from their sup- pliers in every country of the world where they operate.

Cranfield is a shining exception to the rule. In 1996 the first structured research was done on best practice key account management under the leadership of Professor Malcolm McDonald and Diana Woodburn. The current KAM Best Practice Research Club is a sophisticated exten- sion of those exciting, earlier forays into best practice key account management.

The implications for suppliers of the enormous power of buyers today are felt across the entire corporate spectrum, and after a decade of research at Cranfield, we can now truly say that instigating best prac- tice key account management implies a substantial programme of change management and simply cannot be achieved by tinkering with the salesforce.

The sequence of events is as follows:

1. Select the correct accounts to be included in the key account programme.

2. Categorize them according to their potential for helping us to grow our profits continuously.

3. Analyse their needs.

4. Develop strategic plans for and with each of them.

5. Get buy-in from all functions about their role in delivering the agreed value propositions. This involves IT, manufacturing, logis- tics, HR, finance, operations and R&D. This way, these functions will be customer-driven.

6. Get the right organization structure to serve the selected key accounts’ needs.

7. Get the right people and skill sets in the key account team.

8. Implement the plans on an annual basis.

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9. Measure the success of the plans, particularly in respect of whether they create shareholder value added.

10. Reward individuals and teams for their success.

Malcolm McDonald and Diana Woodburn have done a remarkable job in capturing all their research and practical experience in this excellent book and I commend it to you.

Martin Lamb Chief Executive

IMI plc

viii Foreword

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Acknowledgements

We are extremely grateful to Beth Rogers, now of Portsmouth Business School, who for many years helped us with our research and our thinking. Her part in earlier versions of this book, and particularly for the mini-cases for practical learning, was invaluable. We would like to acknowledge the contribution of Professor Tony Millman on the origi- nal key account management research report, back in 1996. Special thanks are due to him for his enthusiasm for the topic. His previous work, and that of Dr Kevin Wilson, was invaluable in creating frame- works for understanding the development of supplier/customer relationships.

Our thanks are due to other colleagues for their help and support: par- ticularly to Dr Sue Holt, for allowing us to include some of her research; to Professor Nigel Piercy of Warwick Business School, for stimulating our thinking on several topics; to Dr Nikala Lane for her contribution to the section on teams; and to Professor Lynette Ryals for her overall support. Huge thanks are due to Steve Doubleday and Peter Mouncey for their major contribution to the editing process. We should certainly not forget our spouses for their endless forbearance during the writing process.

Lastly, too numerous to mention individually, are all the practitioners and their companies who have helped to develop our understanding of key account management, shape our thinking and validate our ideas: through the Cranfield KAM Best Practice Research Club, its focus syndicates and other practitioner forums, through participation in research and in KAM development consultancy projects, and through help with the case study insights distributed throughout the book.

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The purpose of this book

To help the time-starved reader, we have started each chapter with a ‘Fast Track’ for those who want a rapid reprise of the content before you delve deeper into the chapter or, indeed, skip to another chapter that contains material relating to your immediate priority. All the Fast Tracks have been compiled into one inte- grated section at the end of the book, so you can start or finish with the complete helicopter overview.

As this is a book designed for thinking practitioners, we have avoided filling the text with academic references, but we have added a list of items for further reading around each chapter, included at the end of the book.

The expression ‘caveat emptor’ (beware buyer) has been turned com- pletely on its head during the past 10 years, so that ‘caveat vendor’ (beware seller) is now the norm. Customer power, particularly in over- supplied Western economies, is here to stay, hence the growing impor- tance of key account management as a topic on the agendas of all companies, big or small.

This book represents state-of-the-art best practice, based on a decade of in-depth research into global best practice key account management from both supplier and customer perspectives, which has shown that, among other findings:

� Key account management is a strategic approach distinguishable from account management or key account selling. It should be used to ensure the long-term development and retention of strategic customers.

� Key account management is high profile, but difficult to do well.

� Key account management is appropriate to several types of rela- tionships, but is most clearly manifest when supplier and cus- tomer have a mutually recognized partnership and a degree of trust.

� There are often mismatches between the way suppliers and custom- ers perceive each other and their relationship, so careful communi- cation and vigilance are vital.

� Regular monitoring of the profitability of individual customers by suppliers provides crucial information, but is quite rare because customer profitability is difficult to measure.

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� Key account managers need a broad portfolio of business manage- ment skills to deal with interdependent or integrated customer relationships.

� Key account management has structural implications for selling companies. Interdependence and integration can only be achieved where the key account manager has a considerable degree of con- trol over resources and decision making.

