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The Key Account Management Dilemma - Risks!

21st Aug 2006
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Professor Lynette Ryals of Cranfield School of Management, is an acknowledged authority on Key Account Management (KAM) and conducts ongoing research into this field. She also runs management courses on best practices in KAM. As she said:

"The role of the key account manager has become more important, but also much tougher during the past few years as customers become more demanding, more sophisticated and frequently global in their operations."

This interview explores some of these challenges and the dilemmas that are faced by firms hoping to develop stronger and more collaborative ties with their strategic customers.

A brief history of KAM and product centric issues

Lynette said that references to Key Account Management first surfaced in the mid 1990’s and paradoxically the term had both widened and narrowed in the intervening years.

The vast majority of firms are still organised along product lines. For such firms what often happens is that in one division a customer might be a 'key account', whereas in another division the customer may be less significant.

Lynette gave the example of a building supplies firm supplying Tesco with different products from different divisions. In one division Tesco is a top customer and is treated accordingly. The other division rarely gets any business from Tesco and as a result the customer is afforded no special status. Overall Tesco is extremely important to the company, but these divisional lines and unequal treatment end up damaging the relationship. This is one of the biggest issues facing product aligned companies.

These problems are magnified for international companies. A customer may be very important in its home country and be treated as insignificant in another. There is a growing trend among global companies to source products globally, consolidate distribution points in fewer places and centralise their buying. They want global deals and to be treated consistently and seamlessly irrespective of their location.

Wider scope of KAM

This raises major structural and operational issues which suppliers have to solve. It is not sufficient therefore to set up a KAM or Global Account Management team, the entire operations including supply-side needs to be properly coordinated so that the demands of these large customers can be met.

Narrower Scope of KAM

At the same time emerging best practice shows that many firms which have adopted KAM, spread their resources too thinly, treating all big spending customers as key accounts. Research shows that the optimum number of Key Accounts is 20-30. The reason for this is that KAM means much more than simply providing a dedicated relationship resource. To satisfy strategically important customers usually means providing them with some highly customised product and service. This requires substantial investment across the entire organisation so that it can fulfil the customer’s needs. Being a Key Account Manager in this scenario means stepping up to the role of orchestrator of the firm’s resources. It’s a very senior management role.

Xerox developed a Global Account Management team. The authority invested in each global account manager and a recognised career path, shadows that of most country or divisional General Managers. The Global Account Manager (GAM) has the authority to cut across departmental and national boundaries in order to serve a global customer. Expectations have been firmly established across the organisation to support these GAMs, irrespective of the value received by the business unit or individual country.

Risk and the Marzipan Layer

One of the biggest issues with KAM is how to trade-off risk. The assumption that the biggest revenue earners are the most profitable is often false. In the late 1990’s several suppliers to Marks & Spencer made substantial losses as the retailer forced them to reduce prices. They are not the only ones. Power is often concentrated in these large companies at the expense of their suppliers. Great care should therefore be taken before committing substantial resources to these companies who demand greater service at lower cost.

The mistake that many companies have made with KAM is not to monitor the individual customer profitability within their key account portfolio. Many have fallen into the trap of over-investing in services to keep the customer whilst reducing their prices in the face of tough buying practices by the customer’s procurement department.

This is one reason repeated studies show that the most profitable customers are often just below those that generate the largest revenue. To counter this risk, firms need real-time data not just from their accounting systems but also which show the real cost of serving these customers. (see 6 steps to Customer Profitability Analysis by Professor John Murphy)
Firms organised along product lines cannot get this level of insight into the financial dynamics operating in their important customer accounts.

Reward, skills and accountability of the KAM

If the firm does not have access to the complete picture of each customer’s contribution they are in effect flying blind. They may be comforted by greater revenue coming in, but assumptions based on standard product or service margins are potentially very dangerous.

To make it pay, the firms which practice KAM the best, make information management at the customer level a core competence. They also look at longer term measures such as Lifetime Value.

The skill set is very different from that required in the typical sales environment. To be successful takes investment and time. If the reward system doesn’t reflect this, then short term thinking is likely to prove a barrier to success.

