In most B2B and B2C companies, we’ve found that 10–15% of customers contribute virtually all reported profits, and one quarter of this group produces the lion’s share of that amount. Management’s most important priority should be using showcase projects to grow and protect these elite customers.
Showcase projects are arrangements in which a supplier fields a dedicated, multi-capability team to partner with these customers’ counterpart teams to uncover new opportunities and respond to emerging opportunities and risks. These projects provide opportunities to “learn by doing” on both sides of the team and develop an ongoing stream of joint innovations that benefit — and often transform — both companies. (For large, money-losing customers, the multi-capability team has a different objective: to lower the cost to serve them through incremental cost reductions that often increase both companies’ profitability.)
For example, several years ago, the CEO of Baxter’s Canadian health care business approached the CEO of a major hospital customer. Baxter and the hospital had worked together productively for a number of years. The Baxter CEO told me that he met with the hospital CEO and said, “I have an empty bag in my hand. Let’s get a team of my managers together with a team of your managers to figure out how we can take our relationship to a higher level. After a month or two, they will tell me what to put in the bag and I’ll see if you want to purchase it.”
The two CEOs agreed and their teams worked together. During this time, they saw that the compounding process, in which drugs are inserted into bags of IV solutions for particular patients, was inefficient. They determined that it could be significantly automated and improved if the hospital processed a much higher volume of IV bags — and they knew that many hospitals had the same problem. In response, they jointly developed a central compounding center in the hospital to fill more IV bags, faster and cheaper, and distribute them to other hospitals in the region. It was a win-win for both companies.
The Mutual Benefits of Showcase Projects
Showcase projects create a wide-open set of previously unknown opportunities for mutual value creation — a critical strategic advantage when most competitors are stuck offering tactical improvements and jockeying to raise prices. They enable you to avoid commoditization and price wars. Generally, your high-profit customers are very receptive to innovations and are relatively price-insensitive when buying innovative products and services that clearly add value. This ensures that there will be adequate new value that the customer and supplier can share.
To take advantage of these benefits, it’s vital to be a first-mover. Innovative suppliers have visibility into a wide range of best practices from their best customers and can share them with their other non-competing key customers. These innovations provide competitive breakthroughs that are nearly impossible for others to follow.
Showcase projects almost always create transformative improvements in operations and strategy, and most generate cash from the start. For example, several years ago, Xerox slashed inventories by nearly a billion dollars by coordinating its product flow with its key customers. A former VP of Xerox observed, “The process is front-end loaded: The biggest benefits flow from doing the simplest things at the beginning. But planning and performance measurement must change radically for business processes to change. You must take down your assumptions brick by brick.” One top customer manager who was in charge of working with suppliers on a manufacturing transformation project told me, “I never realized that our suppliers could be such an important resource.”
The following three factors are essential for creating successful showcase projects.
Rethink account management.
The first step is to identify your key profit-generating customers. Most companies view their large customers as most important. However, some large customers are huge profit generators, while others are major money losers.
The problem is that traditional aggregate performance metrics like revenues and costs are inadequate because they tell you whether you’re making money, but not where you’re highly profitable. Transaction-level profit metrics, which we call enterprise profit management, give you a true, granular picture of the net profits generated by every nook and cranny of your business.
In previous HBR articles, we described these transaction-level profit metrics. When companies use these profit metrics (creating an all-in P&L for every invoice line), they quickly see that their customers fall into three broad profit segments:
- Profit peaks— their high-revenue, high-profit customers (typically about 20% of the customers that generate 150% of their profits)
- Profit drains — their high-revenue, low-profit/loss customers (typically about 30% of the customers that erode about 50% of these profits)
- Profit deserts — their low-revenue, low-profit customers that produce minimal profit
However, while the profit peak customers, in aggregate, are very profitable, a close analysis shows that some segments of these customers are much more important than others.
For example, in one company, the profit peak customers produced $189 million in net profits. When the finance team divided these key customers into quartiles (four groups with equal numbers of customers, ranked in descending order by profits), they were surprised to find:
- The top quartile produced $124 million in net profits, or $44 thousand per customer
- The upper quartile produced $32 million in net profits, or $11 thousand per customer
- The lower quartile produced $20 million in net profits, or $7 thousand per customer
- The bottom quartile produced $13 million in net profits, or $5 thousand per customer
Clearly, the top quartile of profit peak customers is the prime target and worth the investment of time and resources. The old adage “do fewer things better” rings true.
