openument - Outputsdeliverables.ppt

KeyAccountMasterclass globalbestpracticeDay3 byProfessorMalcolmMcDonaldCranfieldSchoolofManagement 2 GlobalKeyAccountManagement Theobjectivesforthismoduleare toprovideaguidetothecurrentworldclasspracticeofmajoraccountmanagementtoprovideaframeworkforunderstandingthedevelopmentofmajorcustomerrelationshipstoprovideaplanningframeworkforimprovingmajorcustomermanagementOutputs deliverablesfocusonandaugmentbestpracticemajorcustomermanagementimproveunderstandingofthetechniquesinvolvedintheprocess Programme KeyaccountdefinitionModellingkeyaccountsDefiningandselectingkeyaccountsKeyaccountanalysisandplanningOrganisationalandskillsissues Challenges MarketmaturityGlobalisationCustomerpower ProfessorMalcolmMcDonald CranfieldSchoolofManagement Customerpower BigcustomersaregettingbiggerCustomersarerationalisingtheirsupplierbaseCustomershavebecomemoresophisticatedCustomerswanttailor madesolutionsThecostofservingcustomersisincreasingSuppliersandcustomersaredevelopingnewwaysofworkingtogether ProfessorMalcolmMcDonald CranfieldSchoolofManagement Biscuit Manufacturer Board Packaging Speciality Adhesives Metal Bearings 24 76 16 64 14 39 18 44 Biscuit Manufacturer Board Packaging Speciality Adhesives Metal Bearings 1972 1996 oftotal supplier sales From ProfitableCustomers CharlesWilson Salestothetop5customersasa oftotalsuppliersales 1972 96 Increasingcustomerconcentration Customerpower BigcustomersaregettingbiggerCustomersarerationalisingtheirsupplierbaseCustomershavebecomemoresophisticatedCustomerswanttailor madesolutionsThecostofservingcustomersisincreasingSuppliersandcustomersaredevelopingnewwaysofworkingtogether ProfessorMalcolmMcDonald CranfieldSchoolofManagement Increasingcostsofinterfacingwithcustomers Suppliertotheprintindustry turnover 200M Interfacecosts 000percustomer adj forinflation 1980 1996 Top10 ofcustomers 60 140 1980 1996 Bottom10 ofcustomers 15 9 Costsofthefrontline Sales service tradepromotionsetc 1980v1996 Source ProfitableCustomers byCharlesWilson From KeyAccountManagement CranfieldUniversitySchoolofManagement 1996 SuppliersarestillinterestedprincipallyinvolumeWhilsttheyareinterestedinthepotentialfor addedvalue moststilldonotmeasureaccountprofitability Thewideningriftbetweenprofitableandunprofitablecustomers Source SuppliertotheEuropeanprintingindustry turnover 200million 1980 1 2 3 4 5 6 7 8 9 10 15 17 16 13 12 10 7 6 4 1 1 2 3 4 5 6 7 8 9 10 oftotal company profits Largest10 ofcustomers Smallest10 ofcustomers Customerdecilegroups 1 2 3 4 5 6 7 8 9 10 3 26 29 22 20 8 4 3 3 1 2 3 4 5 6 7 8 9 10 oftotal company profits Largest10 ofcustomers Smallest10 ofcustomers Customerdecilegroups 1996 ofcompanyprofitbycustomerdecile eachdecile 10 ofcustomerbase Source ProfitableCustomersbyCharlesWilson Customeraccountprofitabilityanalysis ThekeyphraseisAttributableCostingTheobjectiveistohighlightthefinancialimpactofthedifferentwaysinwhichcustomersareserviced ProfessorMalcolmMcDonald CranfieldSchoolofManagement Creatingcloserrelationshipswithsupplychainpartners Marketing Operations InformationSystems Sales Purchasing Marketing Operations InformationSystems From Supplier Customer DIRECTORS DIRECTORS ProfessorMalcolmMcDonald CranfieldSchoolofManagement Creatingcloserrelationshipswithsupplychainpartners InformationSystems Operations Marketing Operations InformationSystems Marketing To Directorssellingcompany Directorsbuyingcompany ProfessorMalcolmMcDonald CranfieldSchoolofManagement Preliminaryselectionofkeyaccounts Keyaccountpreliminarycategorisation Top15 involume revenuegenerated Next30 Next55 A B C ProfessorMalcolmMcDonald