The rise and rise of procurement is a major challenge to all key account managers selling in to large organisations, whether private or public sector. These days it barely matters what industry you’re operating in, there’ll be a new Chief Procurement Office (CPO) with a team full of CIPS (The Chartered Institute of Purchasing & Supply) and MBA-qualified professionals, armed with a battery of methods and tools that give them the confidence to play tough with suppliers large and small.
The emergence of procurement as a core business discipline has been nothing less than a revolution in business practice. Whereas in the past sales and key account managers focused on developing strong relationships with service and product users, usually the decision makers, procurement has steadily marched into that territory brandishing support from the CEO and taken a grip of proceedings. The result is that procurement now typically manages the whole process of sourcing and firmly takes a leading role in contract negotiations and decision-making.
Professional procurement established its business-impacting credentials originally in the automotive and consumer durable sectors, where a high percentage (often as high as 70%) of sales revenues are the product of purchases from third party suppliers. In these environments, get your purchasing decisions wrong and the cars, washing machines and DIY kit won’t sell. During the late 1990s, businesses began to notice that cost savings negotiated by procurement went straight to the bottom line, an equation that compares favourably with the sales growth required to generate the same amount of profit for the company. Since then, companies in the financial services, utilities, aerospace & defence, retail, professional services and the public sectors have all adopted a systematic approach to managing their 3rd party spend and have successfully delivered year-on-year savings (i.e. profit) to their organisations. Aspirations and expectations remain high as business schools continue to supply an ever-increasing stream of procurement graduates to organisations eager to secure the rich pickings available from better sourcing and supplier management.
The opening-up of a once monopoly market through deregulation were the circumstances faced by Royal Mail during the period running-up to Four Pillars’ involvement. Private sector competitors initially stormed into the market, aggressively courting the large direct mail marketing and utility bill user customers, and creaming-off this high revenue business, as these customers were able to take their business to the open market for the first time. Customers initially challenged Royal Mail to reduce rates, but this proved problematic due to regulator-imposed restrictions on possible commercial deal-making. The easier solution for customers appeared to be to simply let Royal Mail and its competitors fight it out to win their business and leave the complex regulator issues to Royal Mail, the previously monopoly supplier. Retaining all long-standing business in this environment was impossibility, and the Royal Mail key account team (Partnership Directors) were feeling the pressure.
How does a key account management team respond to such challenges? Importantly, how does it gain an understanding of the aggressive procurement practices being deployed by major customers?
Learning to deal with modern, professional procurement represents a degree of paradigm shift for those key account managers raised on relationship selling. No longer can KAMs rely on their long-established relationships with service users within the customer, those who had traditionally enjoyed decision making autonomy. What is now being asked of KAMs is to undertake a dispassionate analysis of the relationship from both sides, with particular focus on the view from the customer’s procurement decision-makers. What better way to do this than to use the very same suite of analysis tools deployed by procurement?
Procurement analysis tools include those deployed in understanding the supply market – researching the suppliers that compete for particular categories of customer spend; commercial & operational dependency analysis – assessing the criteria that determines which party holds the balance of power in the relationship; and a number of other aids than help the customer determine key stakeholders and their interests. One tool used by the most advanced procurement practitioners focuses on the value provided by the suppliers’ key account manager and his/her team. The KAM Assessment truly exposes how successful the key account manager has been in developing a ‘trusted advisor’ role for the customer. The results don’t always make good reading.
An urgent challenge for the Royal Mail key account team was to protect a number of existing strategic accounts. In fact one such customer had threatened to rip-up a contract worth tens of millions annually if our client didn’t capitulate in the face of price-down pressure.
Four Pillars was able to work with Royal Mail’s key account teams in diagnosing a number of current strategic relationships and, using a multitude of procurement tools, analyse those relationships with a true 360° perspective. This provided extraordinary and fresh insight into the relationships. Although the findings didn’t always support a past decision to classify the customer as a genuine key account, what emerged were a number of specification and account engagement plans.
In some cases the strategic direction for the relationship was reviewed and modified, leaving Royal Mail to focus its KAM resources on customers where there was stronger alignment between customer and supplier.
Four Pillars subsequently provided negotiation skills training to the key account team so that they were able to continually signal value and manage the conditioning process with their customer. In the case of the customer that had threatened to re-source the business to a competitor, Royal Mail’s Partnership Director and his team were able to build closer alignment with procurement and succeeded in creating a broader value proposition that resulted in the business being retained under a new 2-year deal. It proved a great result and an unquestionably satisfying return on Royal Mail’s investment.
by David Atkinson