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Customer Relationship Management
November 2002

Back In Black: Understanding The 
Financial Impact of CRM

By Doug Tanoury, Customer Interactions Consulting

A great deal of discussion is taking place regarding customer relationship management (CRM) system initiatives and their financial viability or ROI. There seems to be widespread confusion about the financial impact of these projects on revenue and operating costs.

Most companies that purchase CRM software and embark on these enterprise initiatives lack internal resources that understand enough about the industry, software and the companies' businesses to do the ROI analysis, so the job of completing this critical management function falls to the CRM vendors themselves, or their consultant partners.

Most ROI analyses done by software vendors or consultants are grossly inaccurate and hopelessly optimistic. The results are more wishful thinking and hopeful romanticism than business justification. Of course, software vendors and the consultants who implement these projects want to make a compelling case for action, but the inaccuracy of their ROI models is due to their remoteness and unfamiliarity with the client's business, operations and finances.

The real financial impact from CRM initiatives and the basis of every ROI model are increases in sales revenue and reduced costs based on increased operational efficiency, and staff productivity based on new business processes, technology tools and automation.

The fly in this ointment is predicting how much revenue will increase and by how much costs will be reduced, and what factors shape the business dynamics of the ROI analysis and how close the real world will resemble the ROI model. What many companies do at this point is skip a critical step, which is determining when and how post-implementation financial impact will be calculated. This is the step that holds the planners feet to the fire and makes the CRM owners and stakeholders responsible and accountable for actual results and delivery of business benefits. It's no small surprise that this step is often overlooked and swept under corporate carpets. It leaves results unmeasured and business benefit resting on amorphous perceptions and anecdotal information.

CRM Across The Enterprise
CRM has the potential to revitalize and transform all customer-facing activities that have become know as the 'front-office.' The front office is characterized by three broad functions that are focused on customers. Three primary functions related to customers that every organization must perform are:
' Acquiring,
' Selling, and
' Servicing.

Historically, very specific and standalone systems were used by diverse functional groups within an organization to find, sell and serve customers. These applications typically have unique quality and performance issues.

CRM initiatives break down these silo systems and replace them with a system that incorporates customer knowledge and product or service knowledge at the point of customer/company interaction. CRM systems at a high-level are only very finely focused knowledge management systems that deliver very specific customer information to sales or service staff, while combining deep knowledge regarding a company's product and service offerings.

As the number of products and service offerings increase across organizations, the value of a system that delivers detailed knowledge regarding them to front-office staff increases. Figure 1 illustrates this relationship of the complexity of product/service environment to the value derived from a CRM system across a simple 10-point scale.

Figure 1

As the number and complexity of customers increase across organizations, the value of a system that delivers detailed knowledge regarding them to front-office staff also increases. Figure 2 illustrates this relationship of the complexity of customer/ account environment to the value derived from a CRM system across a simple 10-point scale.

Figure 2

The functional groups within an organization that comprise the front office and focus on customers are:
' Marketing,
' Field sales,
' Customer contact centers (sales/service), and
' Field service.

The Internet has proved an effective means of delivering self-service applications to customers that automate many sales and service functions. Customer self-service is becoming a more integral component of many CRM initiatives.

The Factors That Drive ROI
Unfortunately, there is no cookie-cutter approach to calculating CRM return-on-investment (ROI) in an organization. It is not that simple, and while certain mechanisms always work in the same way, the extent that they impact revenue differ greatly, even between companies in the same industry.
Just as in the laws of economics, certain things must be done to achieve a specific outcome. Increased productivity creates capacity in any workforce. In a sales organization, it means that less staff is required to achieve a constant level of revenue. In a marketing environment, increased lead quality will improve the close rate, which leads to sales revenue increases per campaign. It is no different in contact centers or field service organizations ' increased productivity means increased revenue and/or reduced cost per employee.

The impact CRM has on an enterprise is directly related to the scope or reach of the initiative. A CRM effort can be implemented in some or all of the front-office organizations: marketing, field sales, customer contact centers and field service.

Marketing. CRM marketing analytical tools automate common marketing functions and allow increased tracking and other management functions. It traces the source of leads and allows complex evaluation of leads by source. Historical data can be accumulated over time for in-depth trending and analysis. This knowledge is critical for reducing cost and maximizing revenue of campaigns.

The customer information in the CRM system itself eventually becomes the richest source of customer information for marketing analysis, as the marketing department can also specify what customer profile data should be collected.

