Chapter One: The Rationale for Key Account Management

On August 21, 1998, it was announced that telecommunications supplier Ciena would not be receiving an expected $100 million worth of business from key account AT&T. As a direct result of this news, Ciena's stock price plunged 45%, from $56.78 to $31.25. On August 28, a planned merger between Ciena and Tellabs based on a one-for-one stock swap that valued Ciena at $7.3 billion was being renegotiated at $4.7 billion. Shortly afterwards, Ciena announced the loss of a $25 million sale to key account Digital Teleport. On September 14, the merger was abandoned with Ciena's share price at $13.19.

On January 4, 2000, General Motors announced that it was ceasing participation in B2B auctions managed by Freemarkets Inc. Freemarkets' share price dropped from a high of $370 that week to $164, two weeks later.

In August 2000, AT&T's stock price hit a fifty-two-week low. An article in The Wall Street Journal attributed the decline to problems in the Business Services Group, responsible for over half of AT&T's 1999 revenues and profits. Among the causes: lack of service to major customers in part due to severe downsizing and layoffs to meet short-term profit targets.

Securing and retaining customers is increasingly recognized as the fundamental requirement for improving shareholder value, the primary objective for many corporations around the world. All firms develop their own methods of communicating with customers, but typically in business-to-business marketing, an on-the-road sales force is a critical element in this process. However, in recent years significant pressure has been placed upon the traditional sales force system. As powerful forces have raised the perceived importance of sales and customer management, many firms are reevaluating their sales force processes. As a result, the traditional sales force system is fragmenting and many corporations are developing key account management programs as a new way of organizational life.

In this chapter, we discuss traditional communication systems, the pressures facing them, and the nature of the resulting fragmentation. We see that the development of key account management is a natural response to these pressures, with benefits for both supplier firms and key accounts. We also raise a series of cautions. Finally we present a structure for guiding those firms wishing to invest in key account management; this also doubles as the structure of the book.

ORGANIZATIONAL OBJECTIVES

The critical objective for most publicly held corporations is increased shareholder value. To increase shareholder value, the organization must survive and grow. However, survival and growth are possible only if the firm both makes profits today and is perceived as likely to make profits tomorrow. Profits are earned only when the firm outperforms its competitors in securing and retaining customers.

Over the years, corporations have developed numerous forms of nonpersonal and interpersonal communications in attempts to influence both the purchase and recommendation behavior of current and potential customers. Nonpersonal communication embraces such methods as advertising, direct mail, publicity and public relations, and, more recently, the Internet, in which an individual or group within the firm typically controls the firm's message. Interpersonal communication, by contrast, has traditionally been largely under the control of individual sales representatives. In many industries, the sales force is the principal vehicle for contact between the supplier firm and its customers, and has historically enjoyed the sole responsibility for managing long-term customer relationships.

THE TRADITIONAL SALES FORCE SYSTEM

The traditional sales force system typically comprises a hierarchical organization in which a number of "on-the-road" salespeople report to a first-line sales manager. First-line managers in turn report to more senior managers, for example, regional or zone, ultimately to a national sales manager. The number of managerial levels varies from firm to firm and depends on such factors as sales force size and management's philosophy regarding decentralization and salesperson empowerment. In recent years, downsizing efforts have led to increases in managerial spans of control and a flattening of the hierarchy in many sales organizations.

Furthermore, in any particular sales force, the responsibilities of individual salespeople differ according to whether or not they are specialized in their tasks and the type and degree of specialization -- for example, by product, market segment, channel member, or maintenance-new business. Specialization often makes more effective use of individual salespeople but also leads to reduced flexibility and increased sales force costs. The decision of whether or not to specialize the sales force and what form of specialization to employ is typically governed by judgments regarding the balance of effectiveness benefits versus increased costs. Several major options are available for organizing the sales force:

Geography. The simplest and most cost efficient way of organizing the sales force is geographically. Individual salespeople are responsible for sales of all the firm's products and services, in all applications, to all customers, in a defined geographic area.

Product. In a sales organization specialized by product, an individual salesperson is responsible for the sales of some portion of the firm's (or division's) products, in all applications, to all customers in a defined geographic area. Another salesperson or group of salespersons is typically responsible for sales of some other portion of the firm's products, in all applications, to all customers in the same or an overlapping geographic area.

Market segment. In the market segment-based organization, an individual salesperson is responsible for sales of all the firm's (or division's) products to all customers in a particular market segment, for example, industry or product application. Another salesperson is typically responsible for sales of all the firm's products to all customers in another market segment, in the same or an overlapping geographic area.

Channel member. In the channel member-based organization, one salesperson is responsible for developing and maintaining relationships at a specific level in the channel system, for example, distributors; another salesperson is responsible for developing and maintaining relationships at another level, for example, wholesalers or retailers.

Maintenance/new business. In the maintenance-new business sales organization, a distinction is made between existing versus new accounts. Salespeople responsible for generating sales to new accounts and initiating firm/customer relationships later hand these customers over to a maintenance sales force.

Although these various methods of managing sales force effort have served supplier firms well, increased competition is giving rise to a series of pressures that is transforming this traditional system into a new system for managing firm/customer relationships.

Pressures on the Traditional Sales Force System

We conceptualize pressures on the traditional sales force system as comprising three types: increased competition, internal pressures from the firm's sales organization, and pressures from customers.

Increased Competition

Today, virtually all business organizations around the world face vastly increased levels of competition, making the task of securing and retaining customers ever more difficult. Competition has grown in both depth and scope as separate national economies have become more closely integrated. These linkages have been enhanced by increased global capital flows, and the actions of such supranational global organizations as the World Trade Organization (WTO) (and its predecessor GATT) that promote economic growth by focusing on free trade, by lowering tariff barriers and by reducing other obstacles to competition. In addition, several multinational regional organizations such as the European Union (EU), the North American Free Trade Area (NAFTA), the Association of South East Asian Nations (ASEAN), and Mercosur in South America are leveraging firms out of their national markets, perhaps for the first time, and setting the stage for broader participation in the world economy.

