Delivering ROI from CRM Investments!
Many enterprises pursue expensive customer relationship management (CRM) initiatives without first understanding the challenges and costs involved. This approach often results in CRM projects that fail to meet measurable benefit objectives.
As enterprises acknowledge such first-try CRM failures and boards of directors demand increased accountability, IT and CRM managers are now held to the same standards as their business counterparts. As a result, they have started creating economic justifications to ensure that their CRM projects get funding. Moreover, smart CRM managers not only justify their CRM initiatives; they also utilize the business case throughout their initiatives to ensure they don’t repeat the same mistakes.
Enterprises need to realize that CRM is a business strategy with underlying technology, and that it requires large investments in applications, hardware, software, telecommunications, internal labor, external consulting services and training.
Therefore, an enterprise should calculate the business benefits associated with reducing the total cost of ownership (TCO) of CRM, and use these to build a compelling justification for its CRM project. In addition, ongoing measurement of CRM benefits helps ensure that an enterprise receives expected advantages and achieves strategic objectives.
Several Key Concepts form the Foundation of CRM Economics:
(a) TCO provides a holistic view of IT costs across the enterprise over time, and includes people, processes and technologies.
(b) Benefits are those tangibles or intangibles that promote or enhance the well-being of, or provide an advantage to, the business. Demonstrated benefits result from identifying various metrics and the degree to which implementing CRM will impact those metrics.
(c) Return on investment (ROI) which, in its simplest form, is benefits less cost is the most important concept, because it is a measure of how a project affects an enterprise’s financial statement. An enterprise must understand CRM economics because two of the three key drivers of a CRM strategy optimizing revenue and profitability link directly to understanding economic benefits. These benefits (for example, contributions to earnings per share) accrue only after an enterprise follows through and takes the necessary actions.
The Need to Determine CRM ROI:
An enterprise without standardized measures of business benefits is unlikely to achieve its CRM goals. Disenchantment with CRM largely results from few enterprises completing ROI and building solid business cases from which to manage and measure their CRM Initiatives.
Some of the more common reasons cited for not calculating CRM ROI include:
(a) Difficult to accomplish
(b) Not necessary
(c) Lack of priority by business or IT
(d) No tools for the job
(e) Will be considered after the CRM implementation
(f) No ownership
(g) No clear method for determining ROI
(h) Dropped after initiating the project
However, calculating the TCO and benefits, building a business case and measuring ROI will help an enterprise make wiser CRM investments and enable it to enjoy the results — instead of complaining that CRM fails to meet expectations. Therefore, an enterprise needs to assess the costs (such as technology, labor, consulting services and training) and benefits associated with CRM programs, and express that evaluation in terms of ROI.
To determine a viable ROI, an enterprise needs:
(a) A full understanding of the TCO associated with the Systems
(b) The ability to measure the CRM program’s business benefits, using terms familiar to those working in the business units
(c) A strong foundation in business case preparation
(d) The capability to augment established business standards with realistic, risk-oriented evaluation techniques Delivering ROI from CRM requires
(e) Ensuring that the funder of the CRM initiative is the one who will directly derive the benefits projected, and that IS on the “hook” for delivering the projected benefits
(f) Business unit leaders who actively ensure that redesigned processes meet business unit needs, and are widely adopted within the business unit
(g) Tracking operational and financial projections in the business case, analyzing the difference between the projected and actual results, and taking the appropriate measures or courses of action when differences are observed Because of the cost and complexity of a CRM program, only an enterprise that has these elements will reliably deliver returns.
Who Should Pay for CRM:
To ensure that required process changes occur and the CRM system is properly used, the business units that benefit from the CRM initiative should also fund it, and be accountable for costs incurred and benefits achieved. Any project that requires funding needs to align stakeholders’ incentives with the money that will be spent
Particularly which business units pay for the project and which ones benefit. Most enterprises have a hard time doing this.
ROI methods, such as internal rate of return (IRR) and net present value, often don’t account for such distribution issues. Furthermore, they don’t ensure optimal investment outcomes for business units that make their own profitability their first priority. In most cases, the IS organization assumes the role of provider — turning business unit input into a CRM project.
