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New Measures of CRM Performance
Not all CRM investments show up directly on the bottom line. Intangibles like loyalty and satisfaction are hard to measure, but important to value.
For the rest of the October 2000 issue of CRM magazine please click here
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The return on investment in CRM projects is no longer limited to increased revenues and cost savings measurements. But calculating how such programs impact other increasingly important strategic goals like customer satisfaction and customer loyalty remains a challenge. Understanding the hard returns on CRM in terms of these critically important intangibles is not only important for justifying boardroom financing for them, but their careful measurement can also identify and steer companies toward those initiatives that have the biggest payoffs and most competitive advantages.

As the broadest measure of return, some CRM vendors advertise that users of their systems enjoy sales growth rates that beat some industry averages. Such successes, however, are hard to attribute to any singular solution. No doubt, the financial impacts of CRM systems are enormous. The problem is that the cause-and-effect connections are muddled.

"Senior executives are really frustrated right now because they don't have good tools for measuring what's going on with these things," says Mark Turchan, senior vice president of strategic loyalty at eLoyalty, based in Lake Forest, Ill. "A lot of the projects that are being implemented, which are fairly heavy capital investments, really aren't being selected on a systematic basis. Or if they do get implemented, there's always a challenge in measuring the benefits of the return to see if the project lives up to the promise that it was originally sold on," he says. It's a common problem. "I think that many companies feel that there's an urgency to put in these applications, but then there's the question, ‘How do we justify this investment?' I find a lot of them are struggling with that," says Judy Andaloro, a senior research analyst at Boston-based AMR Research. In fact, according to a March 2000 META Group/IMT strategic study, 90 percent of the 50 largest CRM end users admit not being able to measure a tangible return on CRM. "Vendors themselves aren't selling to customers clearly how they can justify the investment. It's something that you really have to know, but no one has a really good answer for," adds Andaloro.

Return on CRM initiatives is particularly hard to measure, because typically companies are enabling new business processes and often opening new sales channels like the Web along with the rollout of new CRM applications. The broader or more comprehensive those CRM solutions are, the more difficult it is to pinpoint specific causes for business improvement. "It becomes hazier than pure, simple cost savings because now you have new revenue-creating opportunities, and you're cross-selling and up-selling to your customers, as well," says Andaloro. Correlating CRM's impact on values like customer satisfaction is even more challenging and nebulous, since, until recently, there haven't been methodologies.

Measures of Performance
"Any business is really looking for three things from its CRM system: increased revenue, reduced cost and intangible efficiency. While the first two of these are more easily measured, intangible benefits are just starting to be quantified," says Joe Childs, vice president of business development and marketing at Scotts Valley, Calif.-based PreferSoft, a maker of a browser-based customer service application for small to midsize companies.

Benefits of CRM on the sales side are relatively easy to quantify, like increased revenue. Things like shortened sales cycles, faster campaign execution, the amount of time and money spent pursuing leads, higher closure rates and so on can also be measured. Likewise, there are quantifiable benefits from enabling new sales channels. If a Web site, for example, is enabled to deal with product complexity that formerly required the attention and expense of a direct sales force, then the cost of sales drops and the operating margin rises.

Tangible benefits, efficiencies and cost reductions from the customer service side of CRM are also not too difficult to show. "For instance, a typical telephone call at a call center takes about eight dollars to service. If you can move that over to the Web and automate the customer service, that can reduce it down to under twenty cents," notes Childs. "You can measure, in a sense, lower customer service cost because you are able to do more with less money," he says. "You can ramp up your business faster without having to add headcount to customer service, or you can re-deploy customer service people into more revenue-generating jobs."

The metrics frequently used to evaluate the success of CRM initiatives, however, don't always closely parallel the strategic goals a company might have. Old measures of success can bear this out. "To calculate the ROI for something like customer support in the past, you looked at the length of call, the closure rate, the time it takes to satisfy the customer and so on," explains Andaloro. The shorter these were, she says, the more efficient and cost effective was customer service. Today, if a customer calls in on a support issue, a contact center representative might be able to leverage that situation to sell more product. Arguably then, the length of time to close the call is not an appropriate measurement. "Rather, it's how profitable that customer is and how much of a share-of-wallet you have with that customer," says Andaloro.

