Selling CRM to your CFO

Customer Relationship Management promises to deliver huge return on investment through increased sales, customer satisfaction and efficiencies. Yet many sales executives have put together what they thought were solid business plans to implement CRM-only to have those plans rejected by the company's CFO in favor of other projects that didn't seem to deliver the same value.

Too often, business plans don't go far enough in taking into account the ways CFOs evaluate projects. The CFO is your customer for this proposal-and as with any other customer, you've got to understand his or her needs and concerns, and address them accordingly.

Regardless of how your proposal is delivered, whether on the back of a napkin or in a formal presentation, here are some trenchant points to consider when making your pitch.

It's Not Just ROI
ROI, of course, is the money your project will generate as a result of the capital you invest. If your project promises an acceptable ROI, it will merit consideration. But ROI alone won't deliver you the win. Your CFO will evaluate your project using several other factors. The most important and difficult to measure of these elements is your revenue estimate. On what, the CFO will inquire, do you base your return stream? And what is the likelihood your projections are accurate?

Your CFO will ask exactly how your solution will deliver one more close per year, much less two or three.

A common argument made for the adoption of a CRM solution sounds something like this: "We have 50 people in our sales force. If the CRM solution delivers just one more close per rep, per year, and our average sale generates $3,000 in revenue, the CRM system will deliver $150,000 a year." Many sales managers, already persuaded by the CRM concept, will look at these numbers and say, "One more close? Why not two or three?" They will then go on to calculate the new revenue numbers and compound the ROI.

The first question your CFO will ask, however, is exactly how your solution will deliver one more close per year, much less two or three.

Let's take a look at some ways you can justify the conservative "one close more per sales rep" statement that your CFO can buy into.

Increase contact time: The average salesperson spends only about 17 percent of her selling cycle in front of the client, and close to 35 percent of her time performing administrative functions. Through the automation of some of the administrative work, more time will be available to reach and service customers. By examining your buy and sell cycles, you will be able to better qualify these time savings. The key to this argument is to demonstrate exactly how the time saved can be used to make more contacts.

Shorter sales close cycle: Many CRM solutions provide proposal generators, product configurators and more that can decrease the time necessary to generate an accurate proposal. By working with your CRM vendor, you should be able to put together a demonstration of the proposal process on the new system. Comparing your existing process with the new process will go a long way in supporting your estimated ROI. Point out to your CFO that a common tendency in the sales force to close deals is to cut margins as a cost of the close. By reducing the close cycle through the delivery of key information the customer can use, this tendency can be reduced, resulting in better margins.

Decrease training time: In many organizations, the amount of time needed to bring a new salesperson up to speed is measured in months, quarters and sometimes years. The learning curve is even steeper when a rep takes over a territory that has no current account or lead information. The new rep must ask questions of current customers that the departing rep already asked, and will probably make the same mistakes, jeopardizing customer satisfaction. Your CRM solution can capture this critical information, allowing new hires to come up to speed much more quickly, saving the client the frustration of having to retrain your reps on their business.

Increased manager involvement in the sales cycle: By tracking the opportunities as soon as they come into the pipeline, a CRM solution will enable sales to qualify leads and make quick decisions on the best opportunities to pursue. All too often, sales reps pursue business that appears to have a high dollar return, only to find out that that path has already been well-traveled without success. Giving sales managers better control over what leads their sales reps work will result in more closes and better productivity from the field. To prove this point (without the aid of automation), select a pilot group of existing sales reps and dedicate a resource to assist in qualifying leads. Make sure to keep track of the effort necessary to manually track the leads and manage the opportunities. Compare before and after sales figures. By doing this you can make a compelling case for automation-it will deliver the same results, while streamlining the cost- and labor-intensive tracking process.

New product launch: A key success factor in launching a new product is expeditiously training reps to identify new or existing customers and sell them the new product. A CRM solution will enable your sales staff to quickly understand the new product, its place in the existing product mix and how to identify potential customers for the new product.

Responsiveness: studies indicate that time that could be spent selling a potential customer is eaten into by nonselling activities. The result is an overlong sales cycle. Your CRM solution can dramatically reduce the time necessary to reply to your customers with information that will drive them to decide in your favor. Methods by which this is made possible include improved order preparation, proposal delivery, literature fulfillment and generally improved communications between your sales force and your customers. By simply looking at the reasons you are implementing a CRM solution-the "pain points" in your sales cycle that you are endeavoring to correct-you can find the financial justification for the investment.