Other factors driving increased competition include denationalization (privatization) of government-owned corporations, relaxed levels of regulation, and increasingly available low-cost, high-quality communications and transportation. Competition is increasing in the supply chain via forward and backward integration, and the greater willingness of firms to engage in various forms of partnership -- joint ventures, research consortia, cross-licensing and supply chain alliances. Notwithstanding the recent difficulties of many "dotcoms," the growth of electronic commerce via the Internet is having a major impact on competition in many industries, not least by the development of exchanges. Relatedly, the increasingly widespread diffusion of new information technologies enables executives to better manage far-flung enterprises, and faster technological change is leading to competition not just among firms but among entire industries.

Another significant factor is the increasing spread of the shareholder value philosophy. Although primarily a U.S. creation, this philosophy is increasingly making major inroads in such countries as Germany, France, and Japan where alternative corporate governance models have long held sway. As shareholder interests gain preeminence, profit pressures grow for all firms and competition increases.

Heightened competition in their domestic markets is leading increasing numbers of corporations either to venture abroad for the first time, or to enhance their multicountry scopes to become truly global enterprises. Regardless, at home and abroad, they face new competitors that may operate in unexpected ways. Indeed, in many parts of the world, as corporations strive to identify new opportunities by seeking to satisfy ever more complex customer needs, the increasingly global economy is bringing domestic competitors face-to-face with highly skilled and well-financed foreign firms.

On a day-by-day basis, these competitive pressures take many forms. Prices trend downwards, and product line competition increases via more complex products and shorter product life cycles. Service levels improve in response to the rapidly rising expectations of customers no longer tolerant of bare minimum offerings. Distribution channels shift, and a host of new communication vehicles such as satellite and cable TV, and the Internet, are available to all competitors.

Increases in Selling Costs

An additional factor putting pressure on the traditional sales force system is the increasing cost of sales force effort that, for many years, has outpaced inflation. Sales and Marketing Management magazine publishes an annual review of these costs; its data demonstrate that the cost per sales call has been rising in recent years.

Driven in part by labor market factors and in part by internal company decisions such as the provision of computers, cell phones, and other technological aids, these cost increases affect all types of sales effort. They are particularly noticeable for small and mid-size customers where sales revenues are lower. As we discuss below, the increasingly high cost of serving large numbers of small and mid-size customers implies that the firm should explore alternative ways of interfacing with them.

Pressure from Customers

In this section, we highlight four areas: increasing account concentration, the rising corporate importance of procurement, changes in the procurement process, and affirmative reduction in numbers of suppliers.

INCREASING ACCOUNT CONCENTRATION

Sellers face fewer and more powerful customers as the result of many separate environmental forces that are combining to concentrate firm sales with reduced numbers of customers. For example, sales to customers in mature industries are affected by a generalized trend toward oligopolistic market structures as weaker competitors either exit or are acquired by (or merged into) stronger competitors. International regionalization and globalization forces in many industries have accelerated this trend and some previously domestic oligopolies are now consolidating into global oligopolies. Relatedly, the boom in merger and acquisition activity starting in the late 1980s and continuing during the 1990s has, in many cases, reduced the number of available customers. In part, the rationale for these mergers is to increase bargaining power over suppliers:

Example: The North American supermarket industry is undergoing significant consolidation. In late 1998, Kroger purchased Fred Meyer for $13 billion to form the largest U.S. chain. Of the $225 million cost savings, over half was expected to result from better buying [emphasis added].

Finally, in many industries, such as health care, buying groups have developed as countervailing forces to the power of suppliers.

RISING IMPORTANCE OF PROCUREMENT

Historically, for many firms in many industries, vertical integration was viewed as a way of increasing profits by capturing large amounts of value added in the conversion process from raw materials to finished goods. In such companies, where the ratio of value-added to revenue was high and, conversely, the procurement spend-to-revenue ratio low, the procurement function was perceived to be relatively unimportant. Indeed, "purchasing" was often viewed as a managerial backwater.

Several factors have led to increases in the procurement spend-to-revenue ratio:

• Corporate downsizing and the increasing replacement of labor by capital has led to relatively greater expenditures on capital equipment, raw materials, and supplies, versus labor.
  
• Many companies have sought to increase flexibility through reduction in fixed-cost levels via vertical disintegration. For example, at the end of the twentieth century, both General Motors and Ford spun off their parts suppliers, Delco and Visteon respectively.
  
• Company focus on core competence and the concomitant growth in outsourcing has increased the value of purchased goods and services for organizational use.
  
• The growth in importance of branding has led many firms to act as resellers for parts of their product line, also raising the purchasing ratio.
  

In total these changes can be quite dramatic; for example, at IBM, from 1987 to 1997, the ratio of purchasing spend to revenue rose 57% from 28% to 44%.

The profitability implications of this shift have not been lost on corporate management. Consider, for example, two companies with different value-added structures: Company A has a 20% ratio of procurement spend to revenue; Company B has a 70% ratio. Assuming that each firm has a 10% profit margin, a 10% increase in procurement efficiency raises Company A's profit by 20%; a 10% increase in procurement efficiency raises Company B's profit by 70%!

In addition, senior management awareness of the importance of procurement has been heightened by margin pressure from increased competition, a sharpened organizational focus, the aftermath of reengineering, increased emphasis on supply chain management, cost efficiencies secured following mergers and acquisitions, successful organizational transformations following crisis situations (e.g., IBM, in the early 1990s), and proselytizing consulting firms that offer methodologies for reducing procurement expenditures.

Furthermore, it is important to remember that raw material costs in the supply chain are only one of many types of procurement costs. For example, approximately 52% of Johnson & Johnson's sales revenues represent payments to third party providers of goods and services. However, of those costs, only 33% are for raw materials! Much of the remainder is for support services such as travel, communications, computers, and so forth. Procurement managers believe that these areas, frequently purchased in a decentralized manner with little oversight from procurement professionals, have enormous potential for cost reduction.

The results of increased focus on procurement are starting to come in. For example, in the late 1990s, one $10 billion pharmaceutical company announced a reduction in its inbound supply costs of $1.5 billion.

