Creating a valid CRM justification requires a more extensive
effort than most organizations have made to date. CRM projects directly affect an
organization’s revenue stream, and require a rigorous, best practices analysis.
Introduction
For the past several years, CRM has been the must-do IT and
marketing initiative.
It has been seen as a leap-of-faith investment required to meet customer service
demands and to keep up with innovative competitors. It has not been a “Should
we?” decision, but instead a “How can we?” imperative. After all,
satisfying customers is never an option, it’s a requirement.
With the economic slowdown, 2001 has become the “Year of
CRM ROI.” Industry analysts have led the way, proclaiming that CRM projects are no
longer slam-dunks, and that CRM needs to be justified to executive decision-makers. The
business and technology press has picked up the theme, generating an even higher interest
in understanding CRM benefits. Suddenly, CRM alternatives are being looked at more
closely. As Lawrence Peter observed, “If you don’t know where you’re going,
you’ll get there.”
Vendors have responded with proprietary CRM justification
models, organizations have undertaken internal studies, and implementation partners and
industry analysts are offering CRM evaluation services. The challenge for executives is to
understand CRM justification issues in order to make better go/no-go and vendor decisions.
There currently is confusion and misinformation concerning
so-called “CRM ROI.”
This paper highlights five recommendations for generating better CRM ROI analyses:
1. Clear Up the "ROI"
Terminology Confusion
Before beginning a feasibility analysis of CRM, it is
necessary to clear up a problem
in CRM justification terminology. A major confusion is that “CRM ROI” is
being used interchangeably in referring to three different concepts:
(1) Traditionally, “ROI” is an acronym for a return
on investment financial analysis technique. ROI analysis computes the
equivalent interest rate earned by an investment’s discounted net benefits over a
fixed time period. A correct statement would be, “This CRM project delivers a 20% ROI
over three years.”
(2) The most common use of “ROI” is as a term for generic
justification, i.e., that a CRM project in some way pays back more than the investment
required. For example, the November 2001 Customer 360expo included a session entitled,
“ROI: Justifying Enterprise CRM Initiatives” in addition to seven other sessions
with "ROI" in the title.
(3) “ROI” is also being used to refer to individual
benefits, i.e., any advantage delivered during the life of a project.
For instance, a major SFA vendor says, “We deliver ROI
in ten months.” This is an example of mixing definitions and is self-contradiction.
ROI is an interest rate, not a time period. (See the discussion of “payback”
below.) This vendor is evidently using definition number three above to merely say,
“You will begin to see some sort of positive results from this CRM project in about
ten months.” The vendor is not saying that the project will pay itself off
from positive discounted cash flows within ten months—although that may be the
intended impression.
Recommendations: Get everyone (i.e., other
disciplines) involved to focus on the justification of a CRM initiative. If
possible, reserve the term “ROI” to discussions of a specific analysis method.
This will be difficult, because the trade press, industry analysts, and vendors all use
“ROI” indiscriminately. At the very least, educate your CRM evaluation team on
the three definitions so that everyone can be talking about the same thing at the same
time, and so they can better understand what vendors
are actually claiming.
2. Make CRM Justification Meaningful
In his classic book, The Business Value of Computers,
Paul Strassmann writes,
“You should spend at least 5 percent of total lifecycle development plus
maintenance costs (discounted) and more than 5 percent of elapsed time in the planning and
justification phase.” So, for example, a two-year, $1 million project should have at
least $50,000 and five weeks allocated to planning and justification.4 Despite
its
“hot topic” status, CRM analysis is not given this level of attention in
most organizations.
When it is done at all, financial justification is often an
empty effort because no supporting financial management processes are in place. Base case
“before” data doesn’t exist. Afterwards, no one ever revisits actual
justification performance compared to forecast. And nobody is held accountable for results
after the fact—assuming that those responsible haven’t already moved on.
In these situations, CRM justification becomes little more
than an exercise in pre-project discipline. Top executives want to ensure that
decision-makers have
“done their homework.” As Figure 1 shows, what might be an obvious
decision
to the front-line (dubbed a "wink decision" by one finance executive)
becomes more and more formal as it moves up the organizational ladder to executives who
know less
and less about the real details of the project.5 What started out as a
“We need this
to do our job!” at the front-line ends up as a 100-page spreadsheet for the
Executive Committee.
Figure 1.