The automation inherent in the tools deployed in marketing increases staff productivity as well as the tracking of advertising effectiveness. Reporting and analytic tools improve campaign lead quality and execution to increase revenue.

Marketing cost reduction is driven by productivity improvements such as decreased training time for new staff, increased automation, increased advertising effectiveness, increased management reporting, improved historical and real-time campaign data, reduced campaign planning timeframes and increased campaign consistency and quality. Marketing revenue increases are attained by improvements such as increased lead quality, increased advertising effectiveness, increased closed percentage per campaign and higher revenue per sale.

Field sales. Most CRM systems incorporate a sales methodology that follows the typical sales cycle and follows the process to move a customer from lead to prospect to opportunity to customer. Simply deploying a standard sales methodology will have a positive effect on results.

Throughout the sales process, sales staff input customer information so detailed knowledge of new customers is captured. This approach to filling-in-the-blank fact-finding allows the creation of complete and accurate customer profiles. 

In the case of existing customers, sales staff have access to complete customer information and contact history across an organization. 

What drives field sales cost reductions are productivity improvements such as decreased training time for new staff, increased automation, improved sales management and forecasting, a reduction in staff required, improved sales reporting, increased sales order accuracy, increased sales management reporting, reduced sales cycle time and better customer data quality.

What field sales should see in terms of increased revenue can be attributed to increased volume of opportunities, higher close rates, increased revenue per sale, increased revenue from new staff, improved customer information and improved product/service information.

Customer contact center. The area in which CRM ROI is most easily measured is the contact center environment. The one thing that all contact center technology has in common is that it is report intensive. It is also an area that is contained with all the staff in large concentrations. This makes CRM management and implementation a bit easier, and it also simplifies ROI projections and measurement.

Contact center cost reductions are driven by productivity improvements such as reduced contact handling times, increased contact volumes handled, increased sales order or service request accuracy, increased automation of manual tasks, lower staff requirements, decreased training time for new staff, reduced telecommunications costs and improved data quality.

The productivity improvements apply to both sales- and service-oriented contact centers. Service-oriented call centers are usually cost-intensive, or their revenue is derived from maintenance contracts sold; as a result, they are usually not seen as a revenue-generating function.

Contact center revenue increases drive improvements such as an increased volume of opportunities, increased close rates, increased revenue per sale, increased revenue from new staff, improved customer information, improved product/service information and improved sales scripting.

Field service. Field service organizations are typically a cost to a business; so in call centers, small increases in productivity have a dramatic effect on costs. CRM systems focus on entitlements or service level agreements, but can be the result of product quality issues.

Factors that drive field service cost reductions are productivity improvements such as decreased training time for new staff, increased automation, improved management and forecasting, a reduction of staff required, improved reporting, increased service request accuracy, more accurate customer records, increased technical/product information, shorter issue resolution time, reduced repeat visits, less false or erroneous visits and increased customer data quality.

What field sales should see in terms of increase revenue improvements can be attributed to improved entitlement information, better service level agreement (SLA) performance and increased customer retention.

Ensuring Success
What is required is a methodical approach to ensure success and meet ROI objectives by techniques to minimize risk, increase management control and meet business and financial objectives.

Most clients who embark on CRM initiatives do not have the required skills in-house to adequately assess the ROI, as this is a highly specialized area that requires unique management and operational skills. The unfortunate result is that this critical first step is often assigned to CRM vendors themselves or to their consulting partners. This is a bit like turning the fox loose in the hen house.

No wonder most CRM implementations are marked by flying feathers and frantic clucking. The groups that are most often charged with completing CRM ROI analyses are anything but objective. When the final project ROI is measured after the fact, they are long gone. This leaves the business stakeholders within a client organization holding the ROI bag, and the most likely outcome is that ROI is never measured. The logic is that you can't fail if you are never graded.

CRM ROI analysis is a critical management function that cannot be delegated to vendors or consultants. If an organization doesn't have the required skills to complete it, it must develop its current staff or hire new staff with the requisite skills. After all, if you don't have the sophistication in-house to do the ROI, it foreshadows what will happen after implementation when the vendor or consultant leaves and you must maintain and manage the CRM application on your own.

In truth, this is when most failures occur. Many companies do not have the sophistication or resources internally to maintain, manage and enhance the application going forward. They must simply learn by doing. This approach leads to highly visible and costly failures.

