In this article we will discuss about:- 1. The Origin of KAM 2. Determining the Key Account Relationship 3. Objectives and Strategies 4. Implications for the Key Accounts Manager.
The Origin of KAM:
The roots of KAM can be found in various fields such as industrial marketing, sales managements, purchasing managements, the psychology of customer behavior and relationship marketing. These disciplines all share a marked emphasis on relationship-building within a transactional context, a quality characteristic of (and crucial to) effective KAM.
The development of KAM has been gradual and successive, evolving over time to meet changing needs and altered thinking. This evolution is reflected in the KAM process as a progression of five distinct stages of relationship maturity as illustrated in Figure 17.1.
As the nature of the customer’s relationship with the selling organization deepens from that of an ‘anonymous buyer’ to more of a ‘business partner’, the level of involvement between the two parties becomes correspondingly more complex.
We have labeled the typical stages of relationship maturity as Exploratory KAM, Basic KAM, Cooperative KAM, Interdependent KAM and Integrated KAM. Our research showed that each stage of KAM is clearly distinguishable by the issues impacting on the relationship at the time.
Although Figure 17.1 shows an upward or positive development of the business relationship, a selling company should not always expect this to be the case. As with personal relationships, the business partnership can founder for a number of reasons, ranging from a relatively minor misunderstanding to a massive breach of trust. Additionally, the market position and priorities of the buying or selling company can change in ways that negate the strategic necessity for a close relationship.
Recognizing that the KAM relationship can break down at any time, Figure 17.1 nonetheless provides an overview of what can happen if all goes well.
Exploratory KAM can be described as the ‘scanning and attraction’ stage. Like a spaceship seeking its mother craft, both seller and buyer are sending out signals and exchanging messages prior to taking the decision to get together.
Broadly speaking, the aim of both parties is to reduce costs. The supplier prefers customers who are leaders in their respective markets and can offer high volume sales over lengthy periods. The buyer is looking to safeguard the quality and quantity of supplies it purchases in future.
Both parties instinctively know that any form of lasting commitment will be superior to ad hoc, tentative arrangements. Thus commercial issues such as product quality and organizational capability feature strongly in KAM. Expert selling and negotiating skills and also paramount in the inevitable discussions that take place about price.
The key account manager and the purchasing manager must be capable of interacting effectively and on a regular basis in order to bring the two organizations closer together.
Successful bonding relies heavily on the key account manager’s ability to encourage his or her company to become more customer-focused by improving production processes or internal procedures accordingly. All too frequently other managers block proposed changes by putting their individual interests before those of the company.
The key account manager must have high level status (or top level backing) to overcome such adversity. Moreover, the implications of KAM must be made blatantly clear throughout the supplying organization.
At this early stage, it is unlikely that either party will disclose confidential information as no basis of trust has yet been established. A careful and concerted effort is required to protect and cultivate the fragile relationship.
At the Basic KAM stage, transactions have begun and the supplier’s emphasis shifts to identifying opportunities for account penetration. This means that the key account manager needs to have a greater understanding of the customer and the markets in which the customer competes.
The buying company, meanwhile, will continue market testing other suppliers for best price as it seeks value for money. It is, therefore, essential for the selling company to concentrate on packaging the core product or service and its surround into a customer-specific offer. Actions such as the simplification of ‘paperwork’ systems can contribute to a customer-friendly appearance.
At this primary stage, although there may still be a lack of trust, the relationship undergoes a subtle change structurally. The key account manager and the customer main contact are closer to each other with their respective organizations aligned supportively behind them.
The single point of contact presented by the key account manager is a powerful benefit to the buying company in getting things done. To provide an effective customer interface, the key account manager must not only be highly skilled and approachable, but he or she must have the status to demand and obtain speedy responses from the selling company whenever it becomes necessary. Without such status, the key account manager will be bypassed and, for example, a more senior figure will be sought who can deliver the buyer’s requirements.
By now an element of trust has developed and the selling company may be a ‘preferred’ supplier. However, the buying company is rarely prepared to put all of its eggs into one basket and will periodically test the market to check alternative sources of supply.
With increasing trust comes a greater preparedness to share information about markets, short-term plans and schedules, internal operating systems and other issues. Employees of the selling company enter into discussions with their counterparts in the buying company and vice versa, forging links at all levels from operations to the boardroom. This collaboration transforms the business relationship into a network with the key account manager and the purchasing manager at the core, as shown in Figure 17.4.
The multiple relationships portrayed in Figure 17.4 often extend beyond the workplace into the social arena. Interactions may take the form of organized events (such as golf) days or be less formal affairs (such as small dinner parties).
