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AMR Research

Achieve ROI by evaluating needs, dedicating enough time, money, and staff resources to the initiative – and ignoring vendor hype.

Customer Relationship Management initiatives can offer huge rewards, but companies frequently underestimate the challenges of getting from vision to return on investment. The process begins with building a business case for CRM. Companies must delve deep into their business processes, needs, and corporate goals to come up with both qualitative and quantitative data to define and support their CRM visions.

Next, a parade of vendors, each offering an "end-to-end, collaborative, 360-degree e-business solution platform" comes through, and each vendor pleads its case, often luring companies off the paths dictated by their business cases and into risky and confusing territory.

Finally, companies preparing for CRM implementations must make changes in infrastructure, track and manage the risk of failing in front of customers, and budget for the cost of the initiative's licenses, services, training, and maintenance.

Throughout the process, companies face tough decisions and often little help from vendors. AMR Research recently conducted a study of 100 end users across industries that had implemented at least some portion of a CRM strategy. Here is what we found:

o Companies that develop business cases and do formal Return on Investment (ROI) studies are more likely to meet their goals.

o 74% of CRM projects met expectations, but only 12% of projects exceeded them.

o Contrary to what vendors want companies to believe, vendor choice makes little difference in the grand scheme of things.

o Companies must plan and budget for the risks inherent in CRM initiatives.

Developing a Business Case for CRM

AMR Research believes all companies should conduct a formal study of the potential risk and rewards of the strategy before heading into a selection process. From our research, the companies that developed business cases used a mix of revenue growth and cost savings metrics to justify their investments:

o 78% used customer satisfaction/retention rate

o 71% used reduced cost of services

o 59% used increase in sales/revenue

o 57% used new customer acquisition

o 52% used reduced cost of sales

o 50% used head count reduction

It is vital for companies to use a mixture of quantitative and qualitative data to evaluate a CRM initiative. While measurable results from CRM can be quite compelling, intangible benefits cannot be overlooked. A business case that fails to address the qualitative and quantitative relationship between the investment and the impact in revenue risks losing management support as e-business hype wears off and the economic slowdown shrinks discretional spending.

Insight into customer behavior sounds like a vendor tagline, but the users we surveyed gained visibility into customer behavior and the tools to act on this information. Users cited the following capabilities created by insight:

o Better understanding of product mix, grouping, and cross-selling opportunities

o Discovery of new markets they did not know existed

o Identification of purchasing patterns, buying frequency, and seasonal variations

o Identification of their best customers and what they are buying

o Ability to target content and marketing to the right audience

o Identification of drivers of customer retention and profitability

Quantitative data is the other key ingredient in any CRM business case. Companies should factor in both revenue enhancement and cost savings when creating an ROI model. Consider these financial metrics:

o Increase in total number of customers

o Increase in revenue per customer

o Improve customer retention rate

o Decrease the cost to acquire customers

o Decrease the cost of sales

o Decrease the cost to retain and serve customers

Figures 1a, 1b, and 1c show sample metrics, key performance indicators, proposed solutions, and benchmarks companies can use to build a business case for CRM.

Figure 1a - Cost of Sales

Figure 1a - Cost to Acquire

Figure 1a - Cost to Serve

The true benefit of building a strong qualitative and quantitative business case for CRM is having solid data to use to continue to drive additional CRM projects, as opposed to the educated guesses the majority of companies are using today.

Users should consider both ROI and Return on Relationships (ROR) when building a business case. All the necessary factors can be incorporated into a four-quadrant model for evaluating e-business opportunities (see Figure 1). The model includes an evaluation method for each quadrant. The quantitative, internal methodology uses a traditional capital budgeting approach, although some new thinking has emerged in this area. The external, quantitative method puts a value on the initiative to the trading partners being affected. Qualitative measures include an assessment of the current competitive external pressure and the readiness of the enterprise's internal infrastructure. Companies should assign a weight to each of the quadrants and evaluate each initiative to establish priorities.

Figure 1 - The Four Quadrant Evaluation Model

End Users Share their Experiences with AMR

Is CRM working? Are there any measurable benefits? To answer these questions, AMR Research conducted a study with 100 end users that have implemented a portion of an overall CRM strategy. The results were mixed. While overall satisfaction with CRM has improved, many obstacles to success and business benefit still plague the market.

All in all, CRM projects are finally meeting expectations, even delivering return on investment. However, there is still room for improvement. AMR found that 74% of CRM projects met expectations, but there are few raving fans.

In the past, much of tarnish around CRM has come from the failures of one module: Sales Force Automation (SFA). Today, the average implementation includes 4.5 modules of CRM, and the highest penetration of systems are focused on improving customer service through contact center deployments (73% penetration), email response management (54%), and Web self-service (41%), compared to SFA, which was only deployed in 37% of the users sampled. This shift in investment is the primary reason why 74% of the projects are living up to expectations.

AMR found that SFA, online sales, product configuration, and channel management are among the least successful components of the CRM strategy. Sales applications continue to disappoint because of these three factors:

Lack of discipline of sales management and employees to change processes to effectively adopt new technology.