This book proposes ways of dealing with these findings, taking the reader to a level whereby he/she can implement solutions. It is intended to help key account strategists and key account managers to capture and develop a scientific basis for their company’s practice. The scope of key account management is widening and it is becoming more complex. For key account management to be successfully imple- mented, there is an urgent need to develop reliable diagnostic tools and measures of performance that support strategic marketing deci- sions. The skills of professionals involved in key account management at strategic and operational levels need to be constantly updated and developed. So this book demonstrates how key account management can be implemented, and describes the elements of best practice that can be adopted by all types and sizes of organization.

Chapter 1: The crucial role of key account management

This chapter sets key account management in the context of a dramati- cally changing business environment where increasingly complex relationships have altered the nature of marketing, and imposed an urgent need for greater understanding and more appropriate treat- ment of key relationships.

Chapter 2: Selecting and categorizing key customers

We explain how to select and categorize the most appropriate accounts to target for key account management, which arguably means that this chapter is the most important in the whole book. Your KAM programme can be fatally flawed by making the wrong deci- sions at this stage.

Chapter 3: Relationship stages

There is a clear hierarchy of key account relationships increasing in complexity and intimacy with the customer. Understanding where you are is crucial to adopting the right behaviour towards the customer.

Chapter 4: Developing key relationships

Important relationships should not be left to develop on their own. Application of the right tools and techniques can help you get to the level to which you aspire with more speed and confidence.

The purpose of this book xi

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Chapter 5: The buyer perspective

Needless to say, buyers have their own view of key supplier relation- ships, and not necessarily the one the supplier would like. Ignorance of their perspective leads to complacency, inertia and disappointment, so understanding it is mandatory, however unwelcome.

Chapter 6: Key account profitability

Profitability belongs to customers much more than to products. Since customers and customer behaviour cause cost as well as revenue, real customer profitability must be measured. It is not easy but, again, ignorance is foolhardy.

Chapter 7: Key account analysis

This chapter examines how to analyse key accounts in order to estab- lish and prioritize their needs.

Chapter 8: Planning for key accounts

We introduce the processes for and the tools and techniques of key account planning. We describe how to set objectives and strategies for each targeted key account, and how to measure their profitability.

Chapter 9: Processes – making key account management work

While key account plans are intrinsic to key account management, a plan is only a plan until it is implemented. Most companies’ processes are not set up to deliver the promises of key account management but, like many initiatives, the devil is in the implementation.

Chapter 10: The role and requirements of key account managers

Key account managers can fulfil one of four roles in managing the cus- tomer relationship, which, depending on the complexity of the rela- tionship, may or may not involve leading a dedicated team. Each role has its own set of competences and attributes which should be under- stood in matching the right key account manager with each key account.

Chapter 11: Rewards and performance in key account management

KAM is designed to improve or at least maintain performance with challenging customers. This chapter gets to grips with what perform- ance means in KAM, at the level of individual key accounts, the whole key account portfolio, and the key account manager. Most companies are determined, rightly or wrongly, to give rewards as incentives for

xii The purpose of this book

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good performance, but seek assistance on how to structure a rewards scheme and what kind of reward to offer.

Chapter 12: Organizing for key account management

There is no perfect structure for key account management as it is essentially a cross-boundary activity, though some structures are less KAM-friendly than others. This chapter looks at how key account management can be positioned in the organization and some of the issues that arise.

Chapter 13: Transitioning to key account management

The rest of the book reflects best practice KAM, but this chapter charts the journey to achieve it from the beginning. KAM is a cultural change as well as a business initiative, and a long haul, not to be undertaken lightly. Following the four-phase route that other suppliers have used will help to anticipate issues and prepare solutions for them.

Innumerable tomes have been written about the importance of cus- tomer focus and getting close to customers. There can be no closer focus than ‘the segment of one’. While all customers are important, there is a danger in spreading scarce resources too thinly and achiev- ing little of the real intimacy required by those few customers who can help us make significant progress towards our long-term objectives. The dilemma, then, is which customers to include in the key account management programme.

The growing complexity of business-to-business markets, which are in a state of metamorphosis from chains of value to integrated recipes of value, presents a great challenge.

All the indications are that in business-to-business marketing, key account management is not so much an option, but a customer expectation.

This book is designed to provide a route through this most difficult of terrains. It is a route map that has emerged from the authors’ extensive research into the practice of global key account management with some of the world’s leading companies. Although there is still much to learn, we believe readers will find this book representative of the very best of best practice.