This network arrangement brings new strength to the relationship, highlighting the fact that customer service operates on many levels and is driven by a desire not to disappoint personal contacts. It is this trust between people which gets results, rather than the somewhat patronizing statements of intent or customer charters favoured by many companies.
However, as the willingness to cooperate is voluntary, not contractual, the relationship is vulnerable to breakdown caused by staff turnover or random management.
At this stage, the buying company regards the selling company as a strategic external resource. The two companies are sharing sensitive information and engaging in joint problem-solving. Such is the level of maturity of relations that each party allows the other to profit from the partnership. Consequently, pricing is long-term and stable, perhaps even fixed.
There also exists a tacit understanding that expertise will be shared. Collaborative programmes to improve products or to simplify the administrative systems which support the commercial transactions provide evidence of this interdependence. The selling and buying companies are now jointly communicating at all levels. It should be noted that the main customer contact is by now not necessarily the purchasing manager, but may be someone more senior.
Here, the corresponding organizational functions communicate directly. The key account manager and the customer main contact adopt a more supervisory role, ensuring that the various interfaces are effective and that nothing deters or disrupts the working partnership.
The partnership agreement is long-term, extending to perhaps three or four years. Some buyers in our study asserted that in practice there is no limit. Even so, performance stipulations contained within partnership agreements may affect the longevity of commitment. The selling company will strive to uphold the ‘spirit of partnership’ by meeting all performance criteria consistently and to the highest possible standards.
However, as there are no exit barriers in place at this stage, it is still possible for both parties to end the relationship.
Integrated KAM refers to the companies relating so strongly and pervasively that they create a value in the market place over and above that which either could achieve individually. In effect, the two companies operate as an integrated whole while still maintaining their separate identities.
At this stage, the key account manager’s role changes fundamentally. The multiple linkages now function in a way that is largely independent of the key account manager. This is not to say that the role is redundant but that the incumbent can take a far more strategic approach than before. Figure 17.6 illustrates arrival at the integrated stage.
The borders between buyer and seller become blurred. Focus teams made up of personnel from both companies assume responsibility for generating creative ideas and overcoming problems. The key account manager and the customer main contact merely coordinate the efforts of these teams.
The reason for constructing focus teams may be to tackle operational, market or project issues or to introduce motivational forces. The respective teams will meet on a regular basis, setting their own agendas and objectives. Special project teams may be short-lived, existing only long enough to serve their intended purpose.
At this advanced stage, the companies’ electronic data systems are integrated, information flow is streamlined, business plans are linked, and the erstwhile unthinkable is now willingly explored. About the only issue that remains sacrosanct for the selling company is its brand. Any requests from the buying company that might undermine the brand should be rejected.
Determining the Key Account Relationship:
No one KAM stage is better than another; they are just different. The main question concerns the appropriateness of the relationship with a particular customer at a particular time. To illustrate this point, let us consider some of the relationships we experience in our personal lives.
Our relationship with passing acquaintances may not extend beyond an acknowledgement of familiarity such as nodding ‘Good morning!’ At the other end of the scale are our close family and friends with whom our relationship is warmer and stronger. The degree of intimacy in a relationship reflects the level of personal investment.
A reversal of our behaviour with these two groups would be seen as highly inappropriate, verging on insane. Similarly, we do not seek intense friendships with everybody we meet. To do so would not only be unsuitable but impossible, for we do not have unlimited emotional reserves.
In the same way, organizations do not possess the resources to have all of their KAM relationships at the integrated level, even if it were deemed appropriate. Like people, organizations have a range of relationships that can be intensified, maintained or subdued. Naturally, investments of time, energy and resources must be justified and guided by strategic considerations.
The development of the KAM relationship is an evolutionary process. The speed of progress through the five typical stages is largely determined by the rate at which the buyer and seller can develop the necessary levels of trust.
While some relationships may appear to ‘stick’ at one particular level for a long time, it is also possible for relationships to be held in a transitional phase, somewhere between any two consecutive KAM stages. It is therefore likely that an organization will have key accounts at different stages.
The significance of identifying the present position of key account relationships is that it allows us to anticipate the development requirements of individual accounts as well as the collective demands of the account portfolio. Such knowledge and understanding is intrinsic to the setting of key account objectives and strategies.
Developing Key Account Objectives and Strategies:
A little thought will quickly expose the inadequacies of systems that classify key accounts into just three categories such as A, B or C.
As most companies are judged on the basis of profit, key accounts should be classified in accordance with their potential for growth in profits over, say, a three-year period.