The fragmentation of the technology to support different aspects of the sales process, requiring lots of integration between SFA, configuration, order management, channel management, and the list goes on. This fragmentation problem bodes well for vendors like Siebel, Oracle, PeopleSoft, and SAP, who are working on the complete sales footprint.

The channel conflict and organizational silos between direct sales force, web sales, and indirect channels.

Instead of starting with sales applications that have a few strikes against them, users considering a CRM initiative should prioritize the CRM modules and really focus on getting a few quick wins in the first six months. The word will get out about the success, and this will lead to better user adoption of subsequent CRM module releases. To prioritize, use data about benefits and time to help determine the sequence of implementation.

Though time to implement and time to business benefit are vital considerations, the most important factors should still be business needs and overall corporate goals.

Figure 2 - Report card on CRM: Users

Choosing a CRM Vendor

Processes and people achieve benefits, not software. Users must fight the temptation to base their CRM strategies on a vendor's vision and reputation. Base your strategy on your own needs, goals, and processes.

Vendors typically overvalue their applications' roles in a CRM strategy. For example, Siebel advertises that companies that have implemented its applications enjoy on average a 21% improvement in customer satisfaction, an 18% improvement in productivity, and a 17% growth in revenue. However, the companies we surveyed had a different experience.

Contrary to vendor claims, our study suggests that there has been very little advantage in buying from one of the big three CRM vendors. In nearly all categories of business benefit, the companies using one of these three market share leading applications were outperformed both by lesser-known CRM vendors and the in-house development effort.

The software brand does not matter; software is just a means to an end. A great project team backed by a responsive organization can make a weaker tool shine, and a weak project team backed by a inflexible organization can make the best functionality fail. Invest in the team, the process definition, and the executive leadership, and don't worry as much about the perfect functionality.

There are hundreds of vendors selling at least some part of a CRM vision. The following is a list of the top ten vendors in the market today: Siebel Systems, Nortel Networks, Oracle Corporation, PeopleSoft, SAP, E.piphany, KANA Communications, Onyx Corporation, Interact Commerce, and Pivotal Corporation.

Buyer beware: Every vendor raves that its system has high value and ROI, but few can prove it. Make vendors prove their claims with user references and then reward them with your business.

Figure 3- Detail on average implementation time vs. average business benefit

Are You Ready for CRM?

Risk is inherent in any significant technology investment, but no area of the business carries as much financial risk as customer management. The need for organizational alignment and process change, the idea of opening up information and transactions directly to the customer, and the environment of rapidly changing and immature technology all spell risk for these investments. Furthermore, the effects of failures that do occur are even worse in CRM because they happen right in front of customers. Companies must quantify, anticipate, and cope with these risks in order to unlock the potential rewards of new customer management strategies.

Figure 4 - The overall success of business benefits by brand

When evaluating a CRM initiative, companies must look internally to make a qualitative judgment concerning the organization's readiness to undertake customer-facing initiatives, and at what scale and scope. Infrastructure assessments should focus on several key areas:

o Physical infrastructure comprises the manufacturing, warehousing, and administrative facilities. The ability to adapt to changing conditions in the marketplace is critical. For example, facilities that are highly specialized for economies of scale may actually become a burden in a marketplace where the customer dictates specifications.

o Organizational infrastructure relates to how human resources are allocated. Companies must be willing to draw on resources across functional groups and break down traditional functional barriers to take full advantage of an initiative. Some of this evaluation is related to corporate culture, which may be too qualitative, so be careful not to weight this element too much in the evaluation.

o Technology infrastructure deals with existing technology and platforms. It must be able to accommodate the new requirements. Companies with successful Enterprise Resource Planning (ERP) and Supply Chain Management (SCM) implementations have a distinct advantage. The ability to integrate transactions, supply access to useful information, and coordinate activity is essential. Having successful implementations may also indicate better organizational readiness, as such an achievement requires effective cross-functional teams driving business change.

Table 1 - CRM budget guidelines by size of company

In our study, end users said that the application license and maintenance fees only represented 24% of the annual cost. Most of the money is still in implementation services, training, hardware, and software. The applications themselves represent less than a quarter of the total potential of the initiative, and companies should use that figure as a guideline for allocating time as well as money.

Based on this research, as well as the research on AMR Research's annual studies on Application Spending and Penetration, we have developed a budgeting guideline. The goal of the numbers is to provide a benchmark for planning purposes on the annual cost of implementing and managing a comprehensive CRM initiative. The budget benchmarks are broken into three bands based on company size ($250M, $1B, and $5B). The primary difference in CRM budget by size of company is the distribution of budget to services for the larger organizations. As a general rule, the larger the implementation, the more complex and costly, so don't expect economies of scale.

Despite the risk of failure, difficulty in getting some end users to change processes, confusion from vendors, and high costs, Customer Relationship Management initiatives really are meeting expectations and delivering return on investment. Our research shows that companies that really evaluate their own needs and goals, dedicate the necessary time, money, and staff resources to the initiative - and don't accept vendors based on vision alone - have given themselves a head start to achieving returns on their investments.