More Points to Ponder
Here are some other points that may sway the CFO in your direction.
Phased project: If the realization of profit begins after only a portion of the entire CRM investment is made, this should be highlighted in your plan. A new CRM project will have a high initial investment cost due to hardware procurement, making the project look unprofitable. To combat this, however, you can phase the project to deliver some return relatively rapidly. In your initial phase you may deliver an opportunity manager that will return some of the initial investment. The next phase may deliver a proposal generator that will reduce the close cycle for example. Through this method you can maximize return on the initial investment and make the entire project more attractive and less risky.

Business projects face difficulty in giving an appropriate investment cost figure that considers the passage of time.

Competitive advantage/necessity: If you can demonstrate that this project will give your firm a competitive advantage in the marketplace, this must be highlighted and qualified in the proposal. Likewise, if you can demonstrate that it is a competitive necessity, you may have an even stronger case. Amazon.com is an example where competitive necessity drove an industry to invest in a technology. Amazon's success compelled most major booksellers to take the plunge into e-commerce.

Expanding markets: If you can demonstrate that this project will allow you to expand your market into other, yet untouched areas, do so. For example, your CRM solution may include a Web-based/enabled component that could help you expand your market world wide, or link your overseas offices more efficiently. In the end, if you have not carefully considered and justified your revenue projections, it may not only hurt this project, but others to come. With each successful proposal you build a track record. If your past proposals had poor revenue projections, your present proposal will be viewed suspiciously. If you have presented several proposals and have been able to realize your projected ROI in each case, this will also be factored in. If this is your first proposal, and you don't have a solid business case on how you will realize your revenue, don't present the plan until you do.

ROI & Time
So now let's say your CFO has accepted that you will make the revenues that you say you will. The next factor that's likely to be considered is what your solution will return over the entire span of its useful life. Continuing with our CRM example from above, let's take a look at how the time value of money (discounting) factor may affect a CFO's business decision.

According to our project plan, the CRM solution will require an initial investment of $650,000. As we said, it will close one more deal ($3,000 profit/deal) per year, per rep, and you have 50 reps. The estimated usage time of the new system is about five years. Assume the profit is an after-tax figure. The company's discount "hurdle" rate is 12 percent a year, assuming the project is debt financed (borrowed from a bank or through an issue of company bonds) at a loan rate of 8.5 percent and minimal return on the investment over the finance cost of 3.5 percent.

Let us first take a look at the ROI for this sales force automation using the common and simple ROI concept:

We justified the ROI based on the increased number of closes, so we can calculate the increase of average revenue per sales rep: $3,000 increased sales per rep per year * 50 sales reps = $150,000/year .

To your sales planning manager, this CRM project seems to be a great fit for the company. It will not only increase profit, it will, as we have shown above, significantly increase the efficiency of the sales force. You point to a total of $750,000 increase in sales over five years for an initial investment of $650,000. This project would seem to be acceptable for the company because the ROI ($750,000/$650,000) is a healthy return of 15 percent. Since our company "hurdle" rate is 12 percent, returning 15 percent seems like a win.

But while this simple evaluation is logical, it's technically flawed. The problem here is that the ROI is calculated based on the entire period of the project, and no discounting for time has taken place. This simple ROI concept of dividing the total projected revenue by the total cost is only appropriate when both investment cost and return come over a relatively short period of time.

ROI & NPV
Net present value (NPV) is a discounted cash flow technique where cash inflows (savings or incremental gain) and outflows (cost of investment) are discounted to the present point in time. With CFOs, ROI may get you into the game, but NPV is the way to score points.

Why is it important to consider the time value of money when calculating ROI? Your CFO will focus on financial measures like discounted cash flow, internal rate of return (IRR) and payback periods, all of which have a time element. Investment costs typically come early, while returns may come years later. Business projects face the difficulty of giving a truly appropriate investment cost figure, while considering the passage of time, from which the ROI comes. Therefore, the time value of money (discounting) will need to be entered into your ROI equation.

When looking at the alternatives, only projects with positive NPV are acceptable because the present value of the inflows is greater than the present value of the outflows. Therefore, the project will earn a return greater than the discount rate used to determine the present value. Let's take a look at the ROI using the NPV discounted cash flow methods to evaluate this CRM project.