Changes in the Procurement Process

As a result of the growing complexity and importance of procurement decisions, several changes are occurring in the procurement process:

Centralization. A trend to centralization in procurement decision making has been aided by rapid advances in telecommunications, computer technology and the Internet. Whereas, historically, various business units may have operated independently for procurement purposes, the increasing ability of the center to gather data from its disparate units has led to a shift in the locus of procurement practice. For example, in many retail chains, the corporate office is now heavily involved in procurement decisions for individual stores; in previous years these stores may have operated more autonomously.

Increasingly, in these situations, the act of purchase is conduced by an individual through the Internet. The employee simply enters a specially constructed vendor web site (extranet) to place the order. Such systems allow more complete, accurate, and timely data on purchases from individual suppliers to be collected by procurement personnel. Buyers secure greater leverage and are able to track purchasing performance against benchmark databases. These information systems not only track individual suppliers' performance but also monitor employee compliance with centrally negotiated supply contracts.

Example: Dell Computer's Premier Pages are password-protected customized web sites created for each key account. These sites include approved configurations and negotiated prices for Dell products that key account employees can access to secure the products they require. Premier Pages also provide a variety of management reports that enable the key account to track computer purchases.

Globalization. The globalization trend discussed earlier has led firms to search more broadly for suppliers and to add global coverage as a critical choice criterion. Several firms have shifted to global centralization, and national and regional procurement personnel now report to a head of global procurement. Global procurement maintains a master worldwide vendor file that can be used to access previously developed purchasing solutions.

Greater Effectiveness. Historically, purchasing was tactical and transactional, a clerical function with modest educational requirements. Today, the new breed of procurement professional is often a fast-tracker with an MBA, multiple organizational experiences, and headed for increased responsibility in another function. These increasingly proficient procurement staffs, at multiple management levels, often led by newly appointed procurement executives with high corporate visibility, have introduced new strategies to reduce costs, improve quality, and increase efficiencies.

Example: The day he arrived at General Motors (GM), incoming procurement czar Jose Ignacio Lopez summoned GM suppliers to a next-day meeting at GM's technology center. Holding up a sample GM contract, he ripped it in two saying, "This is one of your contracts; your new contract will incorporate a 20% price reduction!"

Strategic Sourcing. Specific procurement initiatives place great pressure on suppliers via such methods as "strategic sourcing," in which potential suppliers are invited to complete an extensive "Request for Information" (RFI) document before responding to a very detailed "Request for Proposal" (RFP). Highly trained procurement personnel, often using models of suppliers' cost structures, negotiate aggressively to select those suppliers best able to meet specifications at the lowest price.

Example: IBM's procurement training embraces an intensive set of courses at three different levels -- a basic set of "core" courses, then intermediate and advanced series. Suppliers are invited to some of the more advanced courses to focus on joint cost reduction.

Frequently, the new breed of procurement personnel has little or no regard for long-standing relationships (even if the supplier is an internal division), and may send the firm's own consultants into suppliers' plants to help increase efficiency. Other firms benchmark various supply prices (e.g., raw materials, travel, supplies, printing services) against industry standards to secure leverage in supplier negotiations.

Interface Simplification. In dealing with multibusiness firms, procurement personnel have begun to question whether it is really necessary to meet with salespersons from each of several individual firm divisions, preferring to deal with a single supplier firm representative.

Example: Until the early 1990s, salespeople from various divisions of Procter and Gamble (P&G) had relationships with Wal-Mart's procurement personnel. In the new P&G/Wal-Mart partnership, a single key account manager leads a P&G key account team that interfaces with a corresponding Wal-Mart organization.

Concurrently, some suppliers have found they can secure better access to senior management in their major customers by concentrating responsibility for all products and services with a single company contact.

B2B Exchanges. The introduction of these Internet-enabled exchanges has the potential to vastly change companies' procurement practices. The exchanges take several forms, but perhaps the most relevant for key account management is buyer-driven (reverse) auctions. In these auctions, the buyer specifies its requirements, and pre-vetted suppliers place bids to fill the order. A particularly interesting aspect of such auctions is that prices tend to drop dramatically at the conclusion of the auction.

Although much interest has been shown in Internet-enabled exchanges, they are no panacea. For example, in the steel industry, Business Week has reported that few buyers use e-steel.com, "preferring to receive bids from the few mills they're interested in, even if that means cutting themselves off from some low bids," and IBM refuses to hold auctions, believing it "unfair" to solicit quotes from marginal suppliers just to force prices down. In other cases, suppliers refuse to bid. Nonetheless, as auction sites proliferate and key accounts initiate auctions for products they require, suppliers will have to address critical strategic and organizational decisions.

AFFIRMATIVE REDUCTIONS IN NUMBERS OF SUPPLIERS

Concurrent with changes in the procurement process, in recent years, many corporations have made affirmative decisions to forge closer relationships with fewer suppliers and only allow the "best" to compete for their business. These actions run directly counter to the traditional modus operandi of sending specifications to a large number of potential suppliers, then selecting a limited number based on such criteria as price and delivery.

Several factors have led to these reductions: the quality movement and a desire by companies to secure tighter control over their raw material inputs; a desire to reduce input costs, including procurement costs; the increased complexity of many purchases involving multiple technologies and customized service, and requirements for increased procurement effectiveness.

Example: In the mid-1990s, Patrick Grace, president of Grace Logistics, claimed that high-volume purchasing for MRO (maintenance, repair, and operating supplies) could reduce outlays by 10% to 25%. By 2000, many companies were reducing these types of input costs by purchasing directly over the Internet.

In addition, the adoption of Kanban and just-in-time inventory systems, a concern to reduce working capital, business process reengineering, and an overall focus of improving efficiency and effectiveness in the resource conversion process via supply chain management have all contributed to this trend. Finally, an organizational streamlining movement involving narrowing mission scopes and outsourcing has led many firms to seek closer relationships with suppliers in such matters as product development.