Key Account Managers are normally paid a higher percentage of their total remuneration as a basic with a small percentage related to performance. This reflects the longer term demands of the role. Variable pay is not based on volume like the normal sales compensation package, but profit and increased cash flows over time.

Firms which simply task an existing new business salesman with the role of KAM don’t tend to succeed as very different attributes are required. The most important of these is trust and integrity. "We see a lot of B2B customers putting trust and integrity at the top of their list in terms of what they want to see from a key account manager. These take time to establish and the onus is on the supplier to invest time and effort and the right people, up front. They must therefore think very carefully about the nature of the customer and long term potential –it’s a risky business."

Risk mitigation

I asked Lynette what advice she had for reducing this risk of over investment. She said that firms need to consider the type of partnership arrangement the customer is looking for. In the Marks & Spencer example earlier, it is clear that the relationship with some of their suppliers back then, was very one sided. If you have to trade with a customer like this, then put in place a very strong negotiator.

If the customer is open to a more balanced and collaborative relationship, then the key account manager must ensure that there is far greater transparency into his or her organisation. An 'open-book' approach helps the customer to understand the firm’s situation, and most customers in this category will want their suppliers to make money.

The key account manager must also act more like a COO coordinating the firm’s resources, the sales support team, operations and they may also use extranets to foster rapid communications and fulfilment. In the consumer goods field this has led to the emergence of CPFR – Collaborative Planning, Forecasting and Replenishment systems and processes being put in place to serve the demand more predictably, and cost effectively for both the customer and supplier, or supplier network.

The operational and team based skills required by the KAM in this environment are extensive.

Unlike the lone hunter salesman, the key account manager will hold the P&L for the customer relationship and be rewarded on the success of the multi-functional team. This team might include supply chain experts, finance, marketing R&D, IT support, alliance and channel management in addition to sales specialists or presales support consultants. It is very much like a business within a business, which is why the demand for general manger type skills is so high.

Summary of Key attributes of successful KAM

Based on Lynette’s advice, before a firm jumps on the KAM bandwagon, it must first ask itself some very serious questions:

  • With which customers does it make sense to attempt to build long term relationships?
  • Do we have the resources and can we commit them to these 20 -30 strategically important customers?
  • What makes a customer strategic? Long term growth potential? Profit potential? Or are we going to risk our business with a purely revenue focused yardstick?
  • Who in our organisation and amongst our sales force has the right attributes to step up to the KAM role? Or will we need to hire people? If so what profile do we need to insist on?
  • Can we mitigate the risks of being too dependent on fewer customers? If so how?
  • What practices, processes and policies must we adhere to across our organisation if we are to succeed?
  • What information do we need to support the team based roles and how will we make it visible?
  • Are we able to measure profitability at the individual customer level?
  • What reward system must we put in place to make sure we support the right kind of behaviour which will lead to enduring relationships?
  • Is it worth it?

As you can see KAM is not for the faint-hearted, but with some careful thought, planning and training, it can be a very powerful way of cementing highly collaborative relationships with strategically important customers in a way that everyone benefits.

By Jeremy Cox CMC Editor Business & Strategy
If you would like to contact me and share your own experience or opinion please contact me at [email protected]

About Professor Lynette Ryals

Professor Lynette Ryals joined Cranfield from a major management consultancy group. She specialises in key account management, strategic sales, planning and customer portfolio management and has completed a PhD on customer profitability. Lynette began her career in the City as a fund manager and stockbroker trading UK equities, options and futures. She then moved to a marketing company to work on corporate development and acquisitions, subsequently transferring into the consultancy arm of the same business group. Lynette is a Registered Representative of the London Stock Exchange and is the only woman in the UK to have passed the Fellowship examinations of the Society of Investment Professionals. Her teaching assignments include the Cranfield MBA programmes as well as tailored corporate programmes and open programmes run at Cranfield. At Cranfield, she has held positions as MBA Director (2000-2002) and Director of the MSc in Strategic Marketing (2002-2004) and is also the Director of Cranfield`s Key Account Management Best Practice Research Club.

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