Diana Woodburn Professor Malcolm McDonald

Marketing Best Practice

The purpose of this book xiii

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Before you read this book!

Just to give you an idea of your start point, try completing the two questionnaires below before you read further. The first questionnaire is designed to establish the current position of your organization on key account management, overall and on the 10 fundamental requirements of a successful KAM programme. The score profile will show you areas of existing strength and areas in need of serious attention. Try it with other people in your organization and see if they hold the same view.

The second questionnaire is aimed at your individual position, since most readers of this book will have had at least some experience of managing key accounts. Be as honest as you can – no one is looking!

Come back to this page after you finish reading the book and repeat the questionnaires. Your view may change as you learn more about what key account management really means, in practice, and your personal scores may change too, if you have picked up some of the ideas in the book and implemented them.

1. Howwell developed is key account management in your organization?

Score out of 10: 0 ¼ not at all; 10 ¼ best practice.

Does KAM in your organization have: Before reading the book

After reading the book

A role in achieving the strategic vision?

High profile support from senior management?

Buy-in from appropriate organizational framework including teams?

Careful selection of appropriate customers?

Deep understanding of key customers and their strategies?

Well-grounded, analysis-based customer plans?

Customized offers, service or costs?

Excellent, well-rounded key account managers?

Excellent communications?

Supportive, effective, dependable processes?

Total

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2. Howwell do you know your key accounts?

Score out of 10: 0 ¼ not at all; 10 ¼ best practice.

Do you know: Before reading the book

After reading the book

Your key customer’s segments/products and how you add value to them?

The customer’s strategic plan?

The customer’s financial health (ratios, etc.)?

The customer’s business processes (logistics, purchasing, production, etc.)

What the customer values/needs from its suppliers?

Your company’s proportion of the customer’s spend?

Which of your competitors the customer uses, why, and how it rates them?

How much attributable (interface) costs should be allocated to your customer?

The real profitability of the account?

How long it takes to make a profit on a major new customer?

Total

Before you read this book! xv

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List of figures and tables

Figures

1.1 The value chain 10 1.2 Internal value chain: service companies 10 1.3 The product/market lifecycle and market characteristics 11 1.4 Concentration of buying power in industries 13 1.5 Cost of servicing the customer 14 1.6 Evolution of market maturity 16 1.7 The relationship as a medium 17 1.8 Relationship closeness versus relationship success 20 2.1 Key account numbers 31 2.2 The importance of defining the customer clearly 33 2.3 Three types of selection criteria 35 2.4 Account attractiveness assessment for selection as a

key customer 37 2.5 The key account selection matrix 40 2.6 One global customer’s statement of its requirements of

its suppliers 43 2.7 Relative business strength for comparative supplier

evaluation 44 2.8 Reducing numbers of key customers 46 2.9 Unidimensional list versus multidimensional portfolio 47 2.10 Adding the customer dimension to project approval 50 3.1 The relationship perception gap 57 3.2 Hierarchy of key relationships 59 3.3 Needs of the individual compared with the needs of key

relationships 61 3.4 Exploratory KAM relationship 64 3.5 Basic KAM relationship 66 3.6 Cooperative KAM relationship 70 3.7 Contact between selling and buying companies 72 3.8 Customer profitability and the relationship trap 74 3.9 Interdependent KAM relationship 74 3.10 Extent of information exchange between selling and

buying companies 77 3.11 Integrated KAM relationship 79 4.1 Customer expectations of minimum levels of trust and

relationship 91 4.2 Layers of understanding of the customer 93 4.3 Matching relationship level with key customer strategies 96 4.4 Customer organization chart overlaid with contact

importance and relationship 97 4.5 Mapping team-based relationships 100

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4.6 Intercompany relationship layers 101 4.7 Combining organization and individual levels in

relationship-building strategies 103 4.8 Features of interdependent relationships 104 4.9 Mapping relationship links with the customer at different

levels of management 106 4.10 Mapping relationship links at different levels of

management 107 5.1 Business relationship network 117 5.2 Impact of cost savings on net profits 121 5.3 Progress of product development compared with

commitment of final unit cost 125 5.4 Topics for information exchange in KAM relationships 126 5.5 The IMP model 129 5.6 Risks and risk reduction mechanisms 130 5.7 Buying company’s strategy direction matrix 132 5.8 Supplier relationships as a source of business advantage 133 5.9 Strategic supplier criteria 134 5.10 Development of supply chain management 135 5.11 Buyer and supplier perceptions of relationships 138 5.12 Balance of power versus common interest 142 6.1 Financial risk and return 148 6.2 The route to sustainable competitive advantage (SCA) 148 6.3 Customer retention by segment (answers to a Cranfield

questionnaire using an audience response system to guarantee anonymity. The question was ‘We measure customer retention by segment’) 150

