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.

(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 CRM 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.

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.

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 "leap 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.

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.

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 estimate.

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.

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.

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 benefit measures that will not be evident until after the project is complete, and so are less suitable for CRM justification.

(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-selection 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.

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.⁹ 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.

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.

All companies, brands, products, and services mentioned in this Briefing are the trade names or registered trademarks of their respective owners.

Information in this report was obtained from sources CooperComm believes to be reliable.