CranfieldSchoolofManagement Keyaccountpreliminarycategorisation Realisationoffullestpotentialofbothorganisations Confidenceinrelationship stable highlyevaluatedbybothsides Integrated Interdependent Basic Degreeofcollaboration KAMrelationshipstage NeedsofpartiestoKAMrelationship Low transactional High collaborative Reductionofrisk abilitytoforecast Operational efficienttransactions Cooperative ProfessorMalcolmMcDonald CranfieldSchoolofManagement Exploratory Basic Cooperative Interdependent Integrated Strategicintentofseller Strategicintentofbuyer AdaptedfromamodeldevelopedbyMillman A F andWilson K J FromKeyAccountSellingtoKeyAccountManagement 1994 Therelationaldevelopmentmodel ExploratoryKAM Sellingcompany Buyingcompany Managers Clerks Operators Directors Supervisors Managers Clerks Operators Directors Supervisors KeyCustomerContact KeyAccountManager CranfieldUniversitySchoolofManagement1996 PretradingCustomerpotentiallyqualifiesasKeyAccountBothsidesexploringSignalingimportantSellerneedstobepatient preparedtoinvestReputationscritical ExploratoryKAM Sellingcompany Buyingcompany Board Board Admin Admin Ops Ops KeyAccountMgr KeyCustomerContact CranfieldUniversitySchoolofManagement1996 BasicKAM Transactional emphasisonefficiencyDrivenbyprice successmeasuredbypriceProbablymulti sourcingEasytoexitSinglepointofcontactBusinessrelationshiponlyVerylittleinformationsharingReactiveratherthanproactiveProbablylowcommoninterestOrganisationsuitssellingcompanyRewardstructureofKAMgrsparamountSmallchanceofgrowingbusinessCanbestablestateortrialstage BasicKAM CranfieldUniversitySchoolofManagement1996 Co operativeKAM SellingcompanyaddsvaluetorelationshipBasedonassumption experienceofdeliveryperformanceMaybepreferredsupplierExitnotparticularlydifficultMulti functioncontactsRelationshipstillmainlywithbuyerOrganisationmainlystandardLimitedvisitstocustomerLimitedinformationsharingForecastingratherthanjointstrategicplanningNotreallytrustedbycustomer Co operativeKAM Sellingcompany Buyingcompany Managers Managers Operations Operations Administration Administration Board Board Key Account Mgr Purchasing Manager CranfieldUniversitySchoolofManagement1996 InterdependentKAM BothacknowledgeimportancetoeachotherPrincipalorsolesupplierExitmoredifficultLargernumberofmulti functionalcontactsDevelopingsocialrelationshipsHighvolumeofdialogueStreamlinedprocessesHighlevelofinformationexchange somesensitiveBetterunderstandingofcustomerDevelopmentoftrustPro activeratherthanreactivePreparedtoinvestinrelationshipWiderrangeofjointandinnovativeactivityJointstrategicplanning focusonthefutureOpportunitytogrowbusiness InterdependentKAM OperationsFocusTeam FinanceFocusTeam R DFocusTeam EnvironmentFocusTeam MarketResearchFocusTeam MarketingFocusTeam Buyingcompany KeyAccountMgr Sellingcompany Buyer CranfieldUniversitySchoolofManagement1996 IntegratedKAM Realpartnership complementary mutuallydependentFewinnumberSolesupplier posshandlingsecondarysuppliersHighexitbarriers exitistraumaticIndividualorganisationssubsidiarytoteamsociallyDedicated cross boundaryfunctional projectteamsOpeninformationsharingonsensitivesubjectsTransparentcostingsystemsAssumptionofmutualtrustworthiness atalllevelsAbstentionfromopportunisticbehaviourLoweredprotectionagainstopportunismJointlong termstrategicplanningBetterprofitsforboth IntegratedKAM Inte grated Inter dependent Co operative Basic Regresstolowerlevel Orsplit separate DisintegratingKAM OccursatanylevelRarelycausedbypriceproblemsOftenchangeinkeypersonnelKeyAccountManager sapproachorlackofskillsFailuretoforgemulti