We already know that this CRM project will bring a $150,000 increase in sales for the entire sales force per year. According to the NPV equation found on any financial calculator or spreadsheet, this calculation will return a NPV of -$109,284.
Note: Many spreadsheets and financial calculators, when calculating NPV, default the initial capital investment and all future payments to the end of each year-if the initial capital investment will be realized at the start of the project, this needs to be factored in. For instance, in Excel the formula is: =NPV(interest rate cell, Payment 1 cell: payment 5 cell)+capital cost. By using the discounted cash flow method, we can see that the net present value for this CRM project is negative. The CFO of your company will simply reject this project plan because a negative NPV means that the expected rate of return is less than the acceptable desired rate of return.

ROI & IRR
Internal Rate of Return (IRR) is another method used in adjusting cash flows for the time value of money, and it can also be used to determine whether the project should be accepted. IRR is the rate at which the present value of the inflows is equal to the present value of the outflows. In other words, IRR is the rate that makes the NPV equal to zero. If the IRR is higher than the company's required rate of return, the project is acceptable; if the IRR is lower than the required rate of return, the project should be rejected.
In CFO Circles, NPV is viewed as an academic measure, while IRR is used more as a real-world indicator.
How does IRR help your CFO review the return of the project? This CRM project will bring an annual after-tax cash flow of $150,000 and the initial investment (present value of outflows) of $650,000. Again using your financial calculator or Excel this will result in an IRR value of 5 percent. This indicates that the expected rate of return on this proposal is less than the company's discount rate of 12 percent. Clearly, this project will be rejected.

In CFO circles, NPV is viewed as an academic measure, while IRR is used more as a real-word indicator. Still, it's important to understand both in order to be able to talk about your ROI correctly and intelligently.

Covering the Costs
We have covered the revenue side, but this discussion would not be complete without an examination of the expense side. Just as your CFO will want justification for your revenue projections, he/she will also want justification for the expenses that your project will incur. As we have seen in our examples of NPV/IRR, a miscalculation in the expenses will have a dramatic effect on the final evaluation. So when determining the cost for your SFA project, don't rely solely on your software vendor's estimates. On average, the software represents only 25 percent of the total cost of the project. Modify the package and you could be looking at substantial increases in the total cost of your CRM solution. When considering cost estimates, remember to include the following frequently forgotten items.

Hardware
Hot-swappable systems: Can you afford to have a sales rep out of commission due to a computer that is down? For example, if you have truly migrated to a "paperless" ordering or configuration system, what will your reps do if their computers are down for an extended period of time? You will need to include the costs of replacement systems that can be swapped in the field quickly and of rebuilding their databases using information stored on your CRM server and downloaded to the swapped system in the field. Also, don't forget a spare parts pool. Items like modem cards, power packs/batteries, printers and cases that get lost, wear out, break and are stolen must be considered when calculating cost.

New server/network upgrades: You will certainly include new server costs and connections to existing LAN services, but don't forget upgrades that may be necessary to support the new increases in LAN traffic. A 256KB frame relay may support your existing operations, but add 100 sales reps synchronizing information daily and things may have to change. Also consider that upgrades to existing infrastructures may cost you. Are you on the right version of NT, for example, to support the new application? Will SQL for Workgroups support the synchronization server?

Manager systems/expansions: Many times in a CRM proposal, calculations are based on active sales reps currently in the field. But will the managers also use the system, and will they be required to store all the data their various teams generate, thus requiring a larger system to support their unique needs? Are you expecting to expand your sales force in the near future?

Training
New employee training: Remember that when new employees join your staff, they will need to be trained on your system. While the tendency may be to use the "day in the field" training model to reduce cost, this is generally not the best way to deliver training. Plan to train new employees in the same way you will train existing employees when you roll the system out.

Follow-up training/long-term support: As with anything newly taught, unless you have follow-up training, only the items first taught, last taught or of special interest to your sales reps will be remembered. So include follow-up training in your training budget, including such methods as video, AVI files, FAQs or in-house training to support the initial rollout. Long-term support should also be considered. Your sales staff will have questions and problems when they are in the field. How do you address them? Should you staff a help desk? Is it cost-effective to dedicate staff to this important support function? Should you outsource the long-term support? When considering these costs, make sure to include higher support costs at the beginning of the rollout and during system upgrades or major modifications.

