“I love it when a supplier tells me I am a key account – I make a lot of fuss of them. However, most times all I really do is to get concessions on price and terms. I almost feel guilty, it is so easy, but it’s my job.” This confession by a European purchasing manager with a leading engineering company confirms our misgivings about the long-term robustness of key account management (KAM). Many suppliers are lured by its notions of ‘partnership’ and ‘relational development’ but in fact KAM is often fatally flawed and dangerous.

In modern industrial markets, many buyer–seller situations are characterised by fewer, larger and more complex purchasing organisations where intense competition is the norm. Consumer goods markets have seen a radical power shift to retailers, suggesting that increasingly corporate financial performance depends on the effective management of large customers. Almost as a natural consequence, suppliers frequently dedicate most of their resources to the core portfolio of buyers who represent the highest stakes and are identified as ‘key accounts’.
Beyond this, KAM is seen as progression towards a form of partnership with major customers, characterised by joint decision making and problem solving, integrated business processes and collaborative working across buyer–seller boundaries. It is this move from simply focusing resources on a major customer towards what is a new collaborative model of buyer–seller relationships which underpins our misgivings about the long-term robustness of KAM strategy.

What about key account profitability?
KAM is attractive to institutionalise dependency on major customers as a way of doing business. It undermines suppliers’ strategic freedom of manoeuvre and cedes much control of the supplier’s business to the major customers. The eventual outcome for suppliers is inevitably falling prices, commoditisation of their products, and progressively lower profits as major customers exert their market power.
Clearly, many practitioners would dismiss this line of argument as pointless. They argue that in businesses like grocery there is no choice other than to deal with the major retailers who dominate the consumer marketplace because there is no other route to market and little choice other than to accept the terms they offer.
This clearly makes the point that in many ‘key account’ situations, the real issue is less partnership and more about one party dictating terms to the other, which is not the concept of ‘collaboration’ normally advanced to justify KAM investments by suppliers.
If it is conceded that powerful customers will ultimately exploit that power to their own advantage, then their business carries a disproportionately higher risk than that of less powerful, less dominant customers, and it is less attractive as a result. If it is inevitable that major customers will demand more concessions and pay less, then it is likely they will also be substantially less profitable than other customers. In other words: there is little consistent empirical evidence regarding key account profitability.

Buyer-seller dependence
The critical issue is interdependence between buyer and seller, or perhaps more aptly the balance of dependence, since it is rarely symmetrical. Failure to grasp the simple issue of the direction of dependency is likely to blind the seller to a critical vulnerability of KAM, while simultaneously souring relationships with the account in question. Professional purchasers find it difficult to work with suppliers who misunderstand the nature of the relationship they really have with the buyer. Sellers with an exaggerated view of their strategic importance to a buyer have unrealistic expectations of the customer, with the potential for growing frustration ultimately leading to conflict between buyer and seller.
Figure 1 illustrates a buyer perspective on supplier types. Professional purchasers distinguish on the basis of substitutability and impact. From their perspective, suppliers with significant impact on the buyer’s business but who can easily be replaced are mainly targets for price negotiations, while those with low impact, who can be easily substituted are likely to be treated as commodities. Suppliers who cannot easily be replaced may be treated as specialists, or strategic suppliers.
At any time, for most buyers very few suppliers will have strategic importance. In one interview the European purchasing director for a major company estimated that with a pan-European base of more than 2,600 suppliers, the most that would ever be ‘strategic’ was 14 (the number of purchasing managers he had in his team). His complaint was that many suppliers had a greatly exaggerated idea of their importance to him, and they wasted his time as a result.

The illusion of loyalty
Another risk is that if the key account is acquired by a company who imposes its own supplier arrangements, or if the key account’s performance declines, its strategic suppliers will most likely also suffer substantial business losses. Moreover, should the key account need a new strategy, the existing supplier base may well not be a good fit, which would end the illusion of loyalty.
Advocates of KAM strategies also like to argue that it should only be applied to the supplier’s most attractive customers. Such customers are, however, also most attractive to the supplier’s competitors, and the attraction increases most in markets where competition is intense. Consequently, in such markets the ability of the customer to substitute one supplier for another is also highest. Intense competition denies any supplier a strategic status.
Loyalty to the largest customer should no longer be a prerequisite for suppliers. Why should they invest in positions of weakness? In the short term, suppliers should aim to meet the requirements of their largest customers for special treatment. However, in the longer term they must invest in a new business model based on relations with other customers who in reality offer higher margins and lower risks. This is an investment in strength and enhanced future earnings.
From a supplier perspective, KAM is only effective if there is a close match and continuous alignment between seller and buyer relations. Figure 2 points out that without this the customer is burdened with either conflict or frustration. Suppliers need to be convinced how rare this alignment is in practice, as well as how temporary and transitory.
Identifying the right customers as key accounts is another necessity for suppliers. The tendency is to equate large customers with key accounts but that is essentially wrong. Figure 3 shows the dispersion of accounts for a company. It makes a clear distinction between major accounts (where despite large volumes the traditional buyer-seller relation remains intact) and key accounts (the few very profitable customers with high relationship requirements).