levellinksBreachoftrustProlongedpoorperformanceagainstagreedprogrammeChangingmarketpositionsChangingculture organisation ownership roleComplacencyFinancialdisappointment DisintegratingKAM Manyactivitiescrosstheboundaries especiallyinformationbasedactivitiessuchas SalesForecasting CapacityPlanning ResourceScheduling Pricing etc Design Costgeneratedbydecisions Time Cost Increaseofexpenses Potentialsaving Industrialprototype Production 1009075155 Impactofanupstreamaction CustomerRetention Source Bain Co Bain Co1990 0 20 40 60 80 100 1stJanuary 31stDecember PercentageofCustomers CustomerRetentionRate 85 Customerretentionisthebestmeasure RetentionRate No ofcustomersatyearendwhowerecustomersatthebeginningoftheyear No ofcustomersatthebeginningoftheyear x100 Retainingcustomersisextremelyprofitable Source BainCustomerRetentionModel Bain Company CopyrightBain Company1990 Pricepremium Referrals Baseprofit Year Retainingcustomersisextremelyprofitable Howmuchprofitacustomergeneratesovertime Source HarvardBusinessReviewSept Oct 1990 Year 51 30 42 44 49 55 60 40 20 0 20 40 60 0 1 2 3 ProfitperCustomer 4 5 CreditCard Howmuchprofitacustomergeneratesovertime 300 200 100 0 100 200 300 1 2 3 4 5 Year IndustrialLaundry Source HarvardBusinessReviewSept Oct 1990 144 166 192 222 256 ProfitperCustomer Lifetimevaluesofcustomers Source WilsonM MarketingImprovementsGroup ADefectionrate customerlosteachyear BRelationshipLifeexpectancy years CAnnualValue unitsofvalue D B CLifetimeValue unitsofvalue 20 10 5 2 5 5102040 3000300030003000 150003000060000120000 Therefore Halvingcustomerdefectionratedoublesrateoffutureturnover lifetimevalueofcustomer Acreditcardcompany sdefectioncurve Thenetpresentvalueoftheprofitstreamsacustomergeneratesovertheaveragecustomerlife At10 defectionrateforexample theaveragecustomerlifeistenyears 1dividedbythedefectionrate Thecustomervalueisthenetpresentvalueoftheprofitstreamsfortenyears Source HarvardBusinessReviewSept Oct 1990 0 200 400 600 800 1000 40 30 20 10 5 0 50 2 5 3 3 5 10 20 2Years DefectionRate Averagecustomeryears 20 70 38 134 300 525 5 fewerdefectionsincreasesvalueby95 CustomerValue Reducingdefections5 boostsprofits25 to85 Calculatedbycomparingthenetpresentvaluesoftheprofitstratemsfortheaveragecustomerlifeatcurrentdefectionrateswiththenetvaluesoftheprofitstreamsfortheaveragecustomerlifeat5 lowerdefectionrates Source HarvardBusinessReviewSept Oct 1990 Auto servicechain Branchdeposits Creditcard Creditinsurance Insurancebrokerage Industrialdistrib n Industriallaundry Office bldg mgmt Software 30 85 75 25 50 45 45 40 35 20 40 60 80 100 0 IncreasesinCustomerValue Whycustomersstopbuying 1 Die retireorareterminated3 Transfertootherjobs companiesorlocations5 Givetheirbusinesstootherfriends9 Competitivereasons14 Productdissatisfaction68 AttitudeofsupplycompanyResearchbyMillerBusinessSystems Thoughtstarters Towhatextentdoyoumeasurecustomerretentionbysegment Thoughtstarters Towhatextentdoyoumeasuretheimpactonprofitabilityofeach pointincreaseinretentionsegment Keyaccountstrategies InvestinJointinformationsystemsandfocusteams High Low Vigilanceandmotivation InvestindevolvedrelationshipsMaintenance Consistency ExploratoryKAMInvestintailoringproductBasicKAMInvestinbuildingrelationshipsCooperativeKAMInvestinimprovingprocesses BasicKAMCo operativeKAM CustomerAttractiveness StageofKAMrelationship InterdependentKAMIntegratedKAM Adaptedfrom KeyAccountManagement CranfieldUniversitySchoolofManagement 1996 HighLow High Low Supplier sbusinessstrengthwithcustomer Customerattractiveness Strategic invest Volume manageforcash Bread butter maintain Futurestars selectivelyinvest Keycustomer DevelopedfromMcDonald