How to Manage Big, Powerful Clients - How to Manage Big, Powerful Clients - ProfitablyProfitably

by

Professor Malcolm McDonald

Emeritus Professor,

Cranfield School of Management

27th October 2009

Agenda

Challenges Their expectations and demands

– Why price is important to clients

– The impact of price on profits

– How powerful clients classify their suppliers

– The expectations and demands of powerful clients How to respond as a supplier

– How world-class suppliers classify powerful clients

– How to develop profitable strategies for powerful clients

Challenges

Market Maturity

Globalisation

Customer/Client power

Challenges

Market maturity

Technology

Production

Sales

Accountancy

Fads

Marketing

© Professor Malcolm McDonald

Challenges

Globalisation

Embrionic markets Growing markets

Guerrillas

2nd tier

Leaders

Mature markets

New guerrillas

?

New global leaders

Challenges

Client power

Double your money: cut spend on purchases

Profit (6%)

Other costs(44%)

Profit (11%)

Purchases

(50%)

Purchases(44%)

‘Purchasing: adding value to your purchasing through effective supply management’ Institute of Directors, September 2003

Other costs(44%)

Client power

Big clients are getting bigger

clients are rationalising their supplier base

clients have become more sophisticated

clients want tailor-made solutions

The cost of serving clients is increasing

Suppliers and clients are developing new ways of working together

BiscuitManufacturer

Board/Packaging

SpecialityAdhesives

Metal Bearings

24

76

16

64

14

39

18

44

BiscuitManufacturer

Board/Packaging

SpecialityAdhesives

Metal Bearings

t-25 t.o

% of totalsupplier

sales

From: Profitable Customers, Charles Wilson

Sales to the top 5 clients as a % of total supplier sales over 25 years.

Increasing client concentration...

Client power

Big clients are getting bigger

clients are rationalising their supplier base

clients have become more sophisticated

clients want tailor-made solutions

The cost of serving clients is increasing

Suppliers and clients are developing new ways of working together

Increasing costs of interfacing with clients

Supplier to the print industry (turnover £200M)

Interface costs £'000 per client

(adj. for inflation)

t-15 t.0

Top 10% of clients

60

140

t.-15 t.0

Bottom 10% of clients

159

Costs of the frontline (Sales, service, trade promotions etc. over 15 years

Source: Profitable clients, by Charles Wilson

What is a Key Client?

Percentage of our business

Turnover

“Added Value”

Potential

From ‘Key Account Management’ Cranfield University School of Management, 1996

% of Criteria for partnership respondents

Desirable factors in suppliers

Ease of doing business 100

Quality (product) 100

Quality (people factors) 100

Volume related 64

Added value/value for money 64

Company culture 36

From ‘Key Account Management’

Cranfield University School of Management, 1996

Suppliers are still interested principally in volume

Whilst they are interested in the potential for

‘added value’, most still do not measure account

profitability

The widening rift between profitable and unprofitable clients:

t-15

1 2 3 4 5 6 7 8 9 10

15

1716

1312

10

76

4

1

1 2 3 4 5 6 7 8 9 10

% of total companyprofits

Largest 10%of clients

Smallest 10%of clients

client decile groups

1 2 3 4 5 6 7 8 9 10

-3

26

29

2220

8

4

-3 -3

1 2 3 4 5 6 7 8 9 10

% of total company

profits

Largest 10%of clients

Smallest 10%of clients

client decile groups

t.o

% of company profit by client decile (each decile = 10% of client base)

Adapted from: ‘Profitable clients’ by Charles Wilson

LOVE

Low

High

HATE

SalesPotential

How well do you know the real profitability of thetop ten accounts?