The second imperative is to engage these profit peak customers, particularly those in the top profit peak quartile, with multi-capability teams that are highly experienced in developing and managing showcase projects and tightly coordinated customer relationships. The traditional models of a territory rep serving the full range of customers in one (typically geographic) area and a “trusted advisor” counseling large customers are inadequate for making your best customers even better. Instead, you should be a trusted profit partner for your best customers, working closely with them to make both companies more profitable.
Showcase projects also require executive involvement (typically on a steering committee) on both sides to give permission to try new things and commit resources to the endeavor. Executive sponsorship also strongly increases the likelihood of success, as the teams have high-level visibility and do not want to disappoint their executive sponsors.
Develop a joint channel map.
As your showcase team engages with its customer counterpart team, the early conversations often revolve around how each company operates and generally includes site visits to both companies. As the process evolves, it is helpful to structure the process by developing a joint channel map to uncover opportunities for transformative improvement.
A channel map provides a broad view of consumption patterns, operating structures and processes, and performance by tracing intercompany product flow. A channel map has three key components:
- A diagram of the information and product flow, activity by activity, at each stage
- A quantitative analysis or representative model of product processing, accumulation, and movement over a typical time period
- Estimates of the costs and assets at each stage
The channel map should include both the physical products and the related services.
The disciplined, systematic channel mapping process quickly gets the teams focused on both the opportunities for transformative improvements and the possibilities of new joint businesses that draw on each company’s strengths. Some companies force transformative change by starting with a set of financial objectives that are not achievable by either company alone, or by tactical improvements. Channel mapping encourages the team members to search for truly transformative changes, and not just incremental reductions in operating costs.
Showcase projects differ from pilot projects because a showcase offers an opportunity to carefully experiment and develop new ways of working together. By systematically developing intercompany channel maps, the joint team puts every relevant element of both companies under the microscope with a focus on facts. This encourages the team to explore new alternatives for transformative change. A pilot project, on the other hand, is designed to prove out a previously approved project.
These critical projects are often initiated by suppliers, but customers can prompt their key suppliers to engage in the process. For example, several years ago, we met with the purchasing team at a major medical electronics company. They wanted to engage more deeply with their suppliers to benefit both companies, but they felt stymied. They explained that they didn’t have time to specify projects for the suppliers to do.
As our discussion progressed, they realized that they were a very important customer for their major suppliers, and that they could simply invite one of these suppliers to send a team to work with a team of the customer’s own counterparts to develop a showcase project that would identify how the companies could better work together. The process was very successful.
Sell the results internally.
Reducing internal resistance is a major factor in moving from concept to successful implementation. This resistance typically stems from two sources.
First, customer purchasing and supplier sales groups often initially see the showcase process as encroaching on their traditional “turf.” This view is reinforced by narrow compensation systems and lack of understanding of how jobs can change for the better. Second, because intercompany coordination typically involves major changes in operations, operating departments often raise concerns. For example, they might be concerned that the partner company will see too much of the actual or future costs and try to take all of the future savings (or renegotiate the current contract), rather than sharing equitably in the new benefits. The executive sponsors on both sides should set expectations on how future benefits will be distributed between the two companies, clearing the way for the operating team to work without this concern.
In order to overcome these natural points of resistance, it’s imperative that the new arrangements involve transformative change and yield large, measurable new benefits. The top management of both companies can distribute the benefits to the departments involved in order to motivate them to accept the change.
Successful showcase project teams not only create new value, but also specify how to manage the change. Importantly, the change must be sold to key managers in both companies. For example, several companies have established benefit-sharing programs in which traditional performance review standards were replaced by implementation milestones.
Once a showcase project results in a transformative innovation that is applicable to other profit peak customers, your teams should engage with the new customer counterpart teams to “rediscover” the innovation — even though you already know the answer. This will enable the customer’s team to develop the deep understanding of the innovation and its benefits — as well as the commitment — that they need to successfully get buy-in within their company.
The biggest management hazard in the showcase process is to treat them as one-off, ad hoc initiatives. Instead, this process needs to be a permanent capability and a core ongoing company strategy.
Long-Run Profit Growth
Showcase projects are the most effective way to make your best customers even better. They deepen your relationship and expand your customer value footprint. They accelerate your profits and create a virtuous cycle: In a key customer, successful showcase projects create a demand for more showcase projects — creating more and more profits and value for both companies.
All top managers have a vision of what their companies can be. This usually centers on long-run profit growth and strategic success. Showcase projects enable an innovative supplier to join with their customers’ top managers to help make that dream become a reality. This is the underlying source of their power.
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