Quantify the Value Strategic Accounts Provide


We know a strategic account manager at a design-and-build firm who started a relationship with a division of a global service organization. The account manager started slowly, developing trust with the global facilities manager, and soon signed contracts for three continents, making the services organization one of the design-and-build firm's top three customers. Then the design-and-build firm reorganized and named a field general manager to head its strategic account management program. The field general manager did not really understand what strategic account management was and clung to the management style that had given him success in the field—a focus on strict cost controls.

The SAM began to feel constricted almost immediately. As one example, the services organization needed to custom build part of a facility, which required the design-and-build firm to hire out $1,000 of extra architectural design work. The account manager simply passed the bill to his new boss, seeing it as a justified expense in an account potentially worth hundreds of millions of dollars annually. The new director did not see it that way and said that, if the expense was not specified in the contract, the client would have to pay it, regardless of the account revenue potential. The SAM spent $1,000 of his own money to keep from damaging the relationship—and he began to update his resume. He could see that he was not going to be able to maintain loyal and profitable customer relationships.

Let's see what can be at stake with a strategic account by doing a simple exercise that requires some hard analysis (Figure 7-1).

A

Account

B

C

Annual Sales

D

Years

E

10-Year Revenue

F

Profit Margin %

G

Lifetime Value

$

10 years =

$

$

10 years =

$

$

10 years =

$


Figure 7-1: Lifetime Customer Exercise

Calculate the lifetime customer value by following the instructions below:

  • In Column A, place the name of your top three strategic accounts, defining the top three by whatever your strategic goals are.

  • In Column B, grade each of those relationships from A for excellent to F for failing.

  • In Column C, write the annual revenue that each customer generates.

  • Multiply those totals times 10 for 10 years (Column D) and write the new numbers in Column E. We have used 10 years arbitrarily here. If your relationships tend to last longer, multiply the totals times more years. In Column F, write the estimated margin percentage on those relationships and multiply them times the dollars times years to calculate the bottom line. The margin number tends to be the figure that people have most trouble coming up with. If your program is up and running, you can come up with a margin percentage by starting with your firm's average gross margin percentage. Then you could adjust it for strategic account management. See Figure 7-2 for adjustment factors.

    To Decrease SAM Margins

    To Increase SAM Margins

    Volume discounts

    Longer relationships—lower acquisition cost

    Co-investment

    More opportunity to share in value created

    Extra resources required

    Introduction to a new market Higher volume = more effectively utilized equipment


    Figure 7-2: Margin Adjustment Factors

If you can come up with a margin percentage, multiply that percentage times the 10-year revenue figures to get the bottom-line value of the relationship over 10 years. If you are not comfortable estimating the margin percentage, use the 10-year revenue figure. We will show a little later how Boise Office Solutions successfully nailed down the margins of its national accounts.

You now have three numbers. Answer the following questions regarding those numbers:

  1. Examine the total lifetime values you've computed for your top three accounts. What annual dollar-level value are you currently delivering to each of these customers? How do you know? How does that annual dollar level compare with the value they deliver to you?

    This question jumps us into the second part of this chapter, where some effective firms demonstrate how they quantify value they deliver. For now, if your firm is not quantifying its delivered value, the odds are very good that the customer will neither recognize your value nor see much reason to remain loyal.

  2. If you were to lose these three customers, how much would it cost you to develop new account relationships that would generate the same level of revenue or profit? In other words, what are these customers' asset-replacement costs? Would you be able to replace these three customers with three other accounts?

    This is one of those questions that can pale the face of even the most secure executive. No one wants to think about losing a huge customer. Even though businesspeople know that losing such customers means sacrificing a predictable revenue stream over time, it's usually eye opening to see these numbers written in cold, hard print.

    It's as sobering to consider losing these customers as it is to determine exactly what it would cost to replace them. In our experience, few firms have guidelines about what they would spend to replace a major relationship. We do know engineering firms that budget 5 to 10 percent of their annual revenue for special marketing and/or sales expenses; some of these firms apply that 5 to 10 percent as a rule of thumb for acquisition costs. If the customer is worth $10 million annually, the firm is willing to invest $500,000 to $1 million to try to acquire it.

    The reason for the final question regarding the three customers is that, when executives start to think about this issue, they may see that there are not three huge accounts out there "dying to be sold by us," in the words of one executive. In many cases, the firm would have to sell six to nine smaller customers to produce the same level of revenue as the top three generate. Multiplying the number of customers you need to acquire substantially increases the acquisition costs. Next to margin percentage, this is probably the most challenging question in this exercise, but to receive the full benefits of this exercise, you must determine or estimate asset-replacement costs.

  3. How much are you currently investing in these relationships to ensure that you don't lose them?

    After working through the previous question, many executives immediately answer this question by saying, "not enough." And that answer tends to get validated when they determine how much they are already investing. Executives usually answer this question by prorating the salaries of the strategic account manager and support people by how much time they dedicate to the account. If you have already gone though the six-question account portfolio exercise in Chapter 4, you may already have the numbers regarding any extraordinary support expenses these accounts have generated.

  4. What grades did you assign to these three relationships?

    Be watchful for a grade of C or lower. A C grade is a neutral score—while the account has no particular reason to leave you, neither does it have any particular reason to stay. We consider a C grade as a supplier perched at the edge of the strategic account loss cycle, waiting for a push.

  5. What additional investments should you make to ensure the loyalty of these relationships?

    We've noticed that a good SAM (as well as dedicated customer service people) can usually answer this question with specificity and that there is usually a high correlation between the account manager's answer and the answers of critical account contacts. In some cases, the SAM has already been trying to justify these investments over time, but when the supplier quantifies the relationships' lifetime values and replacement costs, the required investments can suddenly take on a new level of urgency.

This exercise lacks the hard-dollar specificity you would find in an ROI case for buying a bulldozer. On the other hand, the relationship asset can easily be thousands of times more valuable than a bulldozer to the supplier over time. This exercise can be a wake-up call to executives who may be thinking short term regarding a long-term asset. It also points to a critical responsibility of the SAM—to continually communicate the value of the account to the supplier. The account is not the only one that has a short memory when value is not regularly quantified.

For a solid example of quantifying the value of a customer, let's turn to Boise Office Solutions, whose executives were frustrated by their inability to determine the profitability of national accounts. Their solution yielded reliable customer profitability and provided a value-added software package that BOS then offered to those same national accounts to serve their customers.

... [T]he SAM [should] continually communicate the value of the account to the supplier. The account is not the only one that has a short memory when value is not regularly quantified.




The Seven Keys to Managing Strategic Accounts
The Seven Keys to Managing Strategic Accounts
ISBN: 0071417524
EAN: 2147483647
Year: 2003
Pages: 112

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