For example, Xerox cut its supplier base 90%, from 5,000 in 1980 to 300 in 1985; at Volkswagen in the mid-1990s, Jose Ignacio Lopez reduced the number of suppliers from 2,000 to 200 (some original suppliers became subcontractors), cutting the purchasing bill by DM1.7 billion (4%); other examples show similar dramatic reductions.

Furthermore, this trend is expected to continue: in a 1996 study of procurement practices, A. T. Kearney found significant reductions (actual and planned) in numbers of suppliers for both North American and European samples of major firms. Indices formed by setting the number of suppliers in 1992 at 100 were North America, 1995 = 77, 1998 (projected) = 43, and Europe, 1995 = 88, 1998 (projected) = 64.

Example: In an extreme example, in late 1996 and early 1997, American, Continental, and Delta Airlines each committed themselves to twenty-year exclusive purchasing agreements with Boeing. In return for the promise of steady business, Boeing agreed to attractive prices and delivery flexibility; the airlines were expected to benefit from significant savings related to training and spare parts inventories. However, these agreements had serious political implications; in July 1997, Boeing agreed to rescind and drop its use of exclusive contracts with major American airlines in a successful effort to win the European Commission's approval of its merger with McDonnell Douglas.

This type of supplier reduction is not only occurring in manufacturing industries. In the advertising agency business, for example, in the mid-1990s, both IBM, and Reckitt and Coleman (a British consumer-goods firm) reduced their numbers of agencies from over thirty to one; Kellogg employs only five agencies worldwide and Nestlé two.

This confluence of pressures discussed above can be especially severe on domestic firms competing with global corporations.

Example: Promon Ltd. is a Brazilian firm supplying telecommunications switching equipment and services for all related systems integration. In the late 1990s, Telesp (Brazil), Promon's largest customer, was privatized and acquired by Spain-based Telefonica España (TE); TE was replacing all Telesp upper management. Promon competed with global suppliers Ericsson, Siemens, NEC, and Alcatel; Ericsson and Alcatel held preferred supplier status at Telefonica España. Telesp was anxious to reduce its supplier base!

Relatedly, many firms are reporting concentration of sales with fewer customers.

Significant pressures are impacting the traditional sales force system. Competitive intensity is rising, macroeconomic trends are reducing the number of available customers, and the cost of sales force effort is leading firms to question their traditional ways of dealing with smaller customers. In addition, considerable pressure is being felt from customers for whom procurement is becoming an ever more important issue; they are affirmatively reducing their supplier bases and changing markedly the way they conduct their procurement activities.

During the past quarter century, several major themes can be identified among the myriad of actions firms have taken to deal with these pressures and improve their competitive positions. First, in the early 1980s, the quality movement led to an across-the-board upgrading of quality in firms' products and processes. Second, by downsizing, reengineering, and other approaches, firms attempted to take costs out of their organizations. Third, focusing not only on costs but also on capital employed, management reconceptualized the scope of the firm and its relationship to the supply chain, and began to outsource activities that had traditionally been conducted in-house.

For the most part, these "actions-of-choice" have improved firm functioning in their increasingly fast-changing, complex, and turbulent environments, but increasingly the process of making sales is taking center stage. Supplier firms have developed a heightened awareness of the importance of a small subset of their customer bases, those firms that currently do, and in the future will, account for a large proportion of corporate revenues and profits. As a result, the traditional sales force system is fragmenting and paving the way for a new, emerging system of sales and customer management.

THE EMERGING SYSTEM

The impact of the various pressures discussed in the previous section has led many supplier firms to reevaluate their nonpersonal and interpersonal communication efforts, in particular their sales force systems. Senior management in many corporations now realizes that, across the customer base, not all customers are equal: some customers are more valuable than others.

As a result, the traditional sales force system has become fragmented. We group customers roughly into three groups: small, medium, and large. Typically, medium-size companies continue to be addressed by the traditional sales force system or some variant; the significant changes concern large customers -- key account management -- and small customers.

Dealing with Large Customers

For virtually all corporations, some form of 80/20 rule operates. Although this rule can be viewed in several different ways, a typical interpretation is that 80% of the firm's revenues is supplied by 20% of its customers. If this rule, or a close variant (90/10; 75/25), operates in the firm's customer environment, the critical business implication is that these 20% (or 10% or 25%) of customers have an importance to the firm's long-run future that exceeds that of the "average" customer.

These high current (and potential) volume (and profit) customers are the firm's critical assets. Of course, they are not visible on the firm's balance sheet, yet they are more important to long-run survival and growth than many of the firm's fixed assets. Indeed, whereas a firm may have a viable business with many customers but zero fixed assets, a business with many fixed assets but zero customers is not viable. Furthermore, fixed assets may in fact be strategic liabilities as, for example, when market requirements and technology change; committed to its fixed asset base, the firm may be unable to adapt to changing circumstances. IBM's unwillingness, in the 1980s, to embrace fully a shift from mainframes to work stations and PCs is an exemplar of the liability of fixed assets.

Both the high value of, and increased competition for, this special set of customers suggests that they should be treated differently from the firm's "average" customers. Indeed, they should both receive a disproportionate share of firm resources and are worthy of greater managerial attention. This compelling rationale has led many firms to the development of key account management programs.

Key account management both focuses the firm's attention on those accounts that are especially important for its current and long-run future, and optimizes the use of scarce resources. It provides for the development of more complete information and analysis of customers' strategic realities, critical needs and buying processes, competitive threats, and important supplier firm resources. As a result, the supplier firm better identifies planning assumptions and opportunities and threats, sets more appropriate objectives, and formulates more appropriate strategies and action programs. Finally, implementation and execution are improved via enhanced internal communications and control.

As a result of these benefits, appropriate design and implementation of a key account program should lead to improved supplier firm performance at key accounts. Indeed, in an early study, Stevenson secured data showing that industrial marketing firms adopting key account management reported improved customer communication and increased sales, market share, and profits.

As we discuss later, the supplier firm may employ one of several methods to organize for key account management. The critical difference between most of these methods and the traditional sales force system is that the regular on-the-road salesperson is no longer solely responsible for the supplier-firm/customer relationship. Indeed, in some systems, key account customers are removed from the regular sales force's jurisdiction and placed within a separate organizational unit.