Rollout cost: Include the costs of rolling out the new system to the field. This encompasses items like trainers, facilities, transportation costs, customized training materials, toys/incentives/promotional items,and hotel rooms for out-of-town travel for managers, technical staff and executives who will attend the rollout. Don't underestimate the costs incurred by your internal staff in organizing these activities. Typically, if you are planning a pilot, costs are then raised because more people are invited to attend. The pilot often becomes an extra expense by serving as a valuable "train the trainer" opportunity.

Customization
Application modifications/additional modules: Planning to have additional modules added to your application or making modifications to the standard package? Get customization costs from your integrator, or internal IT organization. In the same way that your CFO may have a track history on your proposals, if you have a track history with your IT shop, factor it into your estimate. For example, if their estimates are always 25 percent too high or low, don't pretend they will be accurate this time. Better to come in under budget than go back with your hat in your hand.

A good understanding of the EVA methods your company uses allows you to tailor proposals for optimal results.

Analysis: The item most often forgotten in the customization process is the analysis time necessary to implement the required changes. Skip this process and you might as well factor in reworking the application to make it operate the way you originally wanted. Many installations of CRM software bank on the fact that tailoring is a "slight modification" or attempt Rapid Application Development (RAD) to create a prototype, then start implementation. This is the "Ready, Shoot, Aim" method of software development. Nothing takes the place of careful analysis and planning, so don't underestimate this step.

Integration: If your installation will require loading data from an existing legacy system, make sure to include the analysis and development time as well as the expense of extracting this data and updating your CRM application. In many cases this will not be a one-time load, but a daily updating process of such things as pricing and product availability information. Also, consider the cost of information coming out of your CRM solution and being fed back into your legacy systems-for example, order information or credit requests. Again, careful analysis is required to ensure that all the parts fit together. So don't shortcut the analysis process.

Your Competition
You have done your homework, you have justified your revenue and expense figures, you have shown a good IRR, and your CFO still picks another project that just does not seem to deliver the same value as yours. So what happened?

Most likely you have not factored in your internal competition. While we have focused on presenting your CRM solution in the best light to your CFO, this discussion would not be complete if we did not also factor in how your CFO compares your proposal to others that have been presented. There are several ways that your CFO may compare proposals. Here are some commonly used methods.

Financial comparisons: When two or more projects are being compared, a common technique is to examine the financial value returned by each and select the project what has the best IRR/NPV or ROI as presented in the business case. Be aware that one other option your CFO may select is to do nothing. Your CFO may choose to use existing capital to buy down debt, build a buffer for an expected downturn in the economy or for future acquisitions. If you believe you are facing this type of evaluation, make sure to underscore potential opportunity lost or competitive advantage/necessity when presenting your plan.

Economic Value Add (EVA): EVA is a method of evaluating a project that tries to establish how much additional economic value will be brought to the company as a result of its implementation. Its purpose is to take projects that may serve the company in different ways and attempt to evaluate them together, based on the added value they will provide to the company. It's kind of like taking apples and oranges and making them all into bananas for the sake of comparison. This model differs from a simple financial comparison in its use of additional factors added into the evaluation process. Examples of these additional factors have been discussed above, including reducing staff attrition, competitive advantage/necessity and enabling expansion into new markets. A good understanding of the EVA methods your company uses will allow you to tailor your proposal for optimal results.

Balanced Scorecard: A more recent evaluation technique is the Balanced Scorecard, a method first developed and used by the Nolan Norton Institute, the research arm of KPMG. It uses four evaluation factors that are tightly aligned to the corporate mission. While this method does use financial comparisons for scoring competing projects, it also includes customer satisfaction, retention and market and account share information. It considers internal quality issues like response time, cost and new product introductions. Finally, the model calls for an examination of the learning and growth factors associated with the proposed project, including employee satisfaction and information system availability. The book The Balanced Scorecard by Robert Kaplan and David Norton goes into detail about this method and should be considered required reading if your company uses this method.

Closing
With so many projects competing for the same investment dollars, how do you grab the attention of your CFO and ensure the selection of your CRM solution as the project likely to add the most value to your company's bottom line? Focus on justifying your return, consider what your competitors (both external and internal) are doing, closely review your costs and do the numbers the way your CFO will.

You have to make your case both believable and compelling. Your CFO will have many other options to consider, including taking on other projects, buying down company debt or just doing nothing. So to avoid walking in to your CFO's office with the plan you are sure will make your company millions and walking out with your head on a platter, evaluate your ROI the way your CFO will. By doing so, you'll get a better return on your own investment of time and effort, in the form of a solid chance for success in implementing your CRM solution.