In 25 years of consulting, we have encountered only two
organizations that have a formal approach for evaluating the accuracy of justification
studies after the fact.
They used the process not to punish the guilty, but to understand how to make
better financial projections in the future.
Recommendations: First, decide if you really
“mean it” concerning CRM justification. Is this a true go/nogo decision? Is it a
ploy by management to force the CRM team to “think it through?” Or is it
“cooking the books” so that executives will authorize the project regardless? If
the decision process isn’t rational, if the numbers aren’t valid,
if no one is going to care afterwards anyway … why bother?
Second, if you do really mean it, take Strassmann’s
advice. Dedicate sufficient resources such as time, people, and expertise to perform a
valid CRM justification study. This means getting outside IT and marketing to include
finance, auditing, third party experts, vendors, and research from business and trade
literature. It also means being willing to live with the go/nogo decision results.
3. Understand How CRM Justification is Unique
Cost justifying a CRM project is not like doing a financial
analysis on capital goods.
A milling machine, for example, has readily identifiable acquisition and operating
costs, and performance specifications can be used to accurately forecast productivity
gains. CRM has uncertain cost categories, no standards for valuing funds flows,
a changing product, and a varying life for the study. This creates several unique
justification issues:
High penalty costs. CRM is a high risk endeavor
because companies are betting their revenue stream on the project. Service is both a
satisfier and a dissatisfier. It takes consistently great service to generate customer
loyalty, but only one bad interaction to create dissatisfaction and customer loss.
ERP systems are mostly inward-facing, where marginal
efficiencies in traditional processes can be generated, and where systems can be run
side-by-side throughout a conversion stage. CRM systems are customer-facing, and have a
direct effect on customer satisfaction. Marketing, sales, and customer service systems
can’t be run concurrently during a cut-over. CRM is either live or it isn’t.
What is delivered at implementation with CRM is what customers and prospects experience.
The penalty for mishandling a CRM interaction is more than
just the cost of a botched transaction. It is the potential lost revenue from a now
impaired relationship with customers. This is why some so-called "“eap of
faith” CRM decisions are actually justifications based upon customer satisfaction
expectations. For many organizations, good service is a requirement to stay in business,
and integrated CRM is necessary to deliver the level of service customers are demanding.
The ultimate cost of refusing to implement CRM is a reduction in organizational
competitiveness, viability,
and longevity.
Slow results. There is some disagreement among
analysts about how quickly CRM benefits accrue. At issue are the differences between
internal and external benefits.
Internal operational benefits begin at implementation.
Improving call center efficiency, increasing field service utilization, or moving sales
inquiries to the Web can generate immediate savings. But these marginal improvements in
operations are often not enough to fully justify integrated CRM projects.
Customer revenue benefits occur some time later in a CRM
project’s lifecycle. Analysts estimate that true payback justification can take 12
months or more.6 Customer loyalty is generated from a series of pleasing
marketing/sales contacts and service interactions. It requires time for a new CRM solution
to positively influence customer behavior, depending upon the applicable buying cycle.
Currently, CRM justifications are focusing on internal
measures. In a 2001 META Group survey of 800 IT and businesspeople, 63 percent deployed
CRM for the company to improve workflow, and 37 percent deployed CRM to enhance the
customer experience.7 As justification models are refined, organizations will
be able to better evaluate longer term, customer-driven benefits.
Benefit timeframe exceeds CRM product lifecycle.
Although CRM results can be slow in arriving, they can also continue for a very long time.
Inherent in the above discussion of penalty cost is the concept of “lifetime customer
value.” What this suggests is that the benefits or penalties of a CRM system can
accrue far beyond its lifecycle. For instance, a specific Customer Interaction Center
sales and support system may have a three-year life, but it is attracting (or repelling)
customers who might have an average seven-year long relationship.
A good example is when a major toy retailer was unable to
ship its e-commerce orders in time for Christmas. Parents were quoted as saying they would
never again buy from the site or the company’s stores. And this bad experience is
likely to trickle down for decades as the children who were disappointed on this Christmas
day remember when deciding where to buy their children’s toys in coming years.
Similarly, an outdoor clothing outfitter’s success in
creating a retail store chain has been attributed to the strong customer loyalty and
excellent reputation it created in decades of mail-order sales.
The results of CRM projects, closely linked to customers and
revenue, may long outlive the useful lives of specific products and systems. A true CRM
justification study must take into account total funds flows, both positive and negative,
that result during and beyond the system’s expected life.
