Making the business case for customer relationships: part one

By Jennifer Kirkby, consulting editor

I’m sure I’ve still got them somewhere - the Bain PowerPoint charts from the mid 1990s that claim a 5 percent improvement in customer retention can enhance profit by up to 85 percent. This seductive business case, lubricated by IT salesmen, helped kickstart CRM. Then came the great 2001 revelation that 55 percent of CRM projects failed to meet expectations – and the hunt for CRM return on investment (ROI) was on. So where are we now? What have we learnt about the economics of relationships along the way? What is the business case for customer relationship management and its offspring, customer experience management (CEM)?

CRM – cost or investment?

The big issue with the CRM business case is, are you justifying a cost, or making the case for an investment to build up assets? The difference matters.

Traditionally IT systems need cost justifications – capital spend plus revenue spend on running and maintenance. The calculation of this total cost of ownership (TCO) is then used in conjunction with expected increases in income over time, to assess the return on capital employed – is this the best use for it?

Marketing on the other hand (including CRM and CEM)is an investment in building intangible assets – brands, competitive advantage and customer base (see Return on Customer – Peppers and Rogers). Making the business case needs different investment criteria:

• an assessment of objectives to be achieved
• expectations of growth
• appetite for risk

By its very nature, asset building investment is a greater unknown - its value can go down as well as up. So care must be taken in understanding the forces that change the value of the asset, risk must be managed across an investment portfolio and returns tracked – with actions adjusted accordingly.

Justifying an IT system is like buying a car – you look at the capital outlay and maintainance costs, offsetting them against travel benefits and decide the best way to spend your money to maximise what economists call utility (satisfaction). An asset building investment would be in a PhD – you assess your objectives, the risk and the income expectations. You monitor the market for your skills and track likely jobs you might apply for.

Too many companies appear to have treated CRM as a cost justification rather than an asset investment. They have not, therefore, made the right type of business case or, much more importantly, put in the right capabilities for tracking and managing the ongoing investment. That is why 55 percent of cost-based business cases failed to meet asset building investment expectations.

Both Francis Buttle and the Hewson Group have examined a number of CRM implementations and concluded that the cost justification business case is fraught with difficulty. It starts as:

(Revenue – TCO) X 100 = ROI%
Investment

But it is hard to:

a) Isolate incremental revenue, because of the many independent variables at work.

b) Establish all the relevant costs – IT application costs, though large, are only the start as there are also:
• costs of systems integration and hardware
• networks
• cultural and organisation change
• process and operational re-engineering
• and the often forgotten costs of acquiring quality data and building up knowledge

c) Determine the timescales to be used – short, long, medium – the full benefits of a CRM strategy might take up to 10 years, but in the meantime there will be incremental benefits to manage in.

Meanwhile, Tim Ambler from the London Business School points out that this calculation results in under investment, as it ascribes too much importance to cost relative to profit.

The muddle for CRM has come, of course, from the central IT capital spend – or revenue spend in the case of on-demand software. But the failure is that of marketers for jettisoning asset building investment skills, such as strategic analysis, marketing research, and programme management; and companies for focussing more on short-term cost control rather than building longer term sustainability and shareholder value.

Part two, building the CRM business case, click here.