Managing Customer Relationships

by  Kevin Wilson, Ph. D.

Ten or fifteen years ago, the development of highly differentiated products, marketed at a price that the market would bear, supported by a targeted communications strategy and distributed through a carefully chosen channel of intermediaries, would have assured that a company achieved some level of success in the market place.

Times have changed:

How many companies have exclusive control over the technology that their products are based upon?

How many can claim to have developed products which competitors cannot copy (within months)?

How many suppliers can set prices without their customers being aware of their cost base?

Very few.

Traditional approaches to the marketing discipline have focused upon the management of portfolios of products through the product life cycle and upon developing strategic responses to the actions of intelligent competition. This article challenges that perspective and claims that the critical areas for marketing attention are the management of portfolios of customers and the development of strategies which capitalise upon the synergistic benefits offered through collaboration.

What are some of the things that support this contention?

Increasing product homogeneity in many business-to-business markets.

Increasing focus upon core competencies which leads to increasing reliance upon suppliers (and customers) to provide complementary expertise.

Increasing tendency by many leading companies to rationalise and manage their supply base. In addition to this, not all customers are created equal. Some are more important than others, they hold greater potential for profit or increased turnover, they provide greater reference power, or they offer access to technologies, process capabilities or markets that others do not. The Pareto effect, the 80:20 rule, means that some customers are more strategically important than others and those key strategic accounts must be managed differently from other, less important customers.

If they are to enjoy success in today's market place companies must learn, not only to be excellent product and service providers, but also to manage the relationships they have with their customers. They must learn to manage relationships for profit, for cost containment and for relational development.

Work by Tony Millman from Buckingham University and Kevin Wilson of the Sales Research Trust in the UK suggests that buyer-seller relationships develop over time. Millman and Wilson identified a number of stages in the development of buyer seller relationships in organisational markets:

Pre-KAM (Key Account Management)
Early-KAM
Mid-KAM
Partnership-KAM
Synergistic-KAM
Uncoupling -KAM

Pre-KAM relationships are marked by social distance. Transactions, when they take place, tend to be market based and focused upon product exchange and price negotiations. Early-KAM is characterised by exploration of the potential for relational development and the early development of social ties. Mid- and Partnership-KAM reflect a growing closeness between buyer and seller which is represented in the development of strong, multiple inter-organisational links and social ties, the evolution of joint working teams and the development of trust. Partnership-KAM , as the name suggests, is represented by joint projects and increasing inter-dependence. Synergistic-KAM is achieved when buyers and sellers become so close to each other that it is hard to see the join or where the buyer-seller team appears to take on a persona of its own. In effect it becomes a virtual organisation. Uncoupling-KAM may occur at any stage and represents the dissolution of the relationship or the return to a former stage.

Not all relationships develop through all these stages. Some remain forever market based, adversarial and arms length. Others develop to early, mid or partnership stages and never develop beyond there. Some develop very rapidly or even skip stages, and some last for short or very long periods. Some business relationships studied by researchers in Europe had lasted for over 200 years, whilst one, observed in the iron and steel industry in Sweden, was traced back over 900 years.

The way in which suppliers can manage their relationships with customers is by focusing upon the resolution of specific types of problems that are associated with different levels of relational closeness. The model that is offered here to explain the impact of problem resolution upon relational development is called the PPF Model (Product, Process and Facilitation) and was developed by the author during a five year study of buyer seller relationships in Europe.

Buyers and sellers do business with each other in order to solve problems. Remember what Theodore Levitt said all those years ago? "Customers don't buy the drill bit, they buy the hole in the wall!" At the simplest level organisational and industrial buyers are merely attempting to solve problems that are associated with what the product does. These are product-related problems and are solved in terms of the product's performance and conformance to specification.

At another level, the product or service provided by the supplier is incorporated into the value creation process of the buyer. The form of the product, the way it is delivered, the technology it employs, all have an effect upon the manufacturing processes of the buyer. Problems associated with the incorporation of the supplier's product into the value creation process of the buyer are process-related problems.

At an even higher level, customers have the problem of achieving their own strategic objectives within their own market place. Sellers on the other hand have the problem of managing the quality of the relationship they have with the buying organisation. Problems in these areas are called facilitation-related problems. Facilitation-related problems are those related to the alignment of the buyer's and seller's strategic objectives, with the creation of value for both parties, with the development of trust and with the integration of systems and personnel.

The pump manufacturer

XYZ made exceedingly good pumps for the oil, chemicals and hydroelectric industries. They were proud of their engineering skills, and believed these warranted a premium price for their product. In other words they were very good at solving product-related problems.

Their customers acknowledged this but XYZ still lost market share. On investigation it was found that what customers really wanted was a well engineered and reasonably priced product married to strong projects management skills that solved a number of process- related problems. XYZ were not so good at ensuring their product was ready on time, nor were they good at sharing information with the buyer.

XYZ began to claw back market share after they bought in projects management capabilities and began to be more open with their customers. Price ceased to be such a big issue because they were cutting their customer's costs in other areas and reducing their anxiety over being exposed to liquidation damages.