Continuous product improvement. Another factor that
makes CRM different than other capital justification studies is that the system’s
benefits are not static. Organizations don’t buy a CRM solution, install it, then let
it sit as-is for three years. CRM must adapt as customer expectations, effective service
processes, product offerings, organizational structures, and strategies evolve. (A good
example is an organization’s forever changing Web site.)
Consequently, CRM product functionality in Year 1 is not the
same as in Year 3—even with the same product. It is not unusual for a
CRM system to have hundreds of change requests pending when it first goes live, and to
have thousands of changes posted throughout its useful life.
As such, projected benefits of CRM should reflect the
continuously improving functionality of the system. Software that is harder to customize
and integrate will deliver much less value than an open architecture that is easier to
enhance.
Costing human behavior. A final qualifier in
estimating benefits of CRM is that analysts are attempting to put a value on human
behavior. This applies both inside and outside the organization. Most CRM failures are not
due to technical issues,
but are caused by the refusal of employees or customers to use the system.
Organizational change management issues trip-up many organizations. For example, end-user
foot dragging has driven up costs by 300 to 400 percent in some projects.
Assuming the system works as advertised and employees are
using it as intended, CRM justification projects still depend upon accurately forecasting
customer reactions to new systems and service processes. What’s the exact dollar
benefit of a service center improving first call resolution by five percent? How much
extra revenue can be obtained through prospect profiling? Internal cost reductions can be
calculated,
but customer revenue benefits are harder to determine.
Recommendations: You must first decide whether CRM is
a mission-critical business requirement regardless of cost, or if it must justify the
required investment in time and money.
A justification should first start with the CRM system’s
potential reduction in your internal operations costs. Baseline information is more easily
obtained here, and potential efficiencies can be identified with the help of vendors and
benchmark services.
Revenue gains are much more difficult to estimate with
validity. Still, the effects on your revenue should be projected both during the
technology’s lifecycle and beyond
up to your customer lifetime cycles.
In the rush to create an ROI analysis for CRM, you should be
careful not to “over-infer” the data. Human factors can sabotage the most
carefully analyzed projects and dramatically increase costs. Also, predicting customer
response to new systems is challenging. And at this stage in the CRM industry, revenue
benefit forecasts are highly speculative.
You should justify CRM projects on more than just the
numbers. There should be an overall set of criteria used: strategic imperatives, customer
expectations, competitive positioning, financial justification, and your
organization’s capacity and willingness
to accept the change required.
4. Select a Justification Goal
The two popular methods of CRM financial justification
reflect very different goals.
ROI Analysis. Return on Investment Analysis (ROI
definition #1) focuses on estimating how profitable an investment will be over a fixed
life.
ROI inputs: Investment, net benefits, time period. Result:
Interest rate.
Up front, one-time costs are considered to be the investment.
Net benefits (benefits minus costs) throughout a fixed project life are estimated. ROI
calculations then determine the equivalent interest rate earned from the
investment—positive or negative. This rate is the return on investment.
Organizations will have a minimum investment hurdle rate that must be exceeded for a
capital project to be approved.
Payback Analysis. Payback Analysis focuses on
estimating how quickly an organization will recover its investment. This is expressed as a
time period of months or years.
Again, one-time initial costs are the investment. Net
benefits, both recurring and periodic, are discounted at a specified interest
rate—usually the organization’s cost
of capital. The time that discounted net benefits pay back the investment is then
determined. This time is the payback time.
Payback inputs: Investment, net benefits, discount interest
rate. Result: Time.
Return on investment studies generate concerns for some
decision makers. CRM projects are not considered stable enough to realistically forecast
valid cash flows for three or more years. With the rapidly changing, variable nature of
CRM technologies and processes, executives are instead asking the payback question,
“How long before I get my money back out of this project?” A common goal is to
achieve payback within 12 months.
Other measures. Complex techniques such as Economic
Value Added and Total Shareholder Return are long-term justification measures that will
not be evident until after the project is complete, and so are less suitable for CRM
justification.
Recommendation: Once cash flows have been identified,
both ROI and Payback analyses should be performed. ROI provides an indicator of CRM’s
relative value versus other capital investment options. Payback provides risk analysis in
helping to understand how quickly the project can be paid off in anticipation of probable
changes later in the project—which is likely considering the current technological
and competitive environment.
