3 reasons CRM financial analysis always fails

Everybody gets that procuring and implementing software isn’t the same as procuring and implementing hardware. I’ve been writing endlessly about how CRM is different from other enterprise software — not technologically, mind you, but in terms of the business drivers and the mechanics of the cost-benefit equation.

So why does everyone try to make CRM business cases the same way they would for an HVAC system upgrade? Well, part of the reason is that many businesses spend less on IT than they do on heating and energy, so they don’t feel they have to be that careful. Plus, everyone wants to use the financial analysis tools and methods perfected in other parts of the business (say, the factory, the distribution system or the network) rather than starting from scratch. Blindly applying financial rules and methods from other parts of the business to CRM projects yields crummy decisions — and crummy assumptions lead to crummy results.

Unlike any other enterprise software category, the costs and benefits of CRM systems vary widely by industry, and the costs/benefits don’t scale up or down in predictable ways. Further, as with many things in this era, the information that’s easily accessible to you is very likely to be misleading.

CRM vendors will gladly provide case studies only marginally applicable to your business. Industry analysts will give you lots of data and examples, but the data points are from a fairly skewed population. Benchmark data on the meaningful stuff is hard to find because it’s a trade secret (whether it’s a huge success or a big dud, your competitors don’t want you to know).

If you want the right answers to drive an optimal CRM business case, you’re going to have to do some original work.

 

CRM costs are always more than they appear

The good news? Some costs are fairly easily quantified. You can just ask for quotes and, in a few days, know the up-front obvious stuff: license fees, extra products, initial implementation services.

Of course, that’s not the important side of costs. Four factors will completely overwhelm the initial procurement cost:

 

• For a system of any size, the data maintained inside the CRM is far more costly than the system itself. If you pay only $100 per lead, those 750,000 people in your database has already cost you at least $75 million. Of course, that’s sunk cost at this point, but the amount you should be willing to pay to keep that asset valuable and current far exceeds the cost of nearly any CRM project.
• For CRM use casesthat need to have visibility into other systems (in particular, for ecommerce and service and support use cases), the costs of data cleanup, enrichment, integration, and reconciliation can be amazing — a couple dollars per record, sometimes more. Best of all, you’re much more likely to discover new data problems the deeper you dig in. Aside from the unknown financial costs, this is typically the most annoying part of any CRM project, thanks to overburdened personnel and plain old politics.
• The costs of compliance are really sneaky, because, well, you have to comply no matter what it costs. It’s hard to untangle the costs of the CRM’s part of compliance from all the other related system elements and business process impacts. This goes double for the new GDPR requirements.
• For an implementation project of any complexity, the over-runs, data maintenance, and follow-on phases will almost certainly exceed the size of the initial project. In my humble opinion, this goes double for classic waterfall fixed-price CRM projects, or when a lot of integration is required for your CRM to be really effective.
• For a user base of any size, the biggest costs of all may well be wasted user time. Particularly in politically-charged situations that are all too common in CRM projects, even a “correct” system can lead to a lot of organizational silliness. Yes, you can view this as a sunk cost as well, but employee inefficiency should never be ignored. This is particularly true if you have large field forces for sales and support or cantankerous/warring (read: overly competitive) VPs.

 

Sum this up and it’s easy to see why the immediately visible costs don’t matter. Examine your costs at a holistic level: don’t bother goofing around with simple TCO spreadsheets.

 

CRM business benefits are hard to quantify

Perversely, there’s some good news here as well: the business benefits of a killer CRM are broader than you think…and the opportunity costs of missing out can have big impacts on your competitive position.

Let’s start with the straightforward stuff. Vendors pay industry analysts to quantify the productivity, revenue and profitability impacts of a superb CRM implementation. Great. Use that data. Analysts show revenue improvement numbers of 30 percent or even more. To misquote the immortal words of Sybase founder Bob Epstein, “These are the numbers that the vendor guarantees you’ll never be able to achieve.”

Let’s look a little deeper. A killer CRM implementation can mean real revenue upside when automation, follow-through and coordination are your underlying business problem. In a multi-channel sales force — particularly one where renewals and repeat business drive profitability — it really is possible to get important top-line growth. Thanks to the cost structure of sales organizations, incremental investment in CRM means that every dollar of increased sales will have solid contribution margin. Increased profits never hurt.

The same goes for cost avoidance: a very well done omni-channel support system can dramatically lower the number of service calls a support agent has to take, and simultaneously increase customer satisfaction with the service transaction.  This means higher service renewal rates and more repeat business. Hurt me with those problems.

Finally, there are business inefficiencies that are tough to quantify but are very real. According to industry analysts, the typical office worker spends between 10 percent and 25 percent of their time on email; for sales and support, that may is likely quite a lot higher. And every one of those emails pose three icky risks:

1. The email may contain attachments with malware, viruses, or information that you do not want in your systems.
2. The email may contain messages that expose you to legal or compliance risks.
3. The email thread may not be addressed to everyone who actually needs to know, resulting in in-basket silos that waste users’ time as they hunt around to get the big picture.

What if you could reduce your email volume (both internal and involving customers) by 10 percent? What would that do to your company risk and transaction throughput? And how would that effect your bottom line?  Tantalizing, indeed.

However, you should calibrate expected revenue upside against five constraints:

• Is there really 30 percent more demand out there for your current products or services? Is the only thing blocking 30 percent more revenue really marketing, sales or support execution? How much of a bottleneck is caused by your lack of a wonderful CRM?
• If you did have a perfect CRM, would your sales team’s win rates go up? Would they close a month sooner? Is there that much slack or inefficiency in your sales function and supporting processes? Could the rest of your operations actually satisfy that much more business efficiently?
• Is your company good at change management? Are you successful at business process updates and behavior modification? Are you a learning organization?
• For the parts of a bleeding-edge CRM that touch channel partners and end customers, are they culturally willing to play? Or would a rapid switch to automation turn some of your existing customers off?
• Is your company good at big-picture change (such as integrating acquisitions or moving rapidly into/out of new markets)? Are your business processes super complex, and do internal departments have conflicting motivations regarding CRM? I know of one multinational CRM implementation that flushed $10M of implementation costs because they didn’t really want the new system to work.

Let’s try to up-level this a bit. More revenue with less profit is pointless, so let’s optimize for maximal profit dollars. To maximize profits is to focus your attention on the “opportunity costs” minimized, the pitfalls avoided, and the quality of executive decisions. Sure, those sound fuzzy, but they matter: ignoring these factors led to Edsel, New Coke and Microsoft Bob.

CRM investments have a fuzzy bottom line

That’s the problem. The important stuff about CRM investment is tough to quantify before the project is completed. Call it Schrodinger’s Cat for IT. I’m all for business cases — they do matter — but with CRM systems, the bigger the decision you try to make, the more costly and inevitable estimation errors become.

From the point of view of pure decision theory, the best decision you can make is the smallest decision you can make — make them short and simple and then iterate on them so you have easier mid-course corrections. That’s the theoretical underpinning of why an agile approach works better for CRM.