Over the past few weeks we've published a number of articles on maximising return on investment from CRM - the current key concern of most companies implementing CRM. If you are interested in exploring these articles further, you'll find a list of links at the end of this editorial. This week I want to try and synthesise our current view on this vexed topic from the major points brought out by the articles.
The drivers of CRM
It is obvious that customers are important to all companies. It should be equally obvious that looking after those customers, both in order to hold onto them, and to maximise the value of each relationship, is key to the survival and profitability of the company. So why is so much effort being expended to implement Customer Relationship Management with such limited impact?
For the last one hundred years or so the customer has been overshadowed by the production processes in the thinking of major corporations because the application of a systematic approach to those processes has enabled the creation of innovative products and services at otherwise unachievable prices. Whilst customers demand good service, they are also sensitive to product features and price. To get high value for money from their purchases, or products otherwise unavailable, customers were prepared to put up with a less than adequate relationship with the supplier.
The flexibility of modern production processes makes it much harder to differentiate a company's offerings based on product features, so the importance of customers has re-asserted itself. This has been amplified by the increased competitiveness of most markets due to de-regulation, globalisation and other factors, making companies much more sensitive to competition, and hence protecting their customer bases and the value they can achieve from them.
Finally, the ever-increasing capabilities of IT at significantly reduced cost has meant that IT can be applied to the not-insignificant problems of managing the interactions with (in a business to consumer environment) perhaps millions of customers. The new technology supports this in two main ways:
- Firstly, it is powerful and inexpensive enough to apply to understanding patterns of customer behaviour, by analysing that behaviour at both the aggregate and individual level (Analytical CRM). Understanding customer behaviour strategically can lead to an understanding of customer profitability, underlying trends of changes in competitive behaviour, and the development of strategic customer segments amongst others. At a tactical level, segmentation and propensity modelling, combined with other analyses, can identify tactical opportunities to improve individual customer value and retention.
- Secondly, the new technology has led to the development of new channels for communicating, servicing, and transacting with customers. For most organisations this has meant the adoption of a multi-channel strategy to interact with customers (Operational CRM). For example, in banking the traditional branch is complemented by ATMs, call or contact centers, websites, email, and coming shortly, mobile phone / PDA access and interactive TV.
CRM is probably a misnomer. Just as the 20th century was about improvements in the production processes, the beginning of the 21st century sees organisations focused on improving the interfaces between the company and its customers - primarily in the areas of marketing, sales, and customer service. This obviously includes customer relationship management, but is broader than that term implies.
This focus on interfacing with the customer means that CRM technology is used to compete in the marketplace. In a stable environment, a company can compete in the marketplace primarily on one or more of three criteria: product, price, or service. Normally you can't hope to be best on all three. The R&D required to be a product innovator and/or best-of-breed customer service provider require significant investment so it is difficult to also be the lowest cost provider.
However, we don't live in a stable environment. The availability of this new technology opens up a window of opportunity for corporations to develop new ways of interacting with customers that may deliver higher levels of service at lower cost, or even provide new services or products that are based on that new technology. This window will not last indefinitely. Over time we can expect corporations to adapt to the new technology equally effectively, and competition will return to the more conventional game of competing on product, price, and service.
During this transitional period, CRM can be used to improve a company's competitive position. Who will be the final arbiters of who gains, and how long will this transitional period last? The final arbiters will be customers who choose their suppliers based on the combination of price, product and services that best meet their needs. It is likely to take some considerable time for customers to become familiar enough with the new ways of interacting to work out how they want the technology to be used. We suggest (and the case material referred to below supports this) that the window of opportunity is likely to be of the order of a generation - say 20 years, as is common with the adoption of new technology such as, for example, the mobile phone.
How to build the case for CRM and implement it
This overview of CRM has implications for how we go about implementing it and obtaining value. Firstly, we should expect a continuing evolution of CRM techniques as customers become more familiar with what it can do for them. Secondly, if the core CRM objective is to improve the interfaces between customers and the organisation, it is likely to lead to substantial re-organisation of the internal parts of the organisation dealing with customers.
If we accept the outline of CRM proposed above, how should this affect our approach to implementation, and the all-important return on investment for the company adopting it?
- If we are re-working the way we interact with our customers it should be clear that, unlike many IT implementations, we are not only affecting the internal workings of the organisation, but also what customers need to do. This means we need to actively involve customers, as the ultimate end-users of the CRM system, in one or more ways in what we choose to implement. A number of techniques can be used including focus groups to establish what customers think of the organisation as it is today, and what they'd like changed; or implementing measures which allow us to evaluate how customers have reacted (financially and otherwise) to the various initiatives we undertake.
- If we want to establish how we can best improve our relationships with our customers, we need to understand what they are today, and where and how we make money from these relationships, and where the major opportunities lie for our organisation. Different companies in different market sectors in different countries have different opportunities with their customers. This understanding of the business opportunity is unlikely to come from internal IT resources, or external consultants focused on IT implementation. It most likely lies with marketing, business strategists, or executive management. If external support is required it should ideally be sourced from CRM practitioners with practical experience of delivering value from CRM, preferably in the same industry, who should be able to provide the knowledge of the application of CRM to allow internal staff to evaluate the opportunities. The business case for CRM, including the identification and sizing of the opportunities for return on investment, needs to come from business people within the organisation, and that business case needs to shape and drive the CRM implementation projects.