CRM ROI should be tied to a technology plan for the system. All the system functionality cannot be delivered day one of implementation, but must be deployed or rolled out over time. Implementing system functionality in phases minimizes risk and increases management control. Tying CRM ROI to specific functionality in system releases in a technology plan leads to a more accurate ROI model.

A post-implementation ROI measurement should be made in all cases. This is the time to ensure accountability. The company spent millions of dollars across some or all the front-office organizations, so what ROI benefit has been realized? This is a question guaranteed to put fear into the hearts of CIOs and CEOs alike. It takes a great deal of management courage to honestly answer this question.

The problem with most CRM ROI analyses is the organization lacks experience implementing and maintaining these systems. Due to this lack of operational sophistication, the complexity is often underestimated.

Another often underestimated item is the simple cost of ownership of CRM systems, which includes factors such as:
' System development and implementation,
' Initial and ongoing end user and IT staff training,
' Ongoing system administration,
' System updates and enhancements,
' Ongoing maintenance and updates of system knowledge base,
' Ongoing updates of product, pricing and end user scripts,
' System change management,
' Hardware and related support costs, and
' Help desk and user support.

As in all business planning, especially ROI, the details down to the lowest level will determine the difference between success and failure.

Counting The Dollars
CRM implementations in an enterprise-class client cost many millions of dollars and the decisions related to these initiatives are often made at the CEO level. This makes upfront CRM ROI analysis extremely important, but it also makes post-implementation ROI measurement just as critical.

There is no cook book or cookie-cutter approach to the hard work of estimating financial impact and then measuring it after the fact. Staff that has in-depth knowledge of the company's business and operations must perform a unique analysis. It is too critical and strategic a management function to be delegated to CRM system vendors or their consultant partners.

CRM ROI estimates and analyses must be solidly grounded in business operational realities, not in vendor marketing collateral or in the presentations of hopelessly optimistic consultants.

Doug Tanoury is the founder/president of Customer Interactions Consulting (CIC). CIC helps Fortune 500 companies maximize the value of a their customer portfolios through more effective and efficient marketing, sales and customer service. With over 25 years of customer loyalty expertise, CIC assists its clients in optimizing their customer connections across all channels. Contact Mr. Tanoury at [email protected].

[ Return To The November 2002 Table Of Contents ]

Customer Intelligence 'Unsinks' CRM Sunk Costs

By Jeffrey Pease, Business Objects, LLC

It's hard to remember now the boom times when funding for CRM investments was abundant. Without dragging out the usual litany citing thousands of pink slips, stock market doldrums and single-digit growth, let's just admit that the economy stinks. It has now dragged on so long, analysts who once dizzily predicted infinite growth are now smoothly practiced in talking about the importance of business fundamentals, and in Silicon Valley, there have been at least confirmed sightings of neckties. 

IT and CRM managers (those who still have jobs) often must make the most of limited budgets and frozen or reduced head count. Articles appear with titles such as, 'How to restart your stalled CRM implementation.' The good news is that a lot of useful infrastructure got built in better times. Many companies invested in CRM systems and/or data warehouses when times were good. Even those who didn't had the chance to learn from the experience of others. 

The task ahead now is to get the most value from those systems with the least additional money. With today's budget pressures, you can't afford to wait for CRM perfection to show a return. Even imperfect or in-progress CRM implementations can be intelligently leveraged with incremental customer intelligence investments that show a rapid return. Not every CRM implementation is a Ferrari, but even a skillfully driven Hyundai can drive to greater revenues and profits.

Customer intelligence analytic applications can help. They don't replace existing CRM systems; they make them more accurate. That in turn makes your CRM processes better focused, less costly and more revenue-producing.

Sunk Cost
About a decade ago, many companies began to roll out huge operational applications. It seemed obvious to many executives at the time that their organizations needed to deploy a CRM, ERP or other large-scale application as well as a data warehouse to truly harness the power of the information stored inside the company. With new sales channels such as the Web, a robust economy, revenues soaring and new customers coming on board daily, companies were patient enough to wait one or two years (or more) for a payback on these implementations.

Clearly the rules have changed. Budgets are reduced and, often as not, the grand unified data warehouse is still only in the planning stages. Now executives are beginning to question CRM execs and CIOs about the benefits of the existing CRM implementation, asking, 'How is this making me money?' You can almost hear the pencils, if not the knives, being sharpened.

Payback, return on investment (ROI) and total cost of ownership (TCO) are terms that have been around for decades, and these concepts have long been used by companies that spend their IT money carefully. They are just a great deal more careful now. Regardless of whether your company uses ROI, IRR, TCO, NPV or some other acronym or weighty financial concept, the whole discussion boils down to one question during this downturn: 'Which investments will add the most to the bottom line in the shortest time?'