6.4 Intangibles are the key driver of shareholder value 152 6.5 Customer profit contribution over time 155 6.6 Impact of customer retention rate on customer lifetime 156 6.7 The relationship development model 156 6.8 Financial risk versus business risk 157 6.9 A match between buyers and sellers 162 6.10 Mismatch between buyer (basic) and seller (integrated) 162 6.11 Mismatch between buyer (interdependent) and seller (basic) 162 6.12 Cranfield survey on key account profitability 163 6.13 The widening rift between profitable and unprofitable

customers 164 6.14 A basic profitability model 168 6.15 How organizations build value from key accounts 169 6.16 Portfolio analysis – directional policy matrix 170 7.1 Example of a market map including the number of each

customer type 178 7.2 Determining the presence of market segments 179 7.3 Market segmentation process 181 7.4 A four-box directional policy matrix 182 7.5 Business partnership process 183 7.6 Forces driving industry competition 184 7.7 Objectives analysis exercise (industry driving forces) 188 7.8 Annual report summary 189 7.9 Financial analysis 190

List of figures and tables xvii

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7.10 The value chain 191 7.11 Sources of differentiation in the value chain 192 7.12 Value chain analysis summary 192 7.13 Buying process for goods and services 195 7.14 Sales analysis and history 201 7.15 Competitive comparison and competitor strategy 202 7.16 Strategic marketing planning exercise – SWOT analysis 203 7.17 The applications portfolio 204 8.1 The relationship development model 210 8.2 The 10 steps in the strategic marketing planning process 212 8.3 Strategic and operational planning 213 8.4 The impact of effectiveness and efficiency on success 216 8.5 Tactical orientation 217 8.6 Strategic orientation 217 8.7 Hospital groups and key account managers 218 8.8 The planning hierarchy 219 8.9 Prioritizing and selecting segments 220 8.10 Portfolio analysis matrix 220 8.11 Delivery service levels versus cost of holding inventory 222 8.12 Results of a survey of orders over a defined period 223 8.13 Short-term (one-year) customer classification 223 8.14 Breakdown chart with high fixed costs 225 8.15 Breakdown chart with low fixed costs 225 9.1 A process as a series of steps 263 9.2 Audit framework for supplier processes 264 9.3 Layers of activity and processes 265 9.4 The key account manager’s role by process component 267 9.5 Process data capture proforma 267 9.6 Strategic processes in key account management 269 9.7 Value-adding processes in key account management 276 9.8 Relationship development as a process 277 9.9 Critical steps in the business development process 278 9.10 Outline of a process for added-value customer

projects 282 9.11 Operational processes 283 9.12 Lines of communication 285 9.13 Reasons to communicate 286 9.14 Planning communication 287 9.15 Developing a communication plan 288 10.1 The role of key account management internally

and externally 296 10.2 Purchasing trends and supplier responses 298 10.3 Corresponding perspectives on the role of the key

account manager 301 10.4 Link between customer relationship, roles and

competencies 304 10.5 Linking roles to the key account strategy matrix 305 10.6 A model of an interdependent relationship 308 10.7 Cross-functional and sales teams in key

account management 311 10.8 Success factors for key account teams 314

xviii List of figures and tables

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10.9 Example of how to allocate key account managers to customers 316

10.10 Roles and core competencies and attributes 320 10.11 Examples of KAMScope# feedback 321 11.1 The purpose of performance measurement at different

levels in the company 328 11.2 Differences in performance of key accounts 330 11.3 The role of the strategic key account plan 335 11.4 Asset growth and yield 338 11.5 Drivers of behavioural performance 343 11.6 The customer element in performance 344 11.7 Factors linked to KAMmodel 347 11.8 Spectrum of approaches to incentivization 350 11.9 The strategic account plan as a three-way contract 355 12.1 Boundaries limiting key account management success 366 12.2 The interaction between different supplier and customer

organizational structures 372 12.3 Matching local and global structures 375 12.4 Traditional country-based structure 378 12.5 Structure with dedicated, independent key account

management unit 380 12.6 Compromise structure with designated lead key account

manager 382 12.7 A supplier’s portfolio of customers 384 12.8 Decision-making levels 386 12.9 Assessing opportunities 387 13.1 Drivers of KAM 396 13.2 Transitioning to KAM 403 13.3 Cross-functional key account teams 408

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