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Preparing an ROI JustificationMany CRM purchases include the ritual of a Return On Investment (ROI) analysis. A ROI analysis contrasts the costs of the CRM project with the expected benefits, and among other things forecasts how long it will take before the benefits outweigh the costs. ROI analyses traditionally focus on the cost savings created by the increased productivity made possible by the tool, but it's also important to consider potential revenue increases the tool may bring about. ROI are often required to get the purchase approved. While many companies used to take a leap of faith into CRM without making a quantitative justification, this is changing as top management is insisting on cost justification. Even if you don't have a corporate requirement to prepare a ROI analysis, it's very useful to map out what you will get for your investment. You may even find that you curb some of your desires for fancy customizations when you realize that the payback is not commensurate with the expense. While a thorough ROI analysis is the domain of professional financial analysts, the impetus for the ROI and much of the benefits estimates must come from the business owners, so they need to be the ones driving and validating the ROI process. This section contains checklists to help you organize the ROI analysis and some examples to get you started. CostsIt should not be difficult to define the costs (there's much less guessing involved compared to the benefits!) but you need to be disciplined and include all costs, even indirect ones:
Table 7.2 shows an example of a cost analysis for a modestly sized initiative that includes internal costs. Note that, although the implementation is farmed out to an integrator, there are significant IT costs to support and maintain the tool. Further note that, without the internal costs, the Year 1 costs would be only 65% of the total shown here, so internal costs are very significant. Table 7.2. Sample CRM Project Cost Analysis
BenefitsNow that you have a big fat cost number, it's time to add up the benefits to see which side wins and how quickly. BaselineBefore you can define savings, you need to establish a baseline for your current situation and costs. To that end, you need to establish the number of CRM users, broken down by categories, their compensation (averages by category are sufficient) and the key metrics for the tasks they accomplish. Key metrics for sales reps include the average deal size, the closing ratio, the number of appointments or proposals per month, etc. For service reps, this would be the number of issues resolved per month, the ratio of reps to customers, etc. of this tutorial explores the topic of metrics in depth, but at this point you're only looking at basic metrics that capture your cost of doing business. They should give you the current cost per sale and the cost per support case, as well as a structure to forecast the impact of the new tool. It may be difficult to gather reliable data about the current situation, and indeed this may be the impetus for getting a new tool in the first place. Nevertheless, you must estimate the missing data as best you can in order to make progress on the ROI analysis. Cost SavingsOnce current costs are known or properly estimated, then you need to estimate the productivity improvements brought about by the new tool. If today service reps close 10 cases a day, will they be able to close 11? More? If sales reps close (win) 70% of the deals, can they win 80%? Estimating productivity improvements is difficult. The best approach is to break down the tasks being automated by the project both by specific individuals and specific areas of their jobs, and to estimate the savings on each subtask rather than making a global estimate. If sales reps spend 25% of their time preparing for sales calls and the tool allows a productivity improvement of 20% on that activity, perhaps by making it easier to gather relevant materials or by improving collaboration amongst the sales team, then the overall improvement for sales reps' productivity is 5% for that particular activity. (Note that a 20% improvement is very large indeed, so you should question and revisit your assumptions if you should come across such large numbers). Table 7.3 shows an example of how you can use a subtask analysis to forecast the efficiency improvements the tool will bring. Note that the end figure, 8%, is not so large as to be suspiciously over-optimistic. Table 7.3. Example of Productivity Improvements for a Sales Group
To give you another way to approach the same problem, Table 7.4 is an example for a support group that focuses on how the tool will expedite the resolution of an average support case. Here again, the forecasted efficiency gain (about 10%) is reasonably small and believable, although you would need to dig a lot deeper to validate each of the assumptions. Table 7.4. Example of Productivity Improvements for a Support Group
The business owners should be very careful about creating the list of tasks and their distribution since the entire analysis will be driven by the numbers. For instance, in the support example above, if the Level 1 resolution actually takes 30 minutes rather than 15, the overall efficiency improvement in case handling time would be a whopping 16%—from 47 to 40 minutes—compared to the already respectable 14% figure—from 32 minutes down to 28. So make sure you get the big pieces right rather than obsessing over the details. Here are some suggestions for how a CRM tool can improve efficiency for a sales environment. Use them to jog your memory as you analyze the subtasks.
Here are some analysis questions for support centers.
Once you have estimated the productivity improvements, combine them with the cost data to figure out cost savings. This can be a pretty complex operation, perhaps better suited to the talents of a financial analyst, but the idea is simple. If today you accomplish a given amount of work (sell a million dollars' worth of goods or support 1000 customers) with X resources costing Y, with the tool you would be able to accomplish the same amount of work with fewer than X resources at a cost that is less than Y. Revenue and Strategic ImprovementsMost ROI analyses stop right here with the productivity improvements, even though productivity improvements alone rarely launch a CRM project in the first place. Instead, CRM projects often arise from strategic needs to meet market demands, to respond better to existing customers, or to reach new markets. Although it's harder to forecast or even to quantify some of these benefits, I feel it's important to at least give it a try. Here are some questions to answer to identify and quantify top-line benefits.
I like to be conservative in ROI analyses, keeping only tangible, measurable benefits and leaving the intangibles out of the numerical analysis altogether while listing them alongside the numbers. I feel that making sweeping assumptions about the intangibles suggests that the rest of the analysis may not be that realistic either and many CFOs agree with me. If you can't make your case without the intangibles, you may simply not have one. As you prepare the benefits part of the ROI analysis you may find that, in order to gain some of the benefits afforded by the tool, you will need to make changes to your current business processes. To take a simple example, you may see that you need higher caliber sales reps in order to sustain the penetration of larger accounts that is made possible by the tool. If that's the case, you need to go back to the cost section and record the higher cost so you end up with a correct analysis, which is a good segue for the next point. Are ROI Analyses Realistic?The honest answer is: not very. Most ROI analyses are slapped together to create an acceptable justification, and as such occasionally massage the truth to show a neat, short-term benefit. If you want to be able to stand by your analysis for the long term, be realistic rather than optimistic. In particular, sweeping productivity increases are rare. If you are forecasting a 20% increase in sales rep productivity, double-check your numbers. They may be right, but I bet you will find opportunities to temper your optimism. Another area of raging optimism is how quickly benefits will accrue. In my experience, most projects experience a temporary decrease in productivity when the tool is rolled out, as users need to learn their way around the tool (and, not infrequently, technical problems need to be sorted out). Productivity improvements may not appear for weeks or even months after the system is rolled out. The more complex the system, the longer it will take for the improvements to show up. Finally, ROI analyses are most accurate and useful when they focus on reasonably short-term wins, not fuzzy long-term chimeras. Make sure that your short-term benefits are accurately researched and justified. Then you can present the long-term benefits as icing on the cake. The next chapter focuses on selecting an integrator. Integrator selection should occur at the same time as the final selection of the tool, so be sure to advance both paths concurrently. |
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