Even if regular salespersons continue to maintain primary responsibility for the supplier-firm/key-account interaction on a day-by-day basis, major account responsibility typically rests with a key account manager. Although members of the regular sales force may discharge this managerial function, more frequently it is placed with a separate key account management group. Managers work with colleagues in other functional departments (including the sales force) as leaders of key account teams and have primary responsibility for the long-run health of the relationship. Fulfilling this function requires a set of skills involving teaching, coaching, mentoring, planning, and facilitating that are typically not required of the average salesperson.

Finally, firms adopting key account programs are developing systems and processes to improve key account management. In addition to a variety of managerial processes designed to coordinate firm efforts at its key accounts, important advances in computer and telecommunications technologies are having a major impact. For example, many firms are using the Internet to enhance key account relationships. Although it is perhaps too early to predict the future effect of the Internet on relationships between supplier firms and their key accounts, there seems little doubt that it will be significant.

Dealing with Small Customers

A logical corollary of the 80/20 rule discussed above is the 20/80 rule. This second rule implies that 20% of the firm's revenues are derived from 80% of its customers. It gives rise to the following question: "What does it cost to serve this 80% of the firm's customers?" The answer for most firms is: "A lot!"

A supplier to the European printing industry measured the profit secured from its customers in decile groups in both 1980 and 1996. The later results for this company demonstrate a marked change compared to sixteen years previously:

• Profit is now concentrated largely in the second through fifth deciles (97%).
  
• The smallest three deciles in total produce a loss.
  
• The firm now makes a loss with its first decile of customers (the firm's largest). (This item should be treated with care inasmuch as the firm's largest customers may bear a significant amount of the overhead burden.)
  

Although not the topic of this book, we touch briefly on three ways firms are addressing the increasingly high cost of serving small customers.

Stop serving small customers. A simple way of categorizing small accounts is to identify those likely to grow into larger customers, those likely to continue in business but unlikely to grow, and those whose long-run future looks insecure. A firm using this categorization may decide that the latter group and some portion of the second group should be dropped from its customer list. If the firm makes its selections expeditiously, minimal current and potential sales revenue is lost, but the firm enjoys significant cost savings. On the other hand, dropping customers, who then need a supplier, may remove an entry barrier for competition.

Identify less expensive methods for the firm to deal with these accounts. In this approach, high-cost/low-potential accounts are removed from sales force responsibility and placed with an internal group. Field sales calls are no longer made and supplier firm-customer communication is conducted entirely by such methods as telemarketing, direct mail, and electronic mail. Sales revenue is retained but overall costs are reduced. A recent approach is to serve such customers through Internet web sites.

Assigning accounts to agents and/or distributors. Frequently, because their fixed costs are typically lower, distributors are better structured than suppliers to handle large numbers of accounts purchasing small product volumes. Under this option, the firm advises small customers it can no longer serve them directly but that its products and services can be secured through distribution. Direct sales force costs are eliminated but the firm's revenue stream, less the distributor's margin, continues.

Example: A 3M business had over five thousand customers, most of which were small volume users. When a profitability analysis revealed that many of these customers caused losses for 3M, all but the largest customers were handed over to carefully selected dealers. As a result, the customer base was cut to one hundred accounts, some of which were the distributors that acquired the small accounts from 3M.

Example: Motorola's Land Mobile Products Sector (LMPS) had 200,000 accounts spread among 2,000 sales representatives. LMPS shifted to a key account management approach by focusing the sales force on the roughly 20% of customers providing 80% of its business. To address the remaining 80% of its customer base, LMPS set up a dealer organization and transitioned these accounts to the dealer channel. By and large, the accounts were pleased with the transition, as it simplified their relationships with Motorola.

Notwithstanding the advantages of this option, the decisions to pass a customer over to a distributor should be made very carefully. Down the road, such an account may be sufficiently successful to warrant reestablishing a direct account-to-supplier relationship. The distributor may object!

THE VALUE OF KEY ACCOUNT PROGRAMS

Key account management can only be a viable approach for dealing with important customers if it benefits both the supplier firm and its key accounts. In this section we discuss the potential benefits available from individual key account programs. We recognize, of course, that their presence, absence, and degree of achievement are functions both of the individual program per se and its appropriateness for the two parties. Certainly, key account programs are no panacea; they are not without their problems and issues for both supplier firms and key accounts. After a discussion of the benefits of key account programs for supplier firms and for key accounts, we suggest several cautions. Finally, we identify a series of levers to gain top management's attention on the potential benefits of a key account program

Benefits for Supplier Firms

Key account programs may provide a variety of interrelated benefits for supplier firms that together lead to increased sales and profits.

As the key account reduces its supplier base, possibly moving to sole suppliers for certain products and services, the supplier firm may anticipate receiving increased business, often with multiyear contracts. Recently collected data demonstrate the importance for company growth of identifying the firm's most valuable customers.

Though price reductions may occur, price predictability should improve and the supplier firm should enjoy increased efficiencies: in production via scale economies, matching production to demand, streamlining the purchasing/delivery process, and by developing standardized procedures for servicing the key account's multiple locations. In general these benefits follow from:

Improved understanding of the key account's goals, and requirements. As the key account/supplier firm relationship improves, the degree of information sharing across the interorganizational interface increases. The supplier firm enhances its knowledge of the key account's business environment, plays a role in helping to develop the key account's goals and strategy, and better understands its needs so that extra focus may be given to product and service development. Conversely, the key account secures better information on the supplier firm's competencies and developing technologies so that its own strategy development is improved. Greater understanding should lead to improved performance for both organizations.

Example: Said a market operations director at AT&T discussing a particular key account, "There is an excellent give and take. We benefit from strong relationships because we share a strategic direction with our customer. I am told how I can help him."

Increased key account switching costs. As the supplier-firm/key-account relationship develops, the key account comes to rely on the supplier firm for critical inputs to its operations via joint projects, customized products and services, and the like. In addition, the number and variety of interpersonal relationships (professional and social/personal) increases both horizontally (multiple functions) and vertically (multiple levels). All of these factors bind supplier and key account closer, increase the difficulty of severing the relationship, and may lock out competitors.