Millman Rogers 1996 Customerportfoliostrategymatrix 11 9 http www TheMarketingProcessC HighLow High Low Supplier sbusinessstrengthwithcustomer Customerattractiveness Strategic invest Volume manageforcash Bread butter maintain Futurestars selectivelyinvest Keycustomer DevelopedfromMcDonald Millman Rogers 1996 Customerportfoliostrategymatrix Customeraccountprofitability Thetotalsalesrevenuegeneratedfromacustomerorcustomergroup lessallthecoststhatareincurredinservicingthatcustomerorcustomergroup Ward StrategicManagementAccounting WhycalculateCAP Knowingabsoluteprofitabilityofcustomersassistsinthedecision dowewanttokeepthiscustomer Ifso onwhatterms KnowingtherelativeprofitabilityofcustomershelpsinstrategicdecisionsonallocationofresourcesKnowingthefactorsaffectingcustomerprofitabilityenablesinformeddecisionstobetakeninnegotiations andinpitchingfornewbusiness Customerprofitability somequestions Howmuchdoesthecustomerbuyinayear Whatisthedirectcostofthosegoods Standardproductsorbespoke Isitsteadywork orseasonalpeaks Howmanyordersdotheyplaceinayear Bywhatmechanism Howmanyoftheseare emergency orders Smallquantitiesorlarge Howmanytimesdooursalespeoplehavetovisitthem Dowehavetomaintainstockforthem ordowemaketoorder Howmanydeliverysites Where Whatdeliveryterms Howmanyinvoicesdoweraisetothem Howmanycreditnotes Dotheypaypromptly Whatareourcreditcontrolcosts Howmuchdoesitcostustofinancetheirdebts Howmuchafter salesservicedotheyneed Whatislikelytochangeinthefuture CAP Abasicmodel Customeraccountprofitability Remember intheearlystagesofthelifecycle manyofyourcustomersmaybeunprofitabletoservice Considerthelikelyimpactoverthewholelifecycle Customerlifetimevalue NPVoffuturecashflowsoverthecustomer slifetimeLifetimerevenueForhowlong Whatamountsperyear CoststoserviceDiscountrate ValuingKeyCustomerAccounts Background FactsRiskandreturnarepositivelycorrelated ie asriskincreases investorsexpectahigherreturn Riskismeasuredbythevolatilityinreturns ie thelikelihoodofmakingaverygoodreturnorlosingmoney Thiscanbedescribedasthequalityofreturns Allassetsaredefinedashavingfuturevaluetotheorganisation Henceassetstobevaluedincludenotonlytangibleassetslikeplantandmachinery butintangibleassets suchasKeyCustomerAccounts Thepresentvalueoffuturecashflowsisoneofthemostacceptablemethodstovalueassetsincludingkeycustomeraccounts Thepresentvalueisincreasedby increasingthefuturecashflowsmakingthefuturecashflows happen earlierreducingtheriskinthesecashflows ie hencetherequiredreturn improvingthecertaintyofthesecashflows SuggestedApproachIdentifyyourkeycustomeraccounts Itishelpfuliftheycanbeclassifiedonaverticalaxis akindofthermometer accordingtotheirattractivenesstoyourcompany Attractiveness usuallymeansthepotentialofeachforgrowthinyourprofitsoveraperiodofbetween3and5years Basedonyourcurrentexperienceandplanninghorizonthatyouareconfidentwith makeaprojectionoffuturecashflows Itisnormaltoselectaperiodsuchas3or5years Identifythekeyfactorsthatarelikelytoeitherincreaseordecreasethesefuturecashflows Wesuggestidentifyingthetop5factors Useyourjudgementtorankyourcustomersaccordingtothelikelihoodoftheeventsleadingtothosefactorsoccurring Thiswillhelpyoutoidentifytherelativeriskofyourkeycustomeraccounts Askyouraccountanttoprovideyouwiththeoverallrequiredreturnforyourcompany thisisoftenreferredtoastheweightedaveragecostofcapital WACC orcostofcapital NowidentifytherequiredrateofreturnforeachofyourkeyaccountsbasedontheWACC WACCisthereturnrequiredfromtheaveragecustomer Ahigherrequiredratewillapplyformoreriskycustomersandalowerrateforlessriskycustomers