5. Perform Three Levels of CRM Justification
CRM justification is usually thought to be a single step in
the decision process.
There are actually three types of financial analyses that must be performed at
different stages of the decision cycle: CRM justification, vendor differentiation, and
functional selection.
(1) CRM justification focuses on the application
go/nogo decision,
“Will a CRM solution benefit my organization enough to justify the investment?”
The analysis is vendor-independent, and is a pre-RFP step done at the beginning
of the project. The baseline is current operations, and the evaluation alternative
is a generic CRM application. Either CRM ROI or Payback can be estimated.
At this stage, it is too early to fully document vendor
differentiators. Existing vendor CRM justification models, although presented by their
respective salespeople as being specific to their own products, are more useful for
understanding the metrics of generic CRM projections.
(2) Vendor differentiation addresses the question,
“Whose solution will bring me the most financial benefit?” This step takes place
during the RFP cycle, and is typically
a total cost of ownership (TCO) issue. Simply comparing vendor feature sets is a
very poor differentiator.8 Functional capabilities change frequently across all
vendors depending on their various release cycles. And software is unique in that it can
be greatly enhanced through customization and integration. So out-of-box vs. custom
features shouldn’t be the main concern. The issue at this stage should be, “How
much will it cost to do what we want to do throughout the entire life of the
application?”
The good news is that the CRM marketplace has clearly
differentiated CRM architectural philosophies that can be analyzed for their TCO. These
include the partner eco-system, all-from-me, limited partners, and point solution
approaches. Once the CRM “go” decision is made, challenge vendors to
differentiate themselves financially. An eco-system approach with 20 or 30 vendor
integrations has a very different TCO than an comprehensive solution with limited add-ons.
(3) Functional selection identifies the financial
consequences of implementing various CRM functions and customizations. This occurs during
the installation cycle as myriad specific feature options are evaluated for their
individual cost/benefit performance.
CRM justification is not a one-time, up front exercise. Some
organizations concentrate on the initial generic CRM justification—and this is
necessary. But the biggest payoff will come from adding vendor and functional
justification analyses.
Recommendations:
You should carefully review CRM justification models from
your staff, industry analysts, and vendors before committing to the CRM project. The
ultimate goal is to create a customized analysis that reflects your specific situation and
projections. Then you should build your comparative TCO justification template to assist
in making the vendor decision. Finally, you should challenge implementation partners to
supply functional justification estimates to support their feature inclusion license fees
and program customization costs.
Conclusions
Most organizations have so far chosen to make a leap-of-faith
CRM decision based upon service requirements or competitive positioning. Of those looking
for specific benefits, two-thirds of the implementations have focused on the internal
efficiencies
to be generated. Only one-third focused on the effects upon customers.
Typical CRM justifications are often confused, misleading,
and, at best, partial solutions. A proper study includes both cost projections during the
system life,
and revenue projections throughout the longer customer lifecycle. Several
justification methods should be used, and three unique analyses are required at different
points
in the decision and implementation process.
Many justification scenarios have become useless due to
unanticipated CRM change management difficulties that dramatically increase costs. It is
essential to realistically evaluate customization costs and end-user acceptance risks
after implementation.
CRM financial justification is extremely difficult, and
requires a more rigorous analysis than many organizations have been willing to perform. If
CRM justification projections are to be valid, organizations must commit to performing a
best practices analysis similar to that outlined above. Then executives must provide the
management processes to hold project leadership responsible for the CRM justification
results before, during, and after implementation. This is an ideal responsibility for a
new C-level executive such as the Chief Customer Officer.
About the Author …
Kenneth Carlton Cooper is President of CooperComm, Inc., a
St. Louis-based technology consulting firm founded in 1976. He specializes in improving
relationship management systems and processes, and has conducted CRM training and
consulting worldwide for organizations, software vendors, and implementation partners.
Ken’s latest book is The Relational Enterprise: Moving beyond CRM to maximize ALL
your business relationships (AMACOM, 2002).
Footnotes:
1 META Group, "How Do I Plan for CRM in a Slowing
Economy? Proving ROI to the Business", How-To Teleconference, June 21, 2001,
pg. 3.
2
Mario Apicella, "Solid CRM is Difficult,
But not Impossible," InfoWorld.Lead with Knowledge, May 16, 2001, pg. 1.