The Cranfield research showed that the criteria used by companies to measure potential profit growth are:
(i) Available size of spend
(ii) Available margins
(iii) Growth rate
(iv) Purchasing policies and processes
When these criteria are each weighted and scored appropriately for each key account, the accounts can be evaluated in terms of profit growth potential on a ‘thermometer’ scale from low to high. The obvious problem with this simple analysis is that it does not consider the maturity or business strength of the key account relationship. The KAM relationship can be anywhere between the Exploratory stage and the Integrated stage.
In order to define and select target key accounts accurately, a full profile of each account must be obtained. This is achieved by measuring profit growth potential in combination with relationship maturity. A comparative guide using these two dimensions, as given in Figure 17.7, is helpful in setting realistic objectives and strategies for key accounts.
Taking the boxes in each quadrant in Figure 17.7 in turn and starting with the bottom left quadrant (Tow potential/high strength), it is possible to work out sensible objectives and strategies for each key account. Accounts meeting the profile of the bottom left quadrant are likely to continue to deliver excellent revenues for some considerable time, even though they may be in static or declining markets.
Good relationships are already enjoyed and should be preserved. Retention strategies are therefore advisable, incorporating prudence, vigilance and motivation. More importantly, as the supplying company will be seeking a good return on previous investment, any further financial input here should be of the maintenance kind. In this way, it should be possible to free up cash and resources for investing in key accounts with greater growth potential.
The boxes in the top left quadrant (‘high potential/high strength’) represent accounts with highest potential growth in sales and profits. These warrants a quite aggressive investment approach, providing it is justified by returns. NPV calculations may be used as a basis for evaluating these returns, using a discount rate higher than the cost of capital to reflect the additional risks involved. Any investment here will probably be directed towards developing joint information systems and collaborative relationships.
Accounts situated in the boxes in the top right quadrant (‘high potential/low strength’) pose a problem, for few organizations have sufficient resources to invest in building better relationships with all of them. To determine which ones justify investment, net revenue streams should be forecast for each account for, say, three years, and discounted at the cost of capital (plus a considerable percentage to reflect the high risk involved).
Having made these calculations and selected the promising accounts, under no circumstances should financial accounting measures such as NPV be used to control them within the budget year. To do so would be a bit like pulling up a new plant every few weeks to see whether it had grown!
Achievement of objectives should instead be monitored using terms such as sales volume, value, ‘share of wallet’ and the quality of the relationship, enabling selected accounts to be moved gradually towards partnerships and (in some cases) towards integrated relationships.
Only then will it become more appropriate to measure profitability as a control procedure. Accounts which the company cannot afford to invest in should be managed in a similar way to those residing in the final boxes to the bottom right.
Accounts found in the boxes in the bottom right quadrant (‘low potential/ low strength’) should not occupy too much of a company’s time. Some of these accounts can be handed over to distributors while others can be handled by an organization’s sales personnel, providing all transactions are profitable and deliver net free cash flow.
All other company functions and activities should be consistent with the goals set for key accounts according to the general categorization given in Figure 17.7. This rule includes the appointment of key account managers to key accounts.
For example, some key account managers will be extremely good at managing accounts in the Exploratory, Basic and Cooperative KAM stages where their excellent selling and negotiating skills are essential, whereas others will be better suited to the more complex business and managerial issues surrounding interdependent and integrated relationships.
Implications for the Key Accounts Manager:
The fundamental challenge of the KAM task is to succeed in a matchmaking exercise- that is, to marry the manager of most compatible and complementary qualities with a specific account in order to maximize the return on investment.
The correlation between the development of the account relationship and the development of the account manager’s role is summarized in Table 17.1. Of course, real life is not quite so predisposed as to split conveniently into neat boxes and the table merely encapsulates what Cranfield found to be the general experience.
Clearly, the key account manager must be adept at balancing the growing expectations of both selling and buying companies. The roles and responsibilities of key account managers, and their ability to fulfill them, are critical to the success of any KAM strategy. So what is the personal specification of a key account manager?
As part of the Crarifield research, key account managers, their managers and their buying company contacts were all asked the same question, ‘What essential skills/qualities does the key account manager need?’ Surprisingly, there was little agreement among the three groups of respondents.
The selling companies involved in the study were unanimous in rating selling and negotiating skills as the chief essential attributes of successful key account managers. The buying companies, on the other hand, voted trustworthiness and strategic decision-making ability as the principal traits. Furthermore, the buyers so intensely disliked being sold to that they would not permit a salesperson to lead the key account team!
The disclosed discrepancy between the comments of managers of key account managers and those of customer contacts is particularly alarming considering that these senior managers are responsible for appointing key account managers to valuable accounts.
The skill area that prompted most dramatic disagreement is that of ‘selling/ negotiating’. While selling companies put great store on these skills (62 per cent and 67 per cent respectively), only 9 per cent of buying contacts rated them as important. In simply repeating old patterns, selling companies show their perspectives to be more outdated than perhaps they care to admit.