Better Understanding and Management of the Key Account. When the supplier firm has multiple sales relationships with a customer, there may be no single locus for understanding the total supplier/customer relationship. The simple act of measuring revenues and profits at the key account level may reveal a variety of ideas on how to address the key account. In the absence of such focus, on the one hand, potential opportunities may be forgone; on the other, there may be no clear understanding of the supplier firm's risk exposure.

Example: The adoption of a corporate accounts program allowed 3M to identify sales opportunities for its individual business units that previously had been opaque to the company.

Example: British Aerospace Regional Aircraft (BARA) manufactures 70- to 120-seat jet aircraft. Difficulties in the airline industry in the early 1990s forced several large customers into bankruptcy before completing payment obligations. Many planes were returned to BARA, and parent British Aerospace suffered a $2 billion loss. BARA's functional organization was unable to pinpoint potential problems sufficiently early; a well-developed key account system would have surfaced them.

Example: Historically, the process used by Snowbell Inc., a Latin American financial institution, for collecting on loan defaults comprised three disconnected subprocesses -- administrative collection, pre-legal collection, and legal collection. Adoption of a key account collection process enabled the institution to focus attention early on the most serious defaults and so improve its overall collection performance.

Enhanced ability to manage complex relationships. As customers attempt to deal with the increased complexities of their business environments, inevitably the complexity faced by supplier firms also rises. Many networks of relationships must be managed -- within both the customer and supplier firm, and across the interorganizational boundary. Key account management is a process for dealing with this complexity and managing relationship networks.

Presentation of a company perspective. In addition to providing a single point of contact, an effective key account manager can bring together many supplier firm personnel, possibly from different businesses, to speak with a single "company voice" to a customer that buys, or could buy, multiple products. In addition, an effective key account manager can influence her firm's organizational subunits to take a "company viewpoint" when responding to customers' multiunit RFPs. Failure to present a single face to the customer can cause significant problems.

Example: Spun off from AT&T in 1996, Lucent Technologies' share price fell from almost $80 in late 1999 to less than $20 one year later. One contributing factor to this performance was lack of a functioning company-wide key account organization. Broken up into several divisions for the purpose of securing more entrepreneurial behavior, Lucent units competed with each other for individual customers. As one example, a large local phone company seeking to buy an advanced network to carry both voice and data said, "I fully understand what Nortel is doing, and I fully understand what Cisco is offering, but I'm confused on what Lucent is actually offering, because I've heard different descriptions of the same solution from different Lucent teams."

Second-order market benefits. If the supplier firm has chosen its key accounts wisely, they will push it to higher levels of performance on many product and service dimensions. As the performance envelope is pushed outward to serve hard-driving key accounts, internal transfer of best practice makes the supplier firm more competitive in the market as a whole.

Example: Alpha Graphics, a design, copy, print, and networking business, is one of Xerox's major customers. In the mid-1990s, it was entering five new countries per annum with the latest Xerox equipment. Often Xerox would not have appropriately trained personnel in these countries. In order to serve Alpha, Xerox was forced to upgrade service quality and in so doing improved its ability to serve other customers.

Human resource benefits. Introduction of key account programs offers a variety of human resource benefits:

• A rigorous recruitment, selection, training, and retaining process ensures that experienced competent key account managers deal with important customers.
  
• The key account manager position is developmentally important inasmuch as he gains experience in "running a business," valuable preparation for more senior management positions.
  
• Key account management is a motivating career opportunity for the sales force and offers an excellent career track for high-performing salespeople who may neither want, nor be competent in filling, a direct line management position, for example, regional sales manager. Indeed, a critical sales force management problem concerns superior salespeople. Frequently, some form of promotion is necessary to retain outstanding performers, yet these individuals may have neither the ability nor the desire to be promoted to manage a group of salespeople. When flawed promotions do occur, the firm may lose a star salesperson and simultaneously gain an ineffective sales manager! Promotion to key account manager may represent a viable alternative both for recognizing outstanding performance and securing an effective individual for a critical organizational role.
  

Benefits for Key Accounts

As we discussed earlier, key account programs are typically introduced to rationalize the allocation of resources across the supplier firm's entire customer base. Hopefully, major customers will be better served and the benefits discussed above secured. However, this rationale has an internal focus; the supplier firm must be prepared to answer the following externally focused question with specifics:

"What is the value of a key account program for the individual key account customer?"

Since introduction of a key account program frequently represents a major organizational shift for the supplier firm, an internal focus can easily dominate its decision making. The key account program will certainly have less than its desired impact if the supplier firm is unable to articulate to its key account customers the real value of such a designation! This issue becomes increasingly critical as savvy key accounts realize that, ultimately, they pay the price for increased attention from the supplier firm in the form of higher input costs.

Without doubt, managers at the key account will develop a set of expectations (probably high) regarding the value of being named a key account. A combination of high expectations but less than high perceived performance will lead to dissatisfaction. The supplier firm should clearly spell out the positive benefits of being named a key account (and identify what will not occur), rather than allowing expectations to be formed in the absence of supplier input. In particular, it should be careful not to alert the key account unnecessarily to its power in the relationship such that the account demands excessive resources and/or price concessions.

Clearly, the benefits of being named a key account vary from account to account. Nonetheless, among the sorts of benefits key accounts might expect are:

A single point of contact. A difficulty for customers in dealing with major suppliers is that they often have separate interfaces with individual suppliers' various business units. The appointment of a single individual with responsibility for the entire institutional relationship, the key account manager, should lead to improved communications, fewer surprises, faster access to resources, quicker decisions, improved conflict resolution, and generally increased ease of doing business.

Lower costs of securing input products. This benefit may be derived from lower prices, improved procurement efficiencies via reduction in numbers of suppliers, and the streamlining of key-account/supplier-firm interfaces, often via one-stop shopping.

