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How Do I Cost-Justify This Stuff?
Calculating return on investment for your CRM project requires consideration of many factors.
For the rest of the September 2000 issue of CRM magazine please click here
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About this time of the year, I get a lot of inquiries from companies who are working on their CRM budgets for the next year. The first question they ask is, "How much will a CRM system cost me?" This is almost always immediately followed up with another question: "How do I cost-justify this investment?" To take some of the mystery out of calculating the ROI for a CRM, this month's column will focus on providing some suggestions for how to systematically accomplish this task.

Create a Baseline
The first thing you need to do for any type of CRM project is take the time to measure where you are prior to starting the initiative. To do this, you can start by following an imaginary lead through your organization. See who touches it. See how long it takes to get handled at each step in the sell cycle. See what your success conversion rates are; for example, 100 leads turn into 50 first calls, which yield 25 presentations, which result in 10 proposals, finally collimating in two sales. Determine how long it takes to turn a prospect into a customer.

In addition to determining sell-cycle-related data points, analyze non-selling-related issues, too. Determine how much time your people are spending doing non-sales activities. How many hours per week do sales reps spend writing reports, processing paperwork, implementing their own marketing programs, dealing with customer service issues and getting trained? Look at what your sales managers are doing. How much of their time is occupied developing and refining forecasts, realigning territories and tracking the activity levels of sales reps?

Look outside of sales to see how the sales process is impacting your other operations. Determine what other departments are doing to support sales. How many calls a day are fielded by people in inventory management, finance or R&D to answer questions for sales reps? How much time is spent processing or adjusting orders? How much money is spent by marketing to produce and mail sales support materials to field offices?

This analysis serves two purposes. First, it will help you determine what you want to fix now. As you compile this information, process problems that need to be addressed--low win rates, poor forecast accuracy, increasing travel costs--will quickly grab your attention. The other goal is to establish a detailed baseline for your existing operations, so you can track what progress you have made in improving your processes over time.

Track How You Are Doing
Next, determine the metrics for your current level of performance. Take a look at your last 12 months of operations and see how many of the following numbers you can determine for your organization:

• Revenue per rep

• Win, loss and no decision rates

• Lead turnaround time

• Number of sales calls completed per rep

• Average amount of time required to complete each selling step

• Number of calls required to close an opportunity

• Size of the pipeline at each major sell cycle step

• Numbers of existing customer contacts and repeat business orders

• Average order size and order frequency

• Average order discount percentage

• Margin contribution per deal

By gathering these metrics now, you will be able to calculate changes in these and other performance areas, as compared to your original baseline after your CRM system is operational. This will provide you with hard numbers that you can use to determine the ROI your CRM program is generating. If you further supplement your OMS with an executive information system, you will also be able to start to determine such factors as

• Marketing program effectiveness

• Win rate comparisons for different prospect types

• Profitability comparisons for different prospect types

• Sales rep success conversion rates for each sell cycle step

• Profitability comparisons for orders from different channels

• Success rates and profitability comparisons for individual products

Being able to determine these items will help you improve the ROI you are getting for your investments in marketing, product development, channel partner management and the like. Armed with this objective data on how you are performing, you will be able to plan for the future more effectively. Going forward, once your CRM system is functional, you should be able to calculate all of these factors without the sales reps' having to do any extra work. They simply continue to manage their pipelines, and the CRM system will track their performance.

You will also want to have the sales department track a number of other factors, such as the impact of the CRM system on sales management. How has the system improved your sales manager's ability to forecast accurately? How much time do your sales managers spend coaching versus compiling or reviewing reports? How many more customer or prospect calls can the managers make with their salespeople? You should expect to see improvements in these and other areas.

Another key item to track is the impact your CRM project has on voluntary and involuntary sales rep turnover. The cost of having an open territory can be staggering when you consider the average number of clients lost when a salesperson leaves; the amount of revenue lost while the job is vacant; the recruitment costs incurred to find, interview and hire quality people; the training expenses to get them familiar with your products and company and more. In addition, once they are in the job, it can easily take six to twelve months for them to reach full productivity.

Many companies report that after implementing an effective CRM system, voluntary turnover decreases, and the ramp-up time required for a new sales rep to come up to speed is substantially reduced. Your CRM system will allow you to quantify those effects, so you can measure improvements.

Enterprise Impact
You should also look to have other functional departments track a number of metrics. You will want to assess the impact your program has had on such things as marketing's collateral printing and distribution costs, sales' overnight mail cost, order entry's order processing and write-off costs, the amount of administrative time spent on account history look-up and information retrieval and the company's overall travel and phone expenses related to servicing customers. As you implement more and more of your CRM initiative, you should see improvements in all of these areas.

One last suggestion we have is that you do regular surveys to assess the intangible effects of your project. Companies that have implemented successful systems find that these surveys show increases in employee satisfaction rates, sales rep confidence levels and personal productivity improvements. Conducting these surveys with your distribution partners and customers can also help show the impact your system is having on working with and servicing these groups.

Comparing where you are now to your baseline will give you a clear insight into the ROI you are generating. But it will also provide some valuable direction for where to go next. CRM should ultimately help you improve every aspect of your sales process. If, as you review your current-to-baseline comparisons, you notice marginal improvements or no improvement in a given area, that should be a signal for further investigation.

The payback for doing this level of analysis of your sales processes will be substantial. As you enter into each new phase of your CRM initiative, you should use this data to help prioritize what to do next. Take the recommendations you have received from the people using the system, analyze what improvements have or have not been made in that area, project the types of re-engineering steps you could take and what the potential ROI might be, and you will help ensure that your future CRM investments are used to solve your most pressing problems.

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To contact the editors, please email editor@destinationCRM.com
Every month, CRM magazine covers the customer relationship management industry and beyond. To subscribe, please visit http://www.destinationCRM.com/subscribe/.
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