The Myth of ROI, Part 2
In this, the second of two parts, Arthur O'Connor looks at the shortcomings of using ROI as an operating performance metric for CRM.
In the first part of "The Myth of ROI," I discussed the truth behind the customer relationship management (CRM) package myth: Installing a CRM software package doesn't generate ROI. Successful business practices do -- specifically, those that use software in conjunction with people and process.
In this, the second of two parts, we'll look at the shortcomings of using return on investment (ROI) as an operating performance metric for CRM.
ROI for a Standalone Project
Despite lectures and seminars, news stories, books, white papers, and research studies -- not to mention hundreds, if not thousands, of tools and consulting services offering to develop metrics and track ROI -- ROI is not used to measure and manage standalone projects. One reason for this is that no established, standardized, broadly accepted way exists to track and interpret financial return and impact on productivity by investing in technology.
Tracking ROI for a project can be difficult and expensive. Some of the more elaborate methodologies involve active-based costing, including time/motion studies of front-office personnel and processes to establish a financial baseline or snapshot of the current state. Establishing and maintaining this tracking can be prohibitively costly. It's next to impossible to create a standardized process that accurately measures incremental profit contribution that can be irrefutably attributed to implementing a CRM package (or any technology package, for that matter).
Then, there's the sticky issue of objectivity. Given that much ROI calculation is based on projections, ROI studies can become a vehicle for political constituents in an organization to use to justify a predetermined decision, either to move something forward (by goosing the projected estimated numbers) or to kill a project (by inflating the costs surrounding the project and minimizing the expected return).
A Jupiter Media Metrix report addressed the internal bias of employees evaluating the benefits of their own CRM initiatives. The report found 59 percent of in-house ROI studies generate a positive result, and only 17 percent of surveyed companies hired outside firms to conduct or oversee their ROI studies.
Here's my take on the whole issue: Given the strategic nature of CRM, it is usually folly to assume the massive investment required to track and measure the ROI of CRM as a standalone project. In other words, don't look at the ROI of your CRM project. Look at the ROI (or return on equity) of your business instead. Manage accordingly, using CRM as a strategic discipline and enabling technology.
CRM is most successful when implemented as an organic ingredient of an organization's competitive strategy. I would go so far to make this bold claim: Show me a successful CRM implementation, and I'll bet CRM is an ingrained discipline in the organization (though they may not call it "CRM"). Conversely, show me a spectacular failure in CRM implementation, and I'll show you an IT-specific and/or fragmented development effort isolated from the heart of the organization's strategy, culture, and core competencies.
What should you use to measure the operating performance of a CRM system if not ROI? That should be determined by your business objectives and what your system is designed to produce. A good starting point is customer metrics: revenue and cost impact arising from the acquisition and defection rates within different classes of customers.
Arthur O'Connor is a director and heads the CRM Integration Practice at Reuters Consulting, a unit of Reuters, PLC. As one of the nation's leading experts on CRM and business intelligence solutions, he writes on business and technology trends for eCRMGuide.com, as well as on CRM strategy for ClickZ.com. He is a frequent speaker at industry conferences. Last year served as chairperson of the Institute for International Research's CRM Project Management Conference.