27

23

13

10

15

56

1

38

19

15

6

8

3

65

1

21

19 19

9 9

6

11

6

19

22

18

13

10

6 6

1

3

32

20

12

4

16

2

10

4

1 2 3 4 5 6 7 8 9

2001

2002

2003

2004

2005

TotallyNotat all

%

Creating closer relationships with supply chain partners

Marketing

Operations

InformationSystems Sales Purchasing

Marketing

Operations

InformationSystems

FromFrom

Supplier client

D

I

R

E

C

T

O

R

S

D

I

R

E

C

T

O

R

S

Creating closer relationships with supply chain partners

InformationSystems

Operations

Marketing

Operations

InformationSystems

Marketing

Key-AccountCo-ordination

Supplier

To

SupplierDevelopment

client

Directorsselling company

Directorsbuying company

Strategic Purchasing

Nurture ClientExpand BusinessSeek New Opportunities

CoreCore

NuisanceNuisance

Give Low AttentionLose Without Pain

ExploitableExploitableDrive Premium PriceSeek Short Term Adv.Risk Losing client

SUPPLIER PREFERENCESUPPLIER PREFERENCE

VALUE OF BUSINESS

ATTRACTIVENESS

Source: PMMS Consulting Group

DevelopmentDevelopment Cosset Client

Defend VigorouslyHigh Level of ServiceHigh Responsiveness

Business Contribution

Criteria

Business ProcessCriteria

StrategicSuppliers

PreferredSuppliers

CommoditySuppliers

• “First mover” advantage• Channels to market• Reverse revenue generation

• VP lead• Business strategy driven• “A team” on both sides

• Point-to-point solution• Technology access• Operational advantage

• Cost improvement• Superior service levels• Ease of transaction

• Relationship manager• Strategy from CatMan• SLA scorecard

• Managed locally• Performance monitored• E-enabled

10

20

600

1, 350

3,000

10

< 1% ofsuppliers

c. 20% of all suppliers

c. 80% of all suppliers

Type

Supplier Relationships as a Source of Business Advantage

Business ProcessCriteria

Type

• Maximum economic and strategic leverage, i.e. product / market differentiation.• Attainment of time to market, quality & productivity objectives.• Shareholder value creation.• Blending core competencies, leadership capabilities & complementary strengths (allowing outsourcing of non-core capability).• Adding real productivity & value (significant cost savings & revenue potential).• Globally focused, linkages to new business opportunities & capable of complementing the business focus.• Attainment of high performance, low cost & strategic objectives (producing unique design, integration & marketing capabilities).

1.Vision

1.Vision

2.Culture

2.Culture

3.Impact

3.Impact

4.Intimacy

4.Intimacy

5.Balance

5.Balance

• Sharing of long-term vision and orientation.• Global focus and commitment with service & support capability.• Defined but yet flexible boundaries.

• Similar or complementary values.• Understanding of the process to deal with differences.• Flexibility in approach since circumstances may change over time. An exit route needs to exist.

• Readiness to share ideas & information.• Not overly locked into a competitor.

• An element of demonstrated commitment from both sides.• Readiness for risk taking and sharing of costs.• Building trust and, thereby, moving to intimacy.

“Must Have’ Criteria Drive Hard and Soft Measures

Preliminary selection of key accounts

Key account preliminary categorisation

Top 15 (in volume/revenue generated)

Next 30

Next 55

A

B

C

Preliminary Selection of Key Accounts

Large

Medium

Small

Strategic Star

Status Streamline

High

High

Low

Supplier BusinessStrength with client

AccountAttractiveness

Exploratory

Basic

Cooperative

Interdependent

Integrated

Strategic intent of seller

Strategic intent of buyer

Adapted from a model developed by Millman, A.F. and Wilson, K.J.

“From Key Account Selling to Key Account Management” (1994)

The relational development model

Supervisors

Clerks

Operators

Managers

Directors

PurchasingManager

Supervisors

Clerks

Operators

Managers Key AccountManager

SellingSellingCompanyCompany

BuyingBuyingCompanyCompany

Directors

Selling Company Buying CompanyMgrs Mgrs

Operations

Administration

Board

Operations

Administration

Board

Key AcctMgr

Maincontact

Selling CompanySelling Company Buying CompanyBuying CompanyOperationsFocus team

FinanceFocus team

EnvironmentFocus team Market research

Focus team

Key AcctMgr

Maincontact

R&DFocus team

JointBoard Meetings

Directors

Accounts

Marketing Marketing

Service Service

Directors

Accounts

Selling company Buying company

ProductionProduction

Purchasing Manager &Key Account Manager

Inbound logistics &Order processing/

client service?

