CRM ROI: Fact or fiction?

What is the success rate for ROI from CRM implementations? There are many stats on this topic. Get the facts from our ROI expert.

Getting analysts to agree on the potential ROI of CRM is nearly impossible. Several reports published in 2003 claimed that the return on investment (ROI) from recent CRM implementations had been dismal, with eight out of 10 projects failing to deliver on ROI promises, and project failure rates typically running between 50% and 70%. Other reports were more optimistic, estimating that about 70% of companies said their CRM initiatives...

had exceeded original ROI expectations.

Why the big difference in the results? Some blame analysts for a lack of clarity. But the biggest problem is a failure to measure success. Only about 20% of companies surveyed were able to demonstrate ROI for their CRM investments. Additionally, most companies say that, when it comes to determining value, intangible benefits are more significant than cost savings. Yet companies often fail to establish key performance indicators for judging these intangible benefits.

Companies need to use yardstick techniques when evaluating CRM software investments. Metrics are essential. A formal business plan must be in place before the project begins -- one that quantifies the expected costs, tangible financial benefits and intangible strategic benefits, as well as the risks.

According to a February 2003 survey by CAP Ventures Inc., nearly 90% of organizations that have measured ROI-based CRM objectives have found that CRM solutions are meeting their goals. Additionally, about 70% said that their CRM initiatives exceeded their original expectations. The survey showed that the CRM projects cost these companies one-quarter of what was expected. And, finally, the survey found that deployments were completed in five weeks or less, and that projects yielded $1.2 million in cost avoidance by moving more customers to self-service.

How can a company replicate that kind of success? Crafting a detailed business plan is a good start. This plan should predict:

  • Tangible net benefits -- The plan must include a clear and precise cost-benefit analysis that lists all of the planned project costs and tangible benefits. This portion of the plan should also contain a strategy for assessing key financial metrics, such as ROI, net present value (NPV) and internal rate of return (IRR). It should specify a payback period (the amount of time that's expected to pass before the solution produces results). The total estimated cost should be less than 50% of the benefits (because of inevitable cost overruns), and the payback period shouldn't exceed 12 months.
  • Intangible benefits -- The plan should detail the expected intangible benefits, and it should list the key performance indicators (KPIs) that will be used to measure success and shortfalls. Often, an improvement in customer satisfaction is the primary goal of the CRM solution, but this key value, in many cases, is not measured before and after the project.
  • Risk assessment -- The risk assessment is a list of all the potential pitfalls related to the people, processes and technology that are involved in the project. Having such a list helps to lessen the probability of these problems' occurring. And, if they do occur, a company may find that, by having listed and considered the problems in advance, the problems are more manageable than they would have been otherwise.

Assessing the issues in these three categories -- costs, benefits and risks -- helps establish a business case for the project and helps allow for post-project success measurement. Now let's look at each of these objectives in detail.

Implementation costs

Implementation costs are often split equally between IT costs and business-unit costs. Here's how they break down.

IT costs include:

  • CRM software licensing and support contracts.
  • Licensing and support contracts for electronic data interchange (EDI) tools, databases, operating systems and other software.
  • Hardware purchases and support contracts -- specifically server-, storage- and network-related expenses.
  • Software integration and customization, including design, development, testing and maintenance.
  • Implementation labor.
  • Ongoing administration and support labor.

Business-unit costs include:

  • 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 costs (due to the elimination of errors).

Here are a handful of the objectives that should be considered:

  • Reduce the cost of sales.
  • Reduce sales administration overhead.
  • Improve leads-to-sales closure ratios.
  • Increase customer retention.
  • Improve customer satisfaction and loyalty.

Risks

Some potential pitfalls include:

  • Biting off more than you can chew -- Start with small, focused CRM solutions. The solution should target specific sales or service business functions, or specific groups of users. Additionally, it's essential to manage the project's scope, goals and objectives throughout the project-development phase and deployment.
  • Over-budget and behind schedule -- According to CIO magazine, 49% of CRM projects are now expected to be complete within 12 months of their start dates, and 70% within 18 months. Companies are significantly reducing project scope and implementing projects with tighter schedules and more reasonable budgets.
  • Poor user adoption -- Ease of use and adequate training are essential. Otherwise, users might not understand and adopt the solution.
  • Maintenance and support that's too expensive -- The cost of maintaining CRM applications can be high. Weak or incomplete training almost always raises support costs.
  • Isolation -- The effectiveness of a project may suffer if the CRM data isn't used throughout the company. Failure to use the data broadly 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? -- The failure to measure success is one of the clear killers for CRM. Measurement of pre-project status and post-project achievements is essential if a company is to show success.

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

This was first published in February 2004
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