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How Can We Calculate Credible ROI for Our CRM Initiative?
In today's challenging economic environment you will need to convince your company that you have the right strategy with the appropriate payback for the effort and investment.
Posted Sep 22, 2003
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If you are in the CRM business, chances are you will have to produce some type of business case with return on investment (ROI) projections as a part of the justification and approval of your program or project budget. The ROI calculations are an important component of a complete business case, and in today's challenging economic environment you will need to convince your company that you have the right strategy with the appropriate payback for the effort and investment. Calculating ROI is the quantification of benefits in financial terms (revenue enhancement, expense reduction, cost avoidance) compared with the cost associated for people, process, technology, and financing required for the CRM initiative. Discounted cash flow, time to payback of investment, and internal rate of return are all common measure of ROI. What are the steps in creating a credible ROI? First, establish an agreed-to, baseline business definition and current performance measurements. For example, if the goal of your CRM initiative is to increase the effectiveness of your direct sales efforts, you should have a solid baseline of current key performance indicators (KPI), such as average sales cycle time, average order size, sale per headcount, quoting accuracy, and win rate. Improvements in these KPI then can be translated into revenue or margin impact for your ROI calculations. Once a baseline is agreed upon and the critical KPIs identified, you can evaluate current business and operations against industry best practices, your competitors, and your own future state vision to determine the potential benefits of your CRM program. Remember that at this point you are really focusing on the financial benefits so you can establish an ROI. It is important during the benefits-analysis process to get as much end-user (employee, customer, and partner) validation and buy-in of the future vision, benefits of your strategy, and any new performance expectations. Additionally, conduct a gap analysis evaluating your current business versus your future vision and goals. Here you will identify the changes in people, process, and technology required to achieve your future business design. Once the gap analysis is complete, you can construct a detailed road map or implementation plan that identifies the steps that will be taken to get you from your current state to the desired end-state. In this step you will need to understand all the cost associated with your proposed CRM initiative. Total program costs would include labor, travel, hardware, software, and the cost of capital, depreciation, and ongoing support.
Now that you have the detailed financial benefits and detailed cost associated with achieving these benefits, you can proceed to calculate the ROI. Generally, the financial model will be run over a three- to five-year period. Management, however, will probably want to see payback in two to three years, with some quick wins in six to 12 months. You should work with someone from your finance or accounting department to create the financial model for calculating your ROI that is consistent with your company's accepted practices.
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