Barriers to KAM
Managers in our workshops and general discussions on this issue often describe the importance of the KAM strategy as akin to a full-blown merger between buying and selling organisations, an exclusive relation involving joint decision making and exchange of proprietary information. None of them, however, appeared to believe that this quasi-merger should be subject to approval by their shareholders.
Yet this ethical dilemma is less worrying than the potential KAM strategy may create for anti-trust violation. Companies trapped in a KAM-style relationship with a large customer already did attract the attention of competition regulators, who increasingly believe that close collaboration between buyer and seller is potentially anti-competitive.
Inadequate recognition of implementation barriers and organisational issues that come with KAM strategy is another problem. KAM is almost by definition a cross-functional activity and the key account manager will need to have the resources and organisational status to gain support and commitment from managers in other functions and with other priorities. There is a potential for considerable disruption and friction if KAM implementation is not handled effectively and decentralised product divisions or independent local sales organisations can still prioritise their own interests to the detriment of the KAM objectives at large.
It is a key question where to find talented managers capable of leading a team that focuses on a small portfolio of key accounts. Such people are difficult to find, let alone to attract to the key account manager role. But without such talents, the KAM strategy is unlikely to be effective and promises to the account will not be kept.

Find a new business model!
In many situations, the adoption of KAM models is based on the suspect logic that the best use of a company’s resources is to invest heavily in that part of the business (the largest customers) which has the lowest margins and the highest business risk. This is a somewhat unconvincing case for investment.
Suppliers should search for alternative strategies, yet business models that avoid the trap of high dependence on a small number of powerful key accounts. The Procter & Gamble case clearly illustrates this.

P&G’s ‘down the trade’ system In 2005, Procter & Gamble bought Gillette, to create the world’s largest consumer brands group. The combined portfolio of brands provides a much stronger hand in dealing with major retailers. However, the merger also represents a fundamental change to P&G’s business model. The goal is to serve not only the world’s most affluent one billion consumers in developed countries, but to serve the world’s six billion consumers, with a new focus on lower-income consumers in such markets as China and India. In developing these emerging markets, P&G is not deliberately partnering with global retailers like Wal-Mart and Carrefour. Instead, in China P&G will offer Gillette access to a huge distribution system staffed by an army of individual Chinese entrepreneurs – what P&G calls a ‘down the trade’ system ending up with a one-person kiosk in a small village selling shampoo and toothpaste. The effect should be that stable growth in Asian markets will reduce the combined company’s dependence on mature markets dominated by powerful retailers.

New business models that will be effective in avoiding the key account management trap will probably share some of the following characteristics:
• reducing critical dependencies and risks by developing alternative routes to market;
• developing alternative product offerings to rebuild brand strength as a counter to the power of the largest customers;
• emphasising the need for high returns to justify taking on high risk business, not the other way around;
• reducing strategic vulnerabilities created by excessive levels of dependence on a small number of customers or distributors;
• clarifying the difference between major accounts and key accounts and developing appropriate ways of managing these different types of relationship profitably;
• actively rejecting business from some sources because the customer is unattractive in terms of profitability and risk, even if the business on offer is large;
• managing customer accounts as a portfolio (see Figure 3) using criteria of attractiveness and prospective performance, not simply customer size.

There are undoubtedly situations when KAM is an effective collaborative strategy. Managers should, however, carefully consider under what conditions such an ideal scenario comes true and what are truly the conditions they face. It is not the quantity but the quality of business that counts. The quality of business with major accounts includes the profitability of the business but also the business risk involved, the impact of increased dependence on a small number of customers, and the opportunities given up. A balanced evaluation of this kind provides the basis for a more informed decision, but may also be the trigger for the search for strategic alternatives that may avoid the down-side of dependence on powerful key accounts. This balanced evaluation and search for new business models appears urgently needed in many organizations.