CRM ROI: Creating a Business Case

Tom Pisello - 7/23/2004

Introduction

Getting a read on the return on investment (ROI) of customer relationship management (CRM) from analysts is near impossible today. Several 2003 reports claimed the ROI from CRM implementations was dismal, with 8 out of 10 projects failing to deliver on ROI promises, and 50-70 percent typical project failure rates.(1) Some of this year's reports are more optimistic, with about 52 percent of companies responding that their CRM initiatives generated an ROI between 51 percent and 500 percent, and 30 percent of respondents saying the return was greater than 501 percent.(2)

Why the big difference in the results? Some have blamed the analyst researchers for the lack of clarity.(3) But the biggest issue is that only about 20 percent of the companies surveyed are able to demonstrate ROI on their CRM investments, since most companies indicate that non-financial metrics (often called intangible benefits) outweigh financial metrics as gauges of technology investment value.(4) In addition, those that use either financial or non-financial metrics are not quantifying key performance indicators, which would provide clear guidance and proof of success.

Companies need to implement serious yardstick work when seeking to evaluate CRM-software investments. Metrics are essential, with a formal business-case in place before the project begins, and an evaluation that quantifies the expected costs, tangible financial benefits, intangible strategic benefits and risks.

According to a February 2004 survey by IDC, 58 percent of companies that have measured ROI-based CRM initiatives had a payback on their CRM projects within a year. Another 35 percent received payback in one to three years. In the survey, the median initial investment in a CRM application was about $426,000 (USD); this covers all costs incurred before the CRM implementation began. The median total cost over the first five years is estimated at $1.2 million (USD).

The business case for CRM should include

1) Tangible Net Benefits—a clear and precise cost-benefit analysis which tallies all of the planned project costs, quantifies each of the tangible benefits and calculates key financial performance metrics such as ROI, NPV, IRR, and payback period. Costs should be less than 50 percent of the benefits (because of inevitable cost overruns and typical benefit adoption schedules) and the payback period shouldn't exceed twelve months.

2) Intangible Benefits—a total of the expected intangible benefits including key performance indicators (KPI) that will be used to measure success or shortfalls.

3) Risk Assessment—a listing of the people, process, and technology risks in order to proactively mitigate their probability and manage its impact on project success. Getting a read on the return on investment (ROI) of customer relationship management (CRM) from analysts is near impossible today. Several 2003 reports claimed the ROI from CRM implementations was dismal, with 8 out of 10 projects failing to deliver on ROI promises, and 50-70 percent typical project failure rates. Some of this year's reports are more optimistic, with about 52 percent of companies responding that their CRM initiatives generated an ROI between 51 percent and 500 percent, and 30 percent of respondents saying the return was greater than 501 percent.

(1) Popping Bubbles - Maximizing CRM ROI, CRM Today

(2) IDC: The Financial Impact of CRM, February 2004

(3) The Blueprint for CRM Success, CRMGuru.com, December 2002

(4) CRM Quiz: Where's the ROI?, CFO Research Services and Saugatuck Technology May 2003

Creating a Cost-Benefit Analysis

Assessing three categories—implementation costs, benefits, and risk—helps establish a business case for pre-project planning, and post-project success measurement. Implementation Costs Implementation costs are often split between IT costs and business unit costs, where the business unit costs are typically equal to the IT costs.

Implementation costs include

IT Costs

CRM software licensing and maintenance or support contracts
EDI, database, operating system and other software licensing and maintenance or support contracts
Hardware purchases and maintenance or support contracts including servers, storage and network upgrades (as required)
Software integration and customization, including design, development, test and ongoing maintenance
Implementation labor
Ongoing administration and support labor

Business Unit Costs

Planning and requirements meetings
User training and learning time
Process change management

Tangible and Intangible Benefits

Benefits typically include increases in staff productivity, cost avoidance, increased revenue and margin, and reduced inventory through the elimination of errors.

These are a handful of areas of improvement that should be considered:

Key Benefit Area	Key Improvement
Reduce cost of sales	Enable self-service sales channels, changing the mix of direct sales, tele-sales, channel or agent sales, and self-service the most effective or least costly channel in order to reduce costs and improve satisfaction
Reduce sales administrative overhead	Reduce the time spent on sales administrative overhead tasks such as commission calculations, forecasting and reporting enabling increased selling time
Improve leads to sales closure rates	Increase the percentage of leads which are converted to sales
Increase customer retention	Reduce customer churn rate and eliminate replacement expenses
Improve customer satisfaction and loyalty	Improve customer lifetime value

Risks

Biting-off-more-thanyou-can-chew: Instead, start with smaller, more focused CRM solutions, targeting a specific sales or services business function or group of users.

Over Budget and behind schedule According to CIO magazine, 49 percent of CRM projects are now targeted for completion in less than 12 months, and 70 percent within 18 months. Companies are significantly reducing project scope and implementing projects with tighter schedules and more reasonable budgets.(5)

Poor user adoption Ease of use and training are essential for users to understand and adopt the solution.

Too-High Maintenance and Support Maintaining CRM applications can be 40 percent of the original implementation's labor and services. Weak or incomplete training almost always raises support costs.

Isolation Failure to use CRM data across multiple groups can severely hamper the achievement of key benefits.

Garbage In/Garbage Out Because CRM systems require so much data entry, users often put in placeholders, misguided estimates, or inaccurate information leading to poor analytical results and decision-making errors.

Who needs tangible results? Lack of measurement is one of the clear ROI-killers for CRM. Measurement of pre-project estimates and post-project standings is essential for success.

(5)May 2002 CIO magazine

The Bottom Line

CRM solutions should focus on solving a specific sales issue, such as improving response rates, implementing self-service, or automating forecasting and accuracy.
Projected benefits should be twice the expected cost, to assure success.
Solutions should take less than six months to deploy. If more time is needed, phased roll-outs will drive a steady-state of success.
Solutions should provide a positive payback on the investment in less than twelve months from deployment.
Pre-project and post-project ROI analysis including net tangible benefits, intangible benefits and risk measurement is essential to assure success.

About the author

Tom Pisello is the president and CEO of Orlando-based Alinean, the ROI consultancy helping CIOs, consultants, and vendors assess and articulate the business value of IT investments. He can be reached at tpisello@alinean.com.