Investing for a Lifetime

When enough money is pumped into a software system, it's natural to expect a strong ROI  but it might take some time. The true beauty of CRM lies in its ability to retain top customers, getting them to buy more over the lifetime of the system.

[From iSource Business, August 2001] Customer relationship management (CRM) is hot  white hot. As the battle-weary gladiators of B2B procurement stagger around trying to get their bearings, a new princess has walked into the arena, and her efficiencies and optimization are getting all the attention. But with the attention comes some criticism, and skeptical investors have begun wondering, "Will CRM really deliver a ROI?"

To begin with, yes, CRM implementation, for the most part, delivers a return on investment (ROI). But is that return a direct efficiency savings that pays for the deployment? Or is the real value CRM's ability to help an enterprise retain customers while cross-selling and up-selling? Many companies are now looking at CRM as a tool to make the enterprise more competitive. However, in the middle of these discussions companies are finding that CRM is not easy to deploy. Many organizations are stumbling on their path to full utilization, tripped up by adoption resistance.

"There is a high failure rate that has been published, and this is usually an adoption problem," says Gita Guppy, vice president of CRM product strategy for PeopleSoft Inc. of Pleasanton, Calif. "There comes a time when companies look at their spend and try to determine what value they're getting. With the economy the way it is, upper management is really looking hard at ROI."

What Do the CRM Stats Say?

Dataquest reports that the worldwide CRM services market generated $19.9 billion in revenue in 2000, a 28 percent increase over 1999. The average budget for end-user enterprises of CRM initiatives is currently over $1 million. This spending is expected to double over the next 12 months. IDC is even more bullish, projecting that CRM investment will reach $125 billion in 2004.

This isn't surprising, given that top management is buying deeply into CRM right now. "With the downturn, they're trying to see how they can make marketing more efficient, how they can retain customers, and how they can get more from existing customers," says Kevin Scott, an analyst of marketing strategies with AMR Research. "The CEO says their CRM deal is still in the pipeline. We interviewed top executives, and 87 percent say they would keep the CRM budget the same or even increase it."

Studies confirm this point. Improving customer service was listed as the first priority of e-commerce strategies by 80 percent of firms replying to a recent survey conducted by General Management Strategies. This emphasis on using the Internet to improve customer relationships is repeated in several other surveys, with more than three-quarters of respondents saying that improved customer service is their top e-commerce priority. Some companies are already beginning to reap the results of their customer-based automation. McKinsey and Co. estimates that Cisco Systems saved over $130 million in support staff costs through its Web-enabled customer service solution.

What Constitutes ROI for CRM?

There are three basic types of ROI for CRM deployments. One delivers a hard return, while the other two are soft. Yet the soft ROI will ultimately give the enterprise the greatest benefits.

The first ROI is process savings. CRM delivers efficiencies to sales force automation, which then delivers direct savings to the enterprises that deploy the applications successfully. The second ROI comes from improved communications and connectivity to customers. This spans all stages of the customer life cycle, from marketing through sales and ultimately into service.

There are some process savings in improved customer contact, but usually it's not enough to justify the investment. The real value in customer connectivity is the resulting improved customer relationship that should increase the number of sales leads, raise the closing percentages and, most importantly, lift customer retention statistics.

The third and ultimate form of CRM is customer knowledge, sometimes known as "optimization" or "analytics." This functionality drills down into the company's enterprise software, analyzing the customer and the company's products from lifetime profitability. When the analytics are complete, you know which customers are profitable and what products are profitable. A little tweaking here and there, and the customer and product mix can be manipulated to make the entire enterprise more profitable.

"The value of CRM as a discipline is that it increases the value of your customer base, increases the sum total of lifetime value. That's the best way to view CRM," says Don Peppers, founder of the Peppers and Rogers Group in Norwalk, Conn., and an early champion of CRM. "And what is the value of a customer? It's the net value of future profits."

Enter ROI Tools

One of the new buzzwords in information technology (IT) is "ROI tools." In CRM, there are actually companies that specialize in measuring the ROI of CRM. The Delphi Group has introduced a ROI ProofPoint Service, which is designed to help companies determine if they are getting their money's worth from the implementation.

Not all of the costs of CRM systems are visible, which makes traditional ROI calculations difficult. The Gartner Group has estimated that the highly fragmented nature of the CRM software industry might require some customers to purchase software from as many as 50 separate CRM suppliers in order to meet their needs (unless more consolidation takes place in this software market). RealMarket Research has estimated that for every $1 a company spends on CRM software, it will wind up spending $2 to $5 on implementation and maintenance over the lifetime of the product. And the META Group has found that up to 60 percent of the cost of a CRM project may go to integration.

The Most Important ROI is the Hardest to Measure

Some executives believe the fanfare being made over the ROI of CRM applications is shallow, especially since some of the most profound value of CRM doesn't come from efficiencies, but rather from learning considerably more about customers. This lifts CRM out of the operational world and into strategy. "There is a ROI from operational efficiency and a ROI that comes from maintaining a competitive edge," says Ross Goodwin, loyalty manager at Hewlett-Packard. "CRM is an application tool which allows our company to be more productive and reduce costs."

Goodwin believes it's more important to understand the customer than it is to gain increased operational efficiencies. "When you sell your products and services more efficiently, you get a ROI, but the part that's missing is the customer-centric approach. There is little discussion about the value customers are receiving. At every customer-contact point, the value the customer receives is the most important value. This is what increases repurchase rates, market share, revenues and ultimately the value the supplier receives  the true measure of ROI."

"One bottom line is what is your cost of sale," says PeopleSoft's Guppy. "Is there churn? Lack of retention translates into higher cost of customers. You become more profitable by making your retention stronger. Also, who are the most profitable customers? What are the most profitable products? If you can identity opportunities you make your enterprise more effective."

AMR Research's Scott agrees that the CRM functionality that delivers customer knowledge delivers the ultimate best value. "In the end, people want to know which customers are the most profitable."

The Beast at the Gate

Even with its hot reputation, there remain formidable obstacles to effective CRM deployment. According to Selling Power magazine, the CSO Forum found that 69.3 percent of CRM installations failed to meet all goals, while 45.3 percent were late. Another 36.8 percent were over budget, and 31.7 percent did not produce meaningful results.

Yet companies still believe it's worth the attempt, often because their legacy systems are hopelessly archaic. "I know of a billion dollar company where the sales force is still using a single-user version of ACT," says Gerhard Gschwandtner, publisher of Selling Power. "They do have e-mail, but the customer information doesn't reside in one place, so when a customer calls in, the company takes a message and has the salesperson handle the call."

Some CRM deployments run into strong resistance from sales reps who haven't taken well to the intrusion into their space. "Salespeople have always done these CRM things, so it's no big leap for them," says Dennis Byron, vice president of enterprise applications research at IDC. "But they don't like the boss to know what they're doing. It's a barrier to full utilization. Sales guys like to take Friday afternoon and work out their sales plan for the next week and still find time for golf. They find CRM to be an onerous invasion from the home office."

No Turning Back

Even with CRM deployment difficulties and the strain of finding ROI dollars in improvements that behave more like a strategic investment than B2B efficiency savings, you can't get the Pandora back in the box. "My advice is that if you really care about your customers, you'll want to make a commitment to exploit technology aggressively," says PeopleSoft's Guppy.

When you're talking about ROI, it includes an investment in customers, which will help gain market share or keep up with competitors," explains Hewlett-Packard's Goodin. "Is investing in CRM the right thing to do? Absolutely."

See the sidebar "The Functions of CRM" for more information.