So what kind of investment will allow your company to thrive even during difficult economic times? Technology that allows you to harness the single most important asset your company already owns but does not fully leverage ' the information in its database(s).

Customer Loyalty Is More Important Than Ever
In an 'up' economy, the emphasis is on getting customers, but in a down economy, keeping customers is what matters. Yet the most sharp-penciled budget cutter would be hard pressed to argue that loyal, profitable customers are less important in a bad economy than a good one. Although the temptation to cut budgets can fall heavily on CRM spending, companies still need to increase customer loyalty and value. 

Loyalty guru Frederick Reichheld reports in the Harvard Business Review that, depending on your industry, up to 60 percent of customers will defect to competitors before you break even on customer acquisition costs. More startling, 50 to 60 percent of defecting customers reported they were 'satisfied with the company they left,' though they left anyway. In a slowing economy, many companies have seen this demonstrated. It's important to note that this research was conducted well before the current downturn.
In a down economy, keeping profitable customers is actually the most cost-effective, least wasteful form of marketing. Keeping and growing profitable customers is how companies will increase market share and profitability even during a downturn.

Despite the need for loyal customers, any new CRM spending will be heavily scrutinized during this downturn. Be prepared to show an immediate payback on any additional investment. The investment should impact customers directly, and leverage the value of the customer data you have already accumulated and the operational CRM systems you already have.

Getting More Value From The CRM You Have
Customer intelligence (CI) analytic applications make sense in this environment, because they are designed to leverage existing data to make CRM systems smarter. CRM automation traditionally focuses on automating operational processes. They are great, for example, at executing marketing campaigns. They generally provide you with basic segmentation to derive a list, and bundled reporting to let you measure the response rate. But they are not so great at telling you which customers need to be targeted with what campaign today. 

A customer intelligence analytic application has a different focus. It leverages the capabilities of operational CRM systems. If a CRM system is the engine of your customer interaction 'vehicle,' a CI application is the navigation system that tells the driver where to go.

What To Look For
In selecting a customer intelligence application, some key capabilities to consider are the ability to answer complex customer behavior questions, the ability to monitor change at an individual and group level, and an open architecture for integration with your existing CRM.

Customer intelligence would be easy if customers weren't people! Unfortunately, they are, and this means that they are individual, complex and above all, changeable. So a CI application needs to answer complex questions about changing individuals and groups. 'Which platinum customers are becoming less loyal?' 'When in the sales process are deals most often lost?' 'Are we wasting time and effort on an increasing number of low-value transactions?' 'What is the impact on revenue this quarter of customers that have lapsed or customers who are spending less?' Answering such complex questions requires an application that can segment your customers by very precise criteria, such as average purchase size, geographic location and economic profile, and can then track those segments and the individuals who move through them over time.

A good CI application should also monitor customer change, not simply report on it. For example, it should look for customers who are buying less often at an individual level, as well as key metrics for segments and sub-groups that can reveal trends over time. Changes in key metrics should trigger proactive alerts, not wait for someone to look and notice.

Since analysis only adds to the bottom line when it is turned into action, your CI applications should have an architecture that allows them to integrate with your CRM systems, whether packaged, homegrown or a heterogeneous patchwork of both. If you use some kind of corporate portal, the CI system architecture should allow you to embed analytics into that portal, even if you don't integrate right away. It should be easy to set up business rules that feed individual customers who show signs of reduced loyalty to your call center application or campaign management system. 

Don't Do It Perfect, Do It Now
Companies that strengthen customer loyalty efforts when others are cutting them will eclipse competition when the economy rebounds. So it is better to put in a good solution now than a perfect one later. Customer intelligence applications provide a high return in a down economy because they drive more value from CRM systems you already have, even if these systems are not the end-all and be-all of your CRM vision. By automating both monitoring and analysis of customer data, a CI application can reduce the time and manpower required for effective CRM, and can help reduce costly waste. 

It's a long-standing clich' that half of any marketing budget is wasted. At a time when marketers are being told they must do more with fewer people and less money, data managers who implement customer intelligence are in a prime position to tell them which half.

Jeffrey Pease is senior director of product marketing for Analytic Applications at Business Objects, a San Jose-based developer of business intelligence solutions. He can be reached for comment at [email protected].

[ Return To The November 2002 Table Of Contents ]

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