Yourrankingofcustomersabovewillhelpyoutodecidetherequiredreturnbasedonyourunderstandingoftheriskofeachofthesekeycustomers Werecommendarangeofplusorminus30 ofWACCprovidedbyyouraccountant Thus assumingyourWACCis say 10 inamatrixsuchastheoneshowninFigure1 youandyourfinancialadvisormaydecidetousesay 8 5 foraccountsinBox1 ie a15 reductionontheWACC 11 5 forthoseinBox2 ie a15 premiumovertheWACC 13 foraccountsinBox3 ie a30 premiumovertheWACC and10 foraccountsinBox4 Discountthefuturecashflowsidentifiedaboveusingtheriskadjustedratestoarriveatavalueforyourcustomers Anaggregatepositivenetpresentvalueindicatesthatyouarecreatingshareholdervalue ie achievingactualoverallreturnsgreaterthantheweightedaveragecostofcapital havingtakenintoaccounttheriskassociatedwithfuturecashflows 2 Low High RelativeStrength 3 1 4 Low High KeyA C Attractiveness Figure1SriSrikanthan ProfessorMalcolmMcDonald June2001 BasicCustomerProfitabilityAnalysis ShareholderValue TotalValueofCustomer FCF RelationshipMarketingaspects Marketingstrategiesforcustomerretention EconomicvalueofCustomer LinkingCRMtoshareholdervalue Howorganisationsbuildvalue Requiredreturn Risk Return Superprofits createsshareholdervalue Destroysshareholdervalue Thetotalvalueofthekeyaccount Hasthreeelements CustomerlifetimevalueOtherbenefitsfromtherelationshipTheriskofthekeyaccounttheprobabilityofsecuring 1 and 2 Calculatingcustomerlifetimevalue CustomerLifetimeValue Demandingcustomers LIFETIMEREVENUES High Low COSTSTOSERVE High Low RevenueDrivers CostDrivers Mostprofitablecustomers Leastprofitablecustomers Uncommittedorcommoditycustomers MeasuringCustomerLifetimeValueusingrisk adjusteddiscountrates Keyaccountrisk DefectionormigrationVolatilepurchasingpatternsNegativewordofmouthDefault fraud litigationSlowpaymentThen therearethePROFITLEAKS thethingsthatsuppliersthemselvescause Usinglotsofourvaluabletime sales service technical Usinglotsofourvaluableservices thatweofferedthem DemandingemergencysupportatpeaktimesSortingouttheerrorswemade andnotpayingourinvoicesmeantime Factorsreducingcustomerdefectionrisk Measure CustomerRiskScorecard Therelationshipriskscorecard MeasuringCustomerLifetimeValueusingforecastprobability Calculatingtheprobabilityofrelationshipbenefits Managingkeyrelationshipsprofitably Implementkeyaccountmanagementstrategiesbasedonlifetimevalue ManagedefectionofprofitablecustomersManageacquisitionofunprofitablecustomers Pathstovaluecreation Requiredreturn Risk Return Thekeycustomermatrix Exploratory Basic Cooperative Interdependent Integrated Strategicintentofseller Strategicintentofbuyer AdaptedfromamodeldevelopedbyMillman A F andWilson K J FromKeyAccountSellingtoKeyAccountManagement 1994 HighLow High Low Supplier sbusinessstrengthwithcustomer Customerattractiveness Strategic invest Volume manageforcash Bread butter maintain Futurestars selectivelyinvest Keycustomer DevelopedfromMcDonald Millman Rogers 1996 Customerportfoliostrategymatrix KeyAccountAnalysis BusinessPartnershipProcess 1 2 3 4 5 6 7 8 Market segmentselectioncriteria Definingandselectingtargetkeyaccounts Industrydrivingforcesanalysis Client sannualreportsummaryandfinancialanalysis Client sinternalvaluechainanalysis Client sbuyingprocessandinformationneedsanalysis Oursaleshistorywiththeclient Competitiveanalysis Client sobjectivesanalysis 9 Foreachkeyaccount Client sBasicCSFAnalysisProcess Ourobjectives strategiesandplanforT 3 TheApplicationsPortfolioAnalysis Strategic HighPotential KeyOperational Support GainingAdvantage AvoidingDisadvantage Forcesdrivingindustrycompetition IndustrycompetitorsIntenserivalryif NumerousorsimilarsizedcompetitorsSlowindustrygrowthHighfixedcostsLackofdifferentiat