Developing Key Account Professionals:
The selling companies stated difficulty in designing appropriate training for key account managers, especially for those operating in global markets.
Problems centered on the need to develop a range of competencies in traditionally specialist areas, such as:
(i) Technical/product knowledge
(ii) Relationship-building skills (interpersonal skills)
(iv) Marketing/ strategic thinking
(v) Business management
(vi) Project management
(vii) Creative problem-solving
According to respondents, the training of key account managers’ mainly consists of attending a number of short courses when deemed appropriate. On average, key account managers receive 5-10 days training per year excluding induction.
Because recruits generally have a background in sales or marketing, training must deliberately extend their skill bases in order to develop ‘all-rounders’ rather than better specialists. It seems unlikely that the ad hoc and limited approach to training identified here could ever create outstanding key account managers.
In terms of succession policy, selling companies do endeavour to ensure that the handover of a key account is managed with a sense of continuity. Where possible, new account managers are introduced to contacts by their predecessors, who then gradually pass over responsibility to the newcomers.
Our study found that buying companies profoundly appreciate this smooth transition and do not expect the new contact to be a clone of the old one. In fact, it was recognized that a new face can sometimes revitalize a flagging relationship.
Authority and Status:
‘We don’t want to be dealing with a postman who has to trot back [to their boss] every time we ask a question’ was the graphic view offered by one buyer on the autonomy of key account managers. The perception of key account managers as lacking status and authority, especially in the early stages of the KAM relationship, was a recurring theme among the buying companies. Selling companies would be wise to address this concern.
Key account managers, it seems, are well aware of expectations and feel the pressure to make decisions and commit their company, even when they do not have the authority to do so. Paradoxically, although the KAM relationship is intended to develop unique arrangements with the buying company, it is on decision-related matters that account managers most often have to refer back to their company.
It was generally agreed that the one area in which the key account manager has least room for manoeuvre is on prices and margins. Any discretion that is allowed constitutes a ‘freedom’ to operate within carefully defined bands.
When dealing with key accounts, it is important to remember that the position of the key account manager can easily be undermined if the buying company is allowed to gain the ear of someone higher up in the selling organization. Therefore, more senior managers and directors should always be seen to defer to the account manager.
The Cranfield research revealed that 36 per cent of key account managers reported to directors within their companies. Reporting at a less senior level usually meant being accountable to a sales manager, sales and marketing manager, or business unit manager.
All of the key account managers interviewed were, in effect, national account managers. Only four also held some global accounts, with responsibility for results achieved in other countries.
In most of the selling companies studied, key account managers did not have formal – or, for that matter, informal – teams assisting them. Working alone, they were expected to fulfill customer requirements solely by influencing their colleagues to mobilize the necessary resources, which would clearly make progression to interdependent or integrated stages extremely difficult, if not impossible.
Best practice KAM seeks to redress this operational weakness. As the KAM relationship matures, ‘dotted line’ project teams develop. Comprised of functional staff, these teams report to the key account manager on specific matters of interest, while remaining responsible to their functional manager throughout the working day. Not surprisingly, this duality of duty can be a source of tension.
However, problems are not normally about questions of loyalty, but about confusion over priorities. Where project teams are more formalized, team members are set specific objectives and timeframes. In this team environment, it is imperative that the key account manager, as the main customer interface, keeps team members fully updated on all operational and strategic issues relating to their accounts.
Appraisal and Reward:
The majority of key account managers interviewed received a basic salary plus a bonus related to generated earnings, although a significant minority was employed on the basis of a straight salary. The level at which bonuses were set was a contentious issue.
Managers receiving 10-20 per cent of their income as bonus felt that it was too low in relation to the importance placed on the volume of key account business. Other managers felt it unfair for bonuses to be closely linked to volume, since matters in the buying company such as market shifts over which the key account manager has no control could influence business volume.
In some of the selling companies, share options figured as a form of bonus, providing an incentive related to overall company performance.
Many managers remained sales driven by a remuneration package based on 50 per cent salary and 50 per cent commission. Targets were either set by KAM directors or, more usually, were the outcome of negotiations between the director and the key account manager.
In addition to sales volume, the key account managers identified other performance criteria, including:
1. Customer satisfaction ratings
2. Market share
3. Account profitability
4. Accuracy of forecasts
5. Debt recovery
6. Handling of complaints
7. Number of new contacts
8. New opportunities identified
Where products were project based, key account managers were judged by the achievement of milestones and deadlines. In businesses marked by cyclical sales such as capital equipment, the performance of key account managers was assessed against the total value of the selling company’s product portfolio. This relative approach avoided the situation of having excessive bonuses one year and none the next.