The Age of Fluff-Free ROI
It has been all too easy for CRM pundits and promoters to trumpet the present as an age of true return on investment for CRM, dismissing large investments made in CRM technology and strategy during the rapid-growth era of the late 1990s as ignorant of the need for ROI. Of course, decision-makers from that time period recall the circumstances differently, saying that they believed they would see dramatic process improvement and productivity gains.
"They implemented the [applications], not considering, or certainly not considering enough, things like business process and things like data quality," says Elana Anderson, senior analyst at Forrester Research. "The result? They didn't see the gains they had anticipated."
The truth is more subtle. ROI calculations for CRM projects weren't invented after the bubble burst. Instead, today much of the fluff has come out of the calculations.
"What people are moving away from is a reliance on indirect benefits," says Ian Campbell, CEO of Nucleus Research, an analyst firm specializing in ROI computation. "Some people now will only count direct benefits--I can close a building, fire five people, or save $100,000 in shipping. I can touch a pile of money on my desk that I can keep."
Campbell grades potential ROI on a four-level scale, ranging from first-order, "something I can touch," through the middle grades (where the certainty of financial return starts to fall off). After that level it's fourth-level benefits, which rely on such concepts as e-learning improvements of someone's management style (which in turn could possibly lead to happier and more productive employees). "When it comes to writing the check for that I'm not real comfortable with it, because you don't see
the ROI," he says.
Part of the freedom to improve ROI calculations arrived as CRM became more pervasive within whole organizations, and was not simply relied on to provide domino effects from individual groups like the sales and support organizations. "In some of the best cases, CRM is actually impacting the management of capital, [such as in] reduced inventory levels," says Tom Spitale, principal at Peppers and Rogers Group. "People have started to look at CRM as not just a sales and marketing phenomenon."
"Back ten to twelve years ago it was the age of personal productivity, when we put laptops in the hands of the sales force and it was a tremendous step forward," says Jeff Summers, general manager, Siebel Sales. "Then as the economy got tighter we moved into the age of management information, [when] the management philosophy was, if I can see it, I can fix it." The newer approach assumes that inefficiencies will crop up, but visibility will increase the productive capability of leaders to correct those mistakes.
But productivity only results in a net benefit if it allows the elimination of spending, either from a smaller investment in land, labor, or capital, or increased output. "There is only one way to calculate ROI," Campbell says. "Many consultants will tell you anything to sell you something. The challenge is understanding the metric and the calculation."
Campbell particularly decries measures that substitute calculations of internal rate of return (IRR) for ROI. IRR becomes inaccurate over time, because the calculation computes an interest rate that presumes all gains are reinvested. "Anybody who uses IRR is not a finance person," he says. "The further away you get from the cost of capital, the more incorrect [the figure]."
Inevitably, the prominence of ROI in CRM projects will shift, just as it has for other disruptive business communication technologies. No one computes the ROI of a long-distance phone call any longer, but at one time the ROI of a telephone was astronomical. "It happens when enough companies in a particular industry have become proficient enough with CRM that the rest of the competitors in the industry see a significant loss [in] their customer base," Spitale says.
"We're definitely not at the commodity level," Anderson says. "ROI is as important as ever, and it is causing companies to take a much more incremental approach to their CRM efforts."
Campbell reinforces that no matter what the project, the ROI determination should be grounded in facts, not hopes. "You should be focused on things you can touch or feel very confident about. Otherwise, you're being sold."