Enhanced value. A close supplier/key account relationship may provide customers with a trusted advisor, personal attention and a variety of other benefits. These may include access to high-level supplier firm technologists, partnering on new products, early introduction and testing of new products, product design flexibility providing customized solutions to account problems, consistent and high-level service, and specially designed value-added support services.

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Indeed, key account relationships may enhance the probability of receiving value through the use of systems that base supplier payments on measurable results.

Example: Historically, advertisers paid their agencies a flat percentage of media advertising costs. Nowadays, advertising agencies and their key accounts (often consumer package goods companies) are developing systems for payment based on measurable marketplace results.

Guaranteed delivery when capacity is short. As supplier firms strive to improve operational efficiencies by running production facilities closer to capacity, shortages will inevitably develop. A key account relationship should protect the customer from all but the worst of supply shortages.

Long-term relationship. Increased closeness to the supplier firm results in ability to influence supplier-firm decision making leading to joint identification of opportunities and solutions to problems in a genuine win-win partnership, and may lead to an enhanced market position.

Example: Alder Inc., a major North American telecommunications firm told its supplier: "We expect you to provide solutions to the problems we face before we know we have a problem."

Nondirectly related benefits. In addition to those benefits that relate to the transactions between supplier and key account, the key account may receive other types of value from the supplier. Indeed, the supplier may be able to offer a myriad of corporate capabilities to the key account, ranging from the ability to get e-businesses up and running to managing the risk associated with changing weather patterns.

Finally, by the creation of a customer advisory board comprising non-competitive key accounts, the supplier firm may offer key account executives a forum to discuss broad topics of interest in a nonthreatening setting.

Cautions for Key Account Management

All forms of key account management try to direct attention to those accounts that are most important for improving value for the supplier firm's shareholders via improved profits, and organizational survival and growth. However, notwithstanding the considerable potential benefits to both supplier firm and key account discussed above, they should be balanced by several major cautions:

Too many eggs in one basket. A focus on key accounts implies a concentration of resources on few customers. If one or more of these customers is lost, the organizational implications may be severe. In the opening of this chapter, we highlighted the Ciena experience. The advertising industry provides another example:

Example: In an effort to secure the best possible services, major advertisers are conducting agency reviews increasingly frequently. In the mid-1990s, Ammitari Puris Lintas, a member of the Interpublic group, was awarded the entire Compaq account. Less than one year later, the account was reassigned to a competitor agency.

In an attempt to deal with this type of problem, Abbott Laboratories' account personnel submit nominations for their efforts in recovering troubled or lost relationships. Selected personnel are recognized and rewarded, but the program's major goal is to discuss and learn from negative customer relationships.

Insufficient benefits to the supplier firm. Regardless of the overall importance of a particular account, a key account relationship may have negative rather than positive effects. For example, if critical decisions at the key account, including procurement, are truly decentralized, alerting the customer to the variety, and value, of products purchased throughout its organization may lead to pressure for price reductions, volume discounts, and so forth; a better approach may be to "let sleeping dogs lie." Notwithstanding these concerns, the firm should consider all potential benefits from key account management. "If the dog will wake eventually," it may be better to play a role in its waking, rather than leave matters to chance, or to the competition!

Insufficient benefits to the potential key account. If the supplier firm does not carefully manage key account expectations, not only may the account see little benefit in the relationship, considerable dissatisfaction may ensue. Consider the following example when the status "improvement" required a change in firm contact personnel.

Example: A British Telecom regional sales manager received the following letter from a customer:

Recently, [our account manager, Helen Douglas] informed us that...we were scheduled to be "upgraded." I phoned Helen to tell her that we were very happy with the service she provided and did not wish to change to a new account manager. But she told us that the decision was company policy and not hers to change.

Subsequently, I called [several other managers within British Telecom]

So now I'm writing to you and appealing to your common sense rather than to company rule-books. I know it's your internal policy to reassign customers when they reach a certain size...We feel strongly we're better off remaining with Helen.

Certainly for this customer, designation as a more important account carried a significant penalty.

Limitation of opportunities. Successful key account programs are typically based on increasing the degree of interaction between supplier firm and customer organization. The downside of closer relationships is that the key account may insist on developing a list of competitor firms with which the supplier firm may not do business. Conversely, other potential customers may be nervous about such a close relationship between a potential supplier and one of their competitors. In either case, limitations are placed on the supplier firm's market opportunities.

Example: Procter and Gamble (P&G) insists that any advertising agency with which it does business cannot work with one of its competitors. As a result, agencies with P&G accounts are deprived of the opportunity of working with such major potential customers as Colgate-Palmolive, Unilever, Nestlé, and Philip Morris.

Example: In 1999, Coca-Cola forged a major marketing relationship with Universal Studios. According to Fortune, Disney executives were "not pleased" to learn about this relationship from The Wall Street Journal. The result: a fraying partnership relationship between Coke and Disney and increased business for Pepsi.

Cost and Bureaucracy. The addition of a new managerial system to the traditional sales force structure leads to significant out-of-pocket costs. Indeed, supplier firms frequently initiate key account management by focusing on the development of complex sets of policies and procedures. These "top heavy" systems are far too cumbersome. Commencing with relatively few key accounts, then broadening out as the firm gains experience and develops some best practice is a far preferred process.

Significant organizational change. Whether the current system is the firm's first attempt at key account management or represents an evolutionary stage from an earlier process, significant change is typically required -- in the line organization and reporting relationships, in processes such as compensation, and in organizational culture. Unless the implications of these changes are well thought through, and steps taken to minimize the otherwise inevitable disruption, serious consequences, including abandonment of key account management, may follow. The sales force is a particular concern:

Sales force resistance. In many key account management systems salespeople lose some degree of autonomy. In some cases, responsibility for key accounts is entirely removed from the sales force's jurisdiction. These territorial issues and related concerns for sales compensation may lead to severe morale problems.

Unclear responsibility and authority. Frequently, key account management implies an additional reporting relationship for salespeople. Rather than reporting solely to a district or regional sales manager, they also report, in a dotted line sense (sometimes weaker, sometimes stronger), to a key account manager. Not only may these dual reporting relationships invoke considerable tension, salespeople may be required to execute action plans that they had only a minor role in developing. In addition, it may be difficult to identify the causes for success and failure at a particular key account and, consequently, to apportion praise and blame correctly. This is a particularly thorny issue when compensation is involved.