- If we choose to adopt CRM, we must recognise that we are adopting a business strategy that will not be delivered by implementing the technology alone. We need to make the organisational and marketing changes necessary to the strategy. Any strategy based on long-term customer relationships will also need to make sure that it delivers value to the customers as well as value to the organisation. Long-term relationships need to be win-win for both parties.
- Finally, if you agree that CRM is likely to take 20 or so years to mature due to the learning cycle customers and organisations have to go through (and both the National Australia and First Direct case studies are supportive of this), then that should affect the way we go about implementation.
We should not expect to be able to implement CRM in a one-off major implementation. We need to undertake a number of iterative, incremental implementation steps, each with its own business case, and each with its own measures of success (financial and others), and an evaluation of how customers perceive the results of the step. We've sung this song for so long now we don't propose to go into it in detail. You'll find many editorials on the subject, and many documents in our library also address this.
Again, if we can expect an evolving adoption of CRM over a significant number of years we need to recognise that people and organisations don't like change. The CRM programme we run to manage the various CRM implementation projects needs to recognise this and find ways to drive through the continuous change programme necessary for the successful adoption of CRM and the resulting benefits. Our survey of mid-2001 identified this issue of organisational change as the most significant facing CRM projects around the world.
Sources of value from CRM
We hope it is clear that each individual company needs to understand its relationships with its customers, and its opportunities for return on investment from CRM. Nevertheless, there are some areas of benefit that are sufficiently common across companies that they should at least be considered. We outline the major ones below:
- Most organisations adopting CRM appear to have focused on delivering efficiency benefits by implementing multi-channel contact systems to improve communications with customers for sales, marketing, and service (Operational CRM). This is likely to lead to a 'lowest-cost provider' advantage for these functions, plus other efficiency benefits. The Comshare case study produced by the Aberdeen group is an example of a successful implementation in this area. Despite the successes, except in circumstances where the sales and service functions represent significantly high proportions of the costs of the organisation, this is unlikely to be the major ROI opportunity for most organisations. We should also be aware of the negative impact the implementation of such systems has on customers. We all know from our personal experiences the frustrations of trying to get our needs met by using a company's call center, website, or other multi-channel environment. In far too many cases, the frustration generated is the antithesis of customer relationship management. Of course there are cost savings in implementing self-service and other service environments with reduced staffing costs. The reason for our and our customers' frustration with these facilities is primarily that they are poorly implemented, often due to a lack of involvement of the customers in the design of the transactions they use.
- At the other end of the spectrum, a set of companies have set out to use the new technology to provide new services to their customers, often moving to a self-service world. In UK financial services, First Direct, Egg, IF, and Standard Bank are providing financial services on a completely different basis from traditional banks. In other industries Dell and Tesco spring to mind. This looks like an area of significant ROI with competitive edge. However, there are issues. Usually this approach needs much higher investment, a green field implementation, and such organisations will need to evolve their models further as customers adapt to the new world and migrate to the most acceptable models.
- In high volume transaction environments such as banking and telcos, significant success has been achieved by the use of Analytical CRM to understand customer behaviour. The case study of National Australia Bank produced by Tower Group shows how banks can gain significant benefit from understanding customer profitability, developing customer segmentations and organising round those segments, and using propensity modelling and other techniques to identify tactical opportunities for improving individual customer value and customer retention.
Of course a full-function CRM environment is likely to provide all these capabilities. However, if you've been listening, we're unlikely to have or need a full-function CRM environment for quite a while. The issue therefore becomes which are the areas of high opportunity, relatively easy to deliver, that we can attack now. We've outlined above the approach we think companies should take to developing that business case.
What we propose as the ideal CRM implementation is a programme of projects which incrementally and iteratively implement the organisation's CRM strategy, with strong financial and other measures of success that provide us with concrete feedback on the impact those projects have on our customers.
Which projects we undertake needs to be defined internally based on a clear understanding of the business model the company currently operates and the opportunities for changing and improving that business model.
Implementing those projects requires clear and strong commitment from the top to ensure that the business case reflects the priorities and opportunities facing the business, that there is quantified feedback on the successes and failures of the project, and that the organisational changes required to support the new customer interfaces are driven through.
Many organisations may say that it is too late to adopt such an approach. They have already made major investments in data warehouses and multi-channel contact systems. We say that it is never too late to move to such an approach. If such major investments have been made the organisation needs a clear set of projects which follow the principles outlined above and make use, as far as possible, of the existing infrastructure, with minimal new technological investment, and focused on delivering tangible benefit from those investments.
The view we've expressed here is not the end of the story. In the evolving environment we've described we expect to improve our understanding on these issues as time goes by. We will continue to report on the area. Sir Richard Heygate is running a fortnightly newsletter on the subject, and we hope and expect further contributions from other organisations. We hope to continue to contribute ourselves.
In the meantime, as always we welcome feedback and comment on this article. You can contact me at [email protected] or publish a comment directly below by clicking on the appropriate link.
Relevant articles and documents on this topic
CGEY and Gartner share secrets of ROI
Comshare Teams with Applix for Enterprise CRM Solution
CRM Case Study: Optimizing Relationships at National Australia Bank, Ltd.
CRM ROI - A vendor's approach
Delivering value from CRM - Forsyth, Gartner, et. al. tell you how!!
Delivering value from CRM - Microsoft, Reuters, and CRM-Forum members` views
Improving the Return on Investment from CRM: an Introduction
Internet more valuable for customer relationships than transactions
Managing the ROI on eCRM
The pitfalls in measuring your own ROI on e-business
Tracking the Potential Profitability (ROI) of B2C CRM Implementations