The chemicals company

ABC sells chemicals to the oil industry. A joint venture between a major chemicals company and an engineering conglomerate in Europe, they managed to wrest over 40% of the market from their major competitors in just five years.

They reasoned that their product was a commodity and that they could not compete on price. What they identified was that there were major opportunities for streamlining the testing and treatment processes both at extraction and refinement stages in the production process. By the simple expedient of moving test facilities from remote sites to the rigs and to the refineries they were able to cut time and costly mistakes out of the process.

Addressing these process-related problems gave them access to oil company senior management who were then prepared to discuss some of their long term plans. As a result ABC were able to address a number of facilitation-related problems. In partnership with the oil companies they began work on driving costs out of the total system. They now enjoy long term exclusive supply arrangements with those customers and perform a wide range of managerial tasks on their behalf for which they are compensated with a management fee and a share of the profits.

Work by the author suggests that different orders of problem resolution are associated with different degrees of relational closeness.

If suppliers focus only upon meeting customer product need and on solving only product-related problems, then their relationships with customers will remain at the pre-and early-KAM stages of development. Relationships will tend to be adversarial, arms length and focused upon price reduction, as in the case of XYZ, the pump manufacturer.

Where suppliers try to solve process-related problems relationships with customers move through early- to mid and partnership-KAM. This is what the Chemicals Company ABC did. Relationships become closer, less adversarial and focus upon cost reduction rather than price.

Addressing facilitation-related problems allows the relationship to develop further through partnership, in some cases to synergistic-KAM where the focus becomes joint value creation.

One of the implications of the PPF model is that at any one time the firm may be following a number of different, and perhaps conflicting, strategies. Not all customers are key, and only key accounts warrant the very high investment in resources necessary to develop relationships. Other accounts may need to be maintained at the arms length, pre-KAM stage or developed only to the level of mid-KAM. Figure 1 outlines some of the strategies that may be adopted at various stages in the development of the relationship. The figure highlights the link between the nature of the problems that are addressed and the closeness of the relationship. These strategies evolve from a detailed analysis of the firm's portfolio of customers, and of its own capability to meet customer need in all the areas of product, process and facilitation.

The process for developing these strategies for relational management encompass a number of steps:

1. Customer portfolio analysis

What criteria should we use to judge the strategic importance of customers?

Which customers are key to our future development?

Which are going to be our key customers of tomorrow?

Which are providing good business but little potential for relational development?

Which customers are proving too expensive to serve?

Development
Stage

 Objectives

 PPF Strategy

Pre-KAM

1. Identify as key account
2. Establish account potential
3. Secure initial order

1. Identify key contacts
2. Establish nature of 
   product need
3. Identify decision
   making process
4. Display willingness
   to make product
   adaptation
5. Advocate key account
   status "in house"

Early-KAM

1. Account penetration
2. Increase volume of business
3. Become preferred supplier

1. If attractive invest in
   building social relation-
   ships
2. If unattractive serve 
   through low cost channels
   e.g. telephone or
   intermediaries
3. Identify process related
   problems and show
   willingness to provide
   cost effective solutions
4. Extend social network
5. Build trust through
   performance and open
   communication

Mid-KAM

1. Build towards partnership
2. Become first tier or single
   source supplier
3. Establish key account status
4. If limited potential for
   development then evolve a
   standard offering

1. Focus upon process related
   problems
2. Manage the implementation
   of process improvements
3. Build teams between the
   two organisations
4. Establish joint systems
5. Perform management tasks
   for the customer

Partnership
KAM

1. Develop spirit of partnership
2. Lock in customer by providing
   external resource base

1. Integrate processes
2. Extend joint problem
   solving teams
3. Focus upon cost reduction
   and value creation
4. Address facilitation issues
   relating to culture,
   language, etc.

Synergistic
KAM

1. Continuous improvement
2. Shared rewards
3. Quasi-integration

1. Focus upon joint value
   creation for the end user
2. Establish semi-autonomous
   projects teams
3. Establish cultural
   congruence

2. Analysis of individual relationships

What stage has the relationship reached?

What is its potential for growth?

What product, process and facilitation related issues can we identify that are important to the customer?

What strategies can we apply to the management of this customer?

What will be the cost?

What will be the return?

3. Analysis of Internal Capabilities

Do we have the necessary base technological capability to solve product-related problems?

Do we have the necessary process knowledge and capability to drive cost out of the customer value creation process?

Do we have the necessary information systems to manage customers rather than products?

Will our culture allow us to align ourselves with the strategic objectives of our most important customers?

Do we have the flexibility to treat different categories of customers differently?

The ability to produce excellent products at lowest possible cost and to make those readily available to customers is the price of entry into any market. Competitive advantage in that market is achieved, not through managing product, but through managing customers, and that is done by solving problems for them and with them in the areas of product, process and facilitation.

It is hoped that the model presented here will provide managers with insights into the way in which they may manage customers and provide the basis for ongoing debate in the field of Key Account Management.