Customer-Focused Measures of Return
New measures of return on CRM are not strictly about revenues and cost savings but look more broadly and long-term at the lifetime of the customer relationship. To paraphrase a GartnerGroup study, one reason is that it costs something around $250 to get an order from a new customer versus $2.50 to get an order from an existing customer. That could also be a reason why in a Conference Board/Heidrick & struggles survey of 550 CEOs last year, customer loyalty ranked higher than any other strategic issue.

Remember, increased customer loyalty has long been a promised deliverable of CRM. "That's the one that vendors touted the most, traditionally," notes Eric Carrosquilla, group manager, product marketing at Clarify in San Jose, Calif., now a Nortel Networks company. Having customer information, contact history, up-sell and cross-sell information all in one place was supposed to make satisfied, loyal customers. "But when it came to actually providing a dollar figure behind that or some sort of quantifiable return," says Carrosquilla, "for the most part, vendors in this space were just kind of smiling and shrugging their shoulders."

Measuring customer loyalty has been an elusive target to date, but Clarify has introduced a methodology for quantifying it that they call "Return on Relationship."

"Return on Relationship is essentially measuring customer profitability over time- -being able to model, measure and maximize that customer profitability for competitive advantage," says Carrosquilla. It looks less at transaction-based customer interactions and more at relationship-based customer transactions and argues that a better measure of corporate strength is the ability to engender loyalty.

How well CRM systems support loyalty goals is important, and Return on Relationship provides metrics for evaluating just that. "What Return on Relationship is going to allow them to do is be a lot more strategic about how they deploy their resources, whether it's the sales group, the service group or the kind of incentives they provide for people to go online," notes Carrosquilla. By quantifying how these resources impact long-term customer loyalty goals, Return on Relationship can be used to shape CRM initiatives and to provide differentiated service, particularly for a company's most valuable or "gold" customers.

Carrosquilla explains some ways a CRM system that focuses on customer relationships may be different from its predecessors. "From the support point of view, the less time people spent with customers face-to-face, the better it was," he says. But if companies are expecting their CRM systems to build loyalty rather than just cost savings or efficiency, CRM business processes might change. Agents will spend more time talking and have more information at their disposal. "Whereas support people may typically be looked at as a cost center, there can be some changes in compensation to, say, the more time the agent spends with gold customers face-to-face or over the phone the better," says Carrosquilla.

To make sense of these loyalty goals, Nortel has patented a formula, and the way that it appears within the software products Nortel provides so customers can have Return on Relationship data. The key application within their eFrontOffice suite is called Global Account Manager. "That's the catcher's mitt for the information, and that is where the formulas are determined. Then we can use any number of reporting packages to report on that Return on Relationship data, depending if people want to do trend analysis, slice and dice, etc.," explains Carrosquilla. "A lot of this stuff is based on academic theory. There's a gentleman by the name of Frederick Reishheld who pioneered a lot of customer loyalty theories in the early '90s, but it really hadn't made its way into CRM until lately."

Another Approach: Loyalty Value Added
The Loyalty Value Added methodology and toolkit from eLoyalty is another way of translating customer-centered operating metrics into quantifiable values. "What we have come up with is what we believe to be a unique and new measurement methodology and tracking methodology for understanding the tangible economic benefits of CRM initiatives," says Turchan.

The LVA methodology takes a customer-centric perspective, which means, "taking traditional profit and loss financial statements and recasting them from a customer segment or customer profitability perspective, and trying to understand from both a static perspective and a dynamic perspective what's going on within a company and how various potential or proposed initiatives would impact that from a customer value point of view," as Turchan explains.

"The traditional metric of performance management that a lot of companies use today is Economic Value Added," says Turchan. "That is a great metric, and works very well from the shareholder value analysis perspective, but it works typically at the top level, which is the traditional financial metrics of performance: revenue per customer, net acquisition costs, retention probability and retention cost. eLoyalty is more focused on the connection between those and operating metrics at the bottom level, such as call center consolidation and scheduled callbacks and how those impact customer segments."