Integrated

Exploratory Basic

Co-operative

Interdependent

Selling company Buying company

Boa

rd

Adm

in OpsK

AM

gr

Selling company Buying company

Boa

rd

Adm

in OpsK

AM

gr

Relationships and the client profitability trap

-20

0

20

40

60

80

100

120

140

160

Basic Co-operative Interdependent Integrated

Sales

Cost of sale

Attributable overheads

Total costs

Contribution

£m

Operations Focus Team

Finance Focus Team

R&D Focus Team

EnvironmentFocus Team

Market Research Focus Team

MarketingFocus Team

Buying company

KeyAccount

Mgr

Selling company

Buyer

Cranfield University School of Management 1996

Integrated KAM

Many activities cross the boundaries - especially information based activities such as:Sales Forecasting, Capacity Planning, Resource Scheduling, Pricing, etc

Support ActivitiesInfrastructure

Human ResourceManagement

Product & TechnologyDevelopment

Procurement Value Added - Cost= Profit

- Legal, Accounting, Financial Management

- Personnel, Pay, Recruitment, Training, Manpower Planning, etc

- Product and Process Design, Production Engineering, Market Testing, R&D, etc

- Supplier Management, Funding, Subcontracting, Specification

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

SALES &MARKETING

SERVICING

eg.Quality ControlReceivingRaw Material Controletc

eg.ManufacturingPackagingProduction ControlQuality ControlMaintenanceetc

eg.Finishing GoodsOrder HandlingDespatchDeliveryInvoicingetc

eg.client mgmtOrder TakingPromotionSales AnalysisMarket Researchetc

eg.WarrantyMaintenanceEducation / TrainingUpgradeetc

Primary Activities

High LowHigh

Low

Key accountattractiveness

Supplier business strength with client

Selectiveinvestment

Management for cash

Strategicinvestment

Pro-activemaintenance

The key client portfolio

K.A. AttractivenessFactors

10-7 6-4 3-0 X weight

Volume/value 15

Growth/potential % 30

Profit potential% 40

‘soft’ factors 15

100

High

Low

Relative client Satisfaction

LowHigh

XXKey Account Selection Matrix Tool - KA Selection Matrix

Chart

Display Spend:

Display Group:National

National

Spend with UsSpend with Us

client: College Group Relative client Satisfaction: 0.80 Account Attractiveness: 4.40 Spendclient: College Group Relative client Satisfaction: 0.80 Account Attractiveness: 4.40 Spend

Show GroupsShow Groups

RedrawRedraw

Acc

ou

nt

Att

ract

iveness

2

4 127

10

3

8

6

5

1

SupplementaryService Elements

1 Alexander Smith $14,000,0002 Ash & Williams $13,000,0003 College Group $12,000,0004 F T Group $9,900,0005 Harpers $7,600,0006 Parker $9,400,0007 Quality Insurers $16,200,0008 Randsome $14,500,0009 Royal & Co $6,400,00010 Thompson Group $32,000,00011 Tudor Rose $8,000,00012 Woods $11,500,000

clients on ChartXX

IDID

NameName

Maximum SpendMaximum Spend

SupplementaryService Elements

Relationship StageXX

Co-operative

Basic

Exploratory Integrated

Interdependent

11

9

http://www.TheMarketingProcessCo.com

_______________

Selecting and categorising clients by potential

High Low

High

Low

Accountattractiveness

Supplier business strength with client

Selective investment

Management for cash

Strategicinvestment

Pro-activemaintenance

Strategic Star

Status Streamline

Page 37

Key measurements in KAM evaluation

Costreduction

Growth

Profitability

KAM

Page 38

Setting expectations of account performance

P

GC

P

GC

P

GC

P

GCHigh Low

High

Low

Accountattractiveness

Supplier business strength with customer

KAMhigh

KAMhigh/medium

KAMmedium

KAMlow

Streamlinecustomers

Manage for cash

Streamlinecustomers

Manage for cash

Strategic customers

Strategic investment

Strategic customers

Strategic investment

Statuscustomers

Pro-active maintenance

Statuscustomers

Pro-active maintenance

Starcustomers

Selective investment

Starcustomers

Selective investment

Category

Strategic clients

Status clients

Star clients

Streamline clients

Description Very important clients, but the relationship has developed still further,

to the level of partnership.The relationship is ‘win-win’; both sides have recognised the benefits they gain from working together.clients buy not on price but on the added value derived fro being in partnership with the supplier.The range of contacts is very broad and joint plans for the future are in place.Products and services are developed side-by-side with the client. Because of their large size and the level of resource which they absorb, only a few clients fall into this category.

