This is a hot topic in the industry today. There is a great amount of debate and discussion about Return on Investment for Customer Relationship Management systems. There are extremists at both ends of the spectrum. Some people say financial ROI for a CRM system is simply impossible to measure because the direct benefits are either intangible (like customer goodwill) or are intermingled with all kinds of other factors (did our sales increase because of our CRM system or because of that new product launch, or both?). There are others who say you can absolutely equate CRM ROI to dollars, and that you shouldn’t implement until you incorporate that into your plan.
My personal opinion of whether CRM ROI is possible to measure falls somewhere between the two extremes and starts with the phrase that is the cornerstone of fair, open-minded people everywhere: “It depends.”
Really, it depends on what the company’s strategic goals are for a CRM system and the pains it is trying to solve. It also depends on whether it is sufficient to develop metrics that show Business Value that isn’t necessarily financial, or if everything has to equate to the almighty dollar. In other words, define “ROI”.
If a company has developed a true customer-centric philosophy, then non-financial ROI is usually acceptable. By “customer-centric philosophy”, I don’t mean the flattering reference about serving customers that every company has in its mission statement. I mean a real, “the customer truly runs my business” mentality that when followed focuses on building a lifelong (and ultimately more profitable) relationship with the customer, potentially at the cost of short-term gain.
But this is the real world, and not all executives have this philosophy. Even some that would like to simply can’t afford to in the current economic conditions. They need at least something in the way of a financial return in order to justify a CRM purchase. This is completely understandable.
So where do we start? Whether or not financial ROI is needed, we start in the same place: Metrics to measure Business Value. Then if we need a financial justification, we attempt to derive it from one or more of these metrics. We’re of course assuming we have good, solid goals for CRM that provide benefit to the customer as well as to ourselves.
Let’s say for example that our company wants to improve its customer support process. Calls from customers currently aren’t being handled efficiently or timely, causing some customers to get angry and never buy from us again. A CRM system can help this. How can we measure ROI for it? Let’s start by setting up some metrics to develop ROI from the standpoint of Business Value.
- Currently it takes an average of 4 hours to respond to the customer’s initial call and 3 days to work through and solve the problem
- Goals for the CRM system could be to reduce the initial response time from 4 hours to 1 hour and the total time to solve the problem from 3 days to 1.5 days. These are ambitious goals, but after some good historical support data and knowledge base data are entered, it should be possible.
These goals are not directly financial, but they do provide value to the business by taking care of the customer more quickly and making them more loyal (and less angry). We now have one metric of non-financial ROI, but how do we make the jump to financial ROI from this (assuming we are required to)?
- Determine how many customers we lose each year, and what their annual revenue with us was before they left. Let’s say that’s about 20 customers spending an average of $ 50,000 per year.
- Make a conservative estimate as to the percentage we could keep from leaving by implementing the improved service capabilities offered by CRM. Let’s say 10%.
- Therefore, if we keep two $ 50,000 customers from leaving us each year, that’s a $ 100,000 annual return.
That was an easy one for financial ROI. Others could be too, like increasing the conversion rate of leads to orders. But some areas aren’t so clear-cut. Consider these examples:
- Reduce Quote Turnaround from 5 days to 2 days: That’s a simple enough business value metric right there, but how would you translate that to additional revenue?
- One-Click Forecast Generation: The metric here may be the amount of time saved by the salespeople each month by not having to compose a forecast manually. That leaves more time for face-to-face selling, but can you estimate the extra sales from that?
- Know More About the Customer: This is a common CRM goal, and really one that happens automatically if the system is implemented correctly. But how much additional money can we get from that customer by “knowing them better”? We know it is beneficial. We know the customer will likely feel more loyal. But what is it worth?
As you can see, it is much easier to determine and measure ROI that is not financial. Does this mean it is difficult for CRM systems provide a financial return? Of course not. Implemented correctly, with the proper goals, that is exactly what a CRM system will do over time – although it may be difficult to measure. The “over time” concept is something to keep in mind. It is important to understand that a CRM system is only the supporting technology of an overall CRM strategy, which should be a long-term strategy for increased sales and profitability through better knowledge of customers and an improved relationship with them.
And while the overall strategic goal of a CRM strategy may be long-term, there will be short-term return. In fact, that is what we focus on for Phase 1 of a CRM implementation: Features that will provide a company the most business value in the shortest amount of time. If financial justification is needed, the challenge then is deriving a financial ROI from the Phase 1 goals of the system. The ease of which, as we have seen, depends on what those goals are.
Whatever kind of ROI you decide you need, the key is to have the metrics determined to measure it before you start the CRM implementation. These metrics, along with well-defined goals for the system, will guide the CRM process and provide the means to measure the success of your project.
First appeared at Hagerman & Company, Inc.
David Hagerman is Director, CRM Practice for Hagerman & Company. David’s responsibilities include helping clients with all aspects of a CRM implementation, including strategic planning, needs analysis, design, installation, customization and data migration. He holds technical certifications for Pivotal, SalesLogix and MSCRM software.
Hagerman & Company, Inc. is a Value Added Reseller/System Integrator
(VAR/SI) and Consultant specializing in improving organizational productivity through the implementation of technology. A large supplier of software and consulting services in the CAD/CAM, PDM, and CRM market; the company markets its products and services primarily to manufacturing firms and the AEC (architects/engineers/constructors) industry in Mid-America.