The idea is to identify how to apply capital at that operating layer in order to protect or maximize a particular customer base best and ultimately grow results at the financial layer. "Our objective here with this technique is to fill in that gap between the operational metrics and the financial metrics that are traditionally used," says Turchan. "The challenge and goal is to start modeling cause-and-effect relationships. What at the operational level will affect the customer level, which will then affect the financial performance level of the company?" They also need to find analytical ways of demonstrating that. "It's obviously a nonlinear, very complex situation that is hard to model," admits Turchan.

The LVA method applies the financial model known as Black Shoals option pricing, which mainly is used to price stock options. "That looks at the volatility associated with costs and benefits over time and applies that to CRM solutions and benefits and costs associated with CRM solutions, which are basically the cost of technology and the costs of labor, how they may go up and down with time, versus the benefit that is the revenue from customers and really the retention of those customers associated with waiting on implementing the project," explains Paul Marushka, vice president of business case proficiency at eLoyalty.

"Basically, this technique is used in a macro way, looking customer segment by customer segment to say, ‘Here's what you have today in terms of LVA, in terms of customer value, and here's what each project will incrementally do for you in terms of adding to that baseline or subtracting from it,' " explains Turchan. That information can be evaluated against the timing implications for each of the different initiatives that are on the table and help select which projects are the right ones from the customer value perspective to pursue. The expected results of not doing anything are also considered. But instead of looking solely at the present or a five-year horizon, the approach looks at how initiatives add value to that customer over the lifetime of the customer.

While the level of complexity to the methodology means there is no simple turnkey software solution involved and that it requires consulting services, "LVA includes a tool that can be used for measuring the impact of these projects as they go through the implementation phase. Then, they can track the performance of the projects they selected to do in the CRM space as well as to track or to measure the impact of additional projects going forward, so it becomes yet another part of the discipline in running the business," says Turchan. Some care must be taken, however, in its application. "People have said this is just like any other business case modeling tool; you can always manipulate the assumptions to make your projects look great," notes Turchan. That's why eLoyalty advises that eventual ownership of LVA be within a neutral area like the finance department, one that has no vested interest in a specific business unit, technology or marketing group. Ideally performance would be scored against fair industry assumptions and objective benchmarks.

To Go Where You're Going, Know Where You've Been
No matter what measures are used to quantify return, companies can't learn anything if they don't have a clear idea of where they were prior to project implementation. That's true whether they are measuring profits or loyalty. The latter is likely more difficult. "I think one of the biggest things companies miss up-front is benchmarking where they're at," agrees Carrosquilla. Without knowing that, it's impossible to point to improved revenue or efficiency or to measure return on investment at all. "Most organizations that are implementing CRM systems have not kept very good records up-to-date about customers, about profitability information and about what kinds of products and services they like. That was the whole reason they got a CRM system in the first place," he says.

He comments that many CRM systems are designed around collecting sales data and call center data. "If that's all you're implementing CRM systems for, and the only kinds of returns are cost efficiencies, I'd make the case that you are throwing money down a hole. The whole reason why companies are implementing CRM and e-business types of applications is the kind of competitive advantage they can get over their competitors who don't have a similar system," claims Carrosquilla.

Building integrated CRM solutions is an expensive proposition. Depending on the system complexity, a company might spend well into the millions or tens of millions of dollars. "A lot of people are looking for some wisdom on how to measure the benefits and make sure that they are tangibly occurring after they start spending a lot of money," notes Turchan. "It also has huge implications for operation culture and process management, so these new measures are really hitting to the hearts of these guys who are trying to make decisions about how to spend limited dollars."

Does measuring intangibles mean that companies have to have inputs established for everything they do? "Does this mean you have to have every single Nortel module under the sun to make this thing work?" asks Carrosquilla. "No, absolutely not," he says. "You can start off just measuring a piece, looking only at a few variables. Or there also may be customers who want to have very detailed and complex formulas. I believe the former is going to have the most success for companies to just take a few variables that they think are important and measure on those variables," he adds.

Using new approaches like Return on Relationship and LVA to justify CRM systems is in its infancy. Such new systems have hardly been in place long enough to study. Yet, as these approaches help companies to align their CRM initiatives by quantifying their performance in terms of strategic goals, they are likely to be embraced by senior management. "To be quite honest, a lot of this requires a shift in thinking," says Carrosquilla. "There is some process work involved. There is some product work involved. But eventually, I believe this will be the standard that all CRM systems will be held to."

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