However, IS needs to influence equitable alignment of costs with benefits. If the business unit that funds a CRM program doesn’t recover its investment or receive benefits, it likely won’t:
(a) Invest further to maintain the solution and keep it updated as changes in the business necessitate
(b) Encourage use of the system by appropriate business users when determining the right funding model for a CRM initiative, an enterprise should ensure that
(c) It equitably distributes costs to business units that will use and benefit from the system.
(d) Business units that fund the CRM initiative receive benefits and a return in line with their strategic objectives.
Once an enterprise aligns CRM costs with business unit needs and usage, the funding business units can be held accountable for delivering results from CRM investments. Proving ROI then becomes much easier.
Creating a Master Plan for CRM:
CRM implementation requires a unique, overarching enterprise wide work plan that includes the phases, activities and tasks specific to each technology implementation, broken down into manageable components (for example, project management, business process and application design). In addition, the enterprise needs to align each initiative with the overall CRM business process and infrastructure plan, which details execution of the strategies, tactics, processes, skills and technologies.
An enterprise should follow a structured methodology and use economic justification to make sound business-based decisions. Implementation represents just one milestone in a CRM initiative. Because other process metrics better indicate project success, an enterprise — using a balanced scorecard approach — should measure these metrics, which include:
(a) The quality of data
(b) System and network performance
(c) Knowledge transfer to users
Although an enterprise can’t deliver or measure many such outcomes for months or years after the initial implementation, it nonetheless should begin measurements with the pilot and perform periodic measurements throughout the project life cycle.
An enterprise should:
1. Create an enterprise wide CRM plan that incorporates implementation plans for sales, marketing and service, and for the integration of these domains.
2. Have project managers establish, record and measure multiple success metrics.
3. Link project team, project sponsor, executive management and external service provider (ESP) payments and bonuses to such metrics — not to implementation time and initial budget.
Successfully Managing CRM TCO:
TCO — a fundamental decision support tool — presents a holistic view of IT costs across the enterprise over time, and includes people, processes and technologies.
CRM project managers need to complete a TCO analysis of each CRM work plan, accounting for people, technology and process costs.
People costs can include:
(a) Internal staff
(d) ESP or system integrator staff
(e) Vendor staff
(f) Internal support
(g) External support
Technology costs can include:
(a) Software, hardware and maintenance
(e) Handheld devices
(f) Storage devices
(l) Data cleansing
Process costs can include:
(g) Corporate finance
(h) Department accounting
(j) Human resources
In addition, CRM project managers should use the following guidelines to manage TCO successfully:
(a) Understand each TCO component, its impact on the costs and assumptions regarding its useful life.
(b) Build best- and worst-case scenarios to determine TCO tolerances.
(c) Staff the CRM project with employees who have experience in building and measuring TCO.
(d) Include financial analysts on the project to assist with the approval process, and to provide insight for senior management during the life cycle of the initiative.
(e) Create a TCO model that accommodates monthly budgeting for the initiative’s life cycle.
(f) Ensure that senior management and the steering committee commit to the assumptions that underlie each TCO component and scenario.
(g) Align the TCO model with project phases and milestones, and produce a graphic display of costs.
(h) Expect vendor proposals and internal staffing decisions to come before a final TCO calculation.
(i) Use the TCO model to drive many project decisions, such as:
(a) Whether to use an ESP
((b) Vendor selection
(c) Internal staffing scenarios
(d) Choosing a centralized or distributed model
The Right Way to Calculate ROI:
When calculating ROI, an enterprise should:
i. Consider a variety of cost and benefit scenarios
ii. Discount future cash flows in current terms
Many enterprises perform CRM ROI analysis using simple calculations that are based on nominal costs and benefits, instead of discounted cash flows (which factor in the opportunity cost of capital). Even more enterprises calculate ROI using only a best-case scenario. In most and a gaping hole in credibility (akin to what happened with enterprise resource planning in the late 1990s).
To address this issue, an enterprise should:
(a) Assess potential, plausible cost and benefit outcomes from implementing a CRM initiative, using best-case, worst-case and probable-case scenarios.
(b) Evaluate the relative likelihood of each of these scenarios.
(c) Ensure the evaluation appraises the costs and benefits using discounted cash flows, so that the analysis doesn’t unfairly favor outcomes that provide more immediate benefits. CRM project managers that find this process unfamiliar should consult with the enterprise’s finance department, whose staff uses these methods regularly and should understand them well.