In addition to these cautions, over an operating cycle, there are many occasions when difficulties in supplier-firm/key-account management relationships will occur, some driven by the key account, others by the supplier firm. Profit pressures may be extreme: the key account may continually strive for price reductions from the supplier firm, or key account management in the supplier firm may be unwilling to raise prices for fear of adverse reaction. In addition, the key account may be unwilling (or unable) to provide the forecasts that the supplier firm needs to develop its production schedules, yet be furious when delivery is delayed on short-notice orders.

Other difficulties occur when the key account manager is unwilling to accede to a production request to drop an unprofitable product because it is used by the key account. Conversely, wishing to please personnel at the key account, the manager may be aggressive in offering products the supplier firm is unable to produce, or which are not yet ready for delivery. Finally, the smoothest running key account management system will have a difficult time placating customers faced with incomplete order fulfillment, late deliveries, overcharging, poor service, and the like.

For most organizations the benefits of some form of key account program outweigh the associated costs. Some of the factors leading to top management commitment for a key account program are noted. Those senior managers committed to key account management must carefully analyze the chosen key accounts and the various available management systems, then make the tough tradeoffs in choosing that system offering the most effective and efficient method for managing the firm's key accounts.

THE CONGRUENCE MODEL FOR KEY ACCOUNT MANAGEMENT

Key account management embraces the process of identifying the firm's current and future critical customer assets and putting in place management systems designed to increase revenues and profits through enhanced customer loyalty. Because key accounts are so important for the firm's future, the overall manner in which they are addressed is a serious matter worthy of top management concern. Indeed, as management develops strategy for a particular market arena, it may discover that its success or failure depends very largely on the results it achieves with a limited number of key accounts.

Good key account management requires consideration of several complex elements in an overall management process. It is not simply a matter of appointing a few key account managers or introducing a key account planning system. Rather, consideration must be given to several interconnected building blocks that we term the key account congruence model.

The basic thrust of the congruence model is that the firm develops strategy in response to its environmental realities. As a result, other elements must fall into line. Here we define the four elements of the congruence model:

Strategy: the extent to which the supplier firm is prepared to commit resources to key account management, the development of criteria for selecting key accounts, and building and managing the key account portfolio.

Organization: the line organization designed to support the key account strategy, and the roles and responsibilities of the principal players, in particular, top management, the key account director, and key account managers.

Human Resources: the critical human resource assets involved in managing key account relationships; we focus particularly on the key account manager.

Systems and Processes: the human- and information-technology-based systems and processes required for developing and managing key account relationships. An especially important process is developing the key account plan; related processes for making resource allocation decisions both among key accounts and between key accounts and other customers, are also very important.

The key account congruence model addresses the supplier firm's approach to dealing with key accounts as a whole. Nested within the congruence model are specific processes for managing individual key accounts.

Leading and managing successfully in the context of the key account congruence model is not a simple matter. Success will be achieved only if senior corporate executives fully understand the issues involved in key account management and are prepared to put in place the organizational, technological, financial, and human resources necessary to manage the firm's key accounts on a long-run basis.

The purpose of this book is to provide senior management both with a framework for understanding the critical issues involved in key account management, and a methodology for constructing a key account plan. This plan should function as a living document that drives firm actions by providing serious competitive advantage at the firm's key accounts.

STRUCTURE OF THE BOOK

In Chapter 1 we noted that in its attempts to improve shareholder value, a firm faces many pressures on its existing sales force system. The resulting fragmentation is leading to a focus on key account management. Key account management can offer significant, but different, benefits to both supplier firms and customer organizations but these must be tempered with a series of cautions. As firms move to address their most important customers, they must give serious consideration to the several elements of the key account congruence model.

In Section II, we elaborate on three of four elements of the congruence model. In Chapter 2 we discuss the firm's commitment to a key account strategy, and discuss the nature of key accounts. We examine key accounts at different organizational levels, and discuss various types of relationships between supplier firm and key account. We then move to identifying and using criteria to select key accounts, and conclude by considering different approaches to conceptualizing the firm's key account portfolio with a view to deciding how to allocate resources across the firm's entire key account base. In Chapter 3, we shift to organizational issues and explore the types of organization structure available, and the roles and responsibilities of critical players in the key account management process. Chapter 4 focuses on human resources, in particular on the critical organizational position of key account manager. We identify required skill sets, then discuss a series of issues in recruitment and selection, training, retaining, and rewarding key account managers.

In Section III, we turn to the fourth item in the congruence framework, systems and processes, focusing mainly on the key account planning process. Here we address situation analysis, strategy formulation and execution, and mechanisms for coordination and control. In Chapter 5, we focus on the various elements of the key account analysis. In Chapter 6, we complete the analytic portion of the situation analysis with discussions of competitor analysis and analysis of the supplier firm. We then address planning assumptions, and opportunities and threats for the supplier firm at the key account. These two chapters form the foundation for the key account strategy presented in Chapter 7. Here, we introduce vision, mission and the various elements of the key account strategy. In Chapter 8, we move to other systems and processes and address four major topics -- keeping the key account team focused, interfacing with the key account, the role of technology, and performance monitoring.

In the final two chapters of the book, we examine two fast-developing areas in key account management. In Chapter 9, we discuss partnering with key accounts, including the evolution of supplier-key-account partnerships, and present a methodology for identifying partnership opportunities. We highlight the requirements for successful partnerships. In Chapter 10, we turn our attention to global account management, and discuss how managing global accounts differs from, and is more complex than, managing key accounts on a domestic basis.

In addition to the main discussion in the text, a series of seven Exercises contains a guide for developing a key account plan. These exercises comprise several tested sets of questions that enable the key account manager to conduct an in-depth situation analysis and lay out the key account strategy and action programs. Finally, several of the chapters have appendices that elaborate on specific issues.

Copyright © 2001 by Noel Capon