Very important clients (in terms of value).Commit to security of supply and offer products and services which are tailored to the client’s particular needs.Price is less important in the client’s choice of supplier.Both parties have some goals in common.The two organisations have made some form of commitment to each other.Invest as necessary in these clients in order to continue the business relationship for mutual advantage, but do not over invest.

Price is still a major factor in the decision to buy but security of supply is very important and so is service.Spend more time with some of these clients and aim to develop a deeper relationship with them in time.

These clients usually want a standard product, ‘off the shelf’. Price is the key factor in their decision to buy.The relationship is helpful and professional, but transactional.Do not invest large amounts of time in the business relationship at this stage.

Exploratory

Basic

Cooperative

Interdependent

Integrated

Strategic intent of seller

Strategic intent of buyer

Adapted from a model developed by Millman, A.F. and Wilson, K.J.

“From Key Account Selling to Key Account Management” (1994)

Key Client AnalysisKey Client Analysis

Business Partnership Process

11

22

33

44

55

66

77

88

Market / segmentselection criteria

Defining and selectingtarget key accounts

Industry driving forcesanalysis

Client’s annual reportsummary and financialanalysis

Client’s internal valuechain analysis

Client’s buying process and information needsanalysis

Our sales history withthe client

Competitive analysis

Client’s objectivesanalysis

99

For each key account

Client’s

Basic

CSF

Analysis

Process

Ourobjectives,strategiesand planfor T + 3

The ApplicationsPortfolio Analysis

Strategic High Potential

Key Operational Support

GainingAdvantage

AvoidingDisadvantage

Applications whichare critical to

achieving futurebusiness strategy

Strategic

Applications whichmay be critical inachieving future

business strategy

High Potential

Applications uponwhich the

organisationcurrently depends

for success

Key Operational

Applications whichare valuable but

not criticalto success

Support

Creating

Advantage

Avoiding

Disadvantage

The application portfolio

Adapted from Professor Chris Edwards, Cranfield School of Management

The market understanding process

KA A

KA B

KA C

KA D

Etc.

Marketing Sales Mfg. IT R & DEtc.

Finance &Accounting

HR Logistics

Th

e “

Mar

keti

ng

” D

irec

tor

Blake and Mouton

1/9The clients

friend

9/9The problem

solver

1/1The order

taker

9/1The pressure

salesman

5/5Compromise

“Method” approach

Concern for client

Concern for making the sale

9

1

91

Significant differences

Buying companies valued...

– integrity

– Trust

Selling companies valued…

– Selling skills

– Negotiating skills

Developing key account professionals

Commercial awareness

Interpreting business performance

Advanced marketing techniques

Business planning/strategy

Finance

Project management

Interpersonal skills

Some key findings from KAM research

Key account management is a strategic activity

KAM is fashionable, but difficult

KAM can develop beyond partnership to synergy

There are mismatches between suppliers and clients

KAM does reduce costs and improve quality but these are rarely measured

A key account manager needs far more skills than a sales person

KAM needs a client-focused organisation

AppendixAppendix

KA Planning Process

The output of the key account planning process

ie. The contents of the KA Strategic plan

Diagnostic tools/techniques

Mission statement

Financial summary

Critical success factors analysis

Downside risk assessment

ForecastingBudgeting

Porter matrixBCG matrixDirectional policy matrixAnsoff matrix

SWOT analysesPorter’s value chain analysis

Key Account Overview

Key AccountStrategies

Key account portfolio Summary

Key account opportunities/threats

Resource Requirements/budgets

Key account strengths &weaknesses

Issues to beaddressed

Supplier’s trading historyBuying processDefinition of businessSTEEP analysis summary

Market researchMarket segmentationGap analysisProduct life cycle analysisDiffusion of innovationAnsoff matrixSTEEP analysisMarket mapping

ProductPricePromotion

Place

by productby marketoverall

by productby marketoverall

Key AccountPlanningProcess

Phase 1

Goal setting

Phase 2

Situation review(i) For the customer

Phase 3StrategyFormulation

Phase 4ResourceAllocation

Mission statements

Market structure summary

Key AccountCompetitorAnalysis

Key account objectives & strategies

by productby marketoverall

Key accountassumptions

Directional policy matrixResponse elacitiesThe marketing mix

Supplier objectives

Supplier strategies