“Hard” KPIs Are Not Enough

Feature Article | July 21, 2003 by admin

The times of “blind” IT investments – if they ever existed in the first place – are over. Today, most companies are concerned with setting up projects that generate added value within the shortest possible space of time. As a result, those responsible for the budget demand an accurate calculation of the return on investment. In the case of projects in the area of Customer Relationship Managements, however, it is necessary to ask whether, how, and when a financial/mathematical calculation can and should be used, because as a rule, the ROI is calculated on the basis of comparable, financial KPIs (costs, sales, and revenue, for example).

Phase Model

Phase Model

Customer Relationship Management, however, is defined above all by means of “soft,” non-monetary factors – such as an increase in customer satisfaction, for example. In order to draw up a reliable ROI calculation, factors such as this must also be taken into consideration. The IT consulting firm LogicaCMG has developed a method that makes it possible to include both hard and soft factors in the calculation. In this phase model, the most important thing is to carry out a systematic analysis before the actual project work starts.

Pinpointing “soft” factors

Companies that plan a CRM project first need to define the goals that they want to achieve through Customer Relationship Management. In this way, they create a clear and common basis for all those involved in the project, a basis that can also serve as a “definition” for CRM. The most important thing here is to formulate the goals concisely, and to limit them to a manageable number. In the experience of LogicaCMG, it is advisable to define no more than eight main goals.
Some of the goals are values that can be measured in monetary terms, for example “Reduce costs” or “Increase profits”. However, because a CRM project also contains goals that cannot be measured in monetary terms, at first glance it does not make sense to use the ROI in the purely monetary sense.
In order to pinpoint the “soft” goals, it is necessary to consider all processes that affect customer relationships. For the goal “Increase customer satisfaction”, this primarily includes processes that affect areas of contact with the customer, such as the acceptance of an order, support for the order, aftersales support, and complaint processing. In addition, further processes, often company-specific, that affect customer satisfaction need to be considered. One example here could be cooperation with a customer in areas that are not the core business of either party, such as working groups on environmental management.

How do you turn a customer into a satisfied customers?

For each of these processes, it is then necessary to determine the factors that affect customer satisfaction – for example, processing times, product faults, service quotas, types of complaints, and frequency of complaints. An actual value has to be recorded for each of these factors, and set against a realistic target value. Measures are then defined with which the target values – in other words, the goals – are to be achieved.
Some of these goals are monetary values which can be easily integrated in the calculation of the ROI, for example the amount of processing time saved with a smaller number of complaints. In addition, the derived measures, such as master data consolidation, can be assigned costs, so that a reliable figure can be used for the calculation.

A shorter processing time for order acceptance also contains a monetary aspect, because in the time that is saved, more orders can be entered than before. However, the extent of this increase cannot be clearly measured. The number of extra orders that can be booked can merely be forecast. A forecast is also used to evaluate whether customers who did not manage to reach the responsible employee on the first attempt called again. In practice, however, the actual values will deviate from the forecast values in almost every case.

Complex interrelationships

"House of CRM”: Increase Customer Satisfaction

"House of CRM”: Increase Customer Satisfaction

This kind of procedure must be carried out for every area that is affected by a customer contact. Here, it is necessary to take account of the fact that there is a causal relationship not just between the higher-level goals of a CRM project, but also between the individual processes that relate to a goal. If, for example, all relevant customer data is entered when an order is received, better aftersales support can be provided more quickly, because this data does not need to be entered again. The illustration shows the interrelationships between the various areas. It shows a sub-area of the “House of CRM,” a tool for analyzing these interrelationships: the figures provide an example of how the factors define and affect each other. Therefore, effective data entry when the order is received has a considerable effect on the subsequent process of order support. Similarly, the individual processes affect each other to different degrees. In the illustration, this is indicated by the letters.
These interrelationships and the number of forecast values for the goal Increase customer satisfaction alone make it clear that ultimately, the monetary values secured should not form the basis for calculating the ROI. As there are also further goals that are causally related, and which are each characterized by this kind of interrelationship, a very large number of speculative values are included in the calculation.
In addition, it is necessary to bear in mind that factors that are not directly related to a sales transaction are also affected. For example, it is possible that certain measures introduced to increase customer loyalty also have an effect on the products. A subsequent evaluation of intensive and documented consulting meetings, for example, may cause a particular product to be modified. There are consequently dispersions and synergies, the monetary value of which can merely be forecast.

Cleaned Formula

Cleaned Formula

If several of these forecast values are now included unsmoothed in the calculation, even though the likelihood of them actually occurring is very low, very high values may be produced for the ROI. As a result, the company would have a ROI key figure that promised “too much.” It is therefore advisable to use a formula in which the speculative values are “cleaned.” The diagram shows a common formula used to calculation the ROI in cleaned and uncleaned form. The speculative values are marked with asterisks.

Transforming “soft” factors into “hard” KPIs

However, the cleaned formula does not take account of the considerable added value that leads to improved customer relationship management. As a result, the soft factors must be converted into hard KPIs, and then included in the ROI calculation. For this to be possible, target values and KPIs must be defined before the actual project work begins, that is, before a solution is implemented and a CRM philosophy has been established. For example, it is important to know how long non-CRM-driven processing takes for an order. This is the only way to locate and leverage potential. If a starting value is formulated after the project has been closed, and the starting value was not known before the project started, this may adversely affect the results, or even lead to below-optimum or negative results.

Think Big, Start Small

Think Big, Start Small

With the phase model from LogicaCMG, these goals can be achieved systematically. The model works according to the principle “think big, start small,” in which first the complex relationships are considered in detail, and KPIs are established for the individual areas. These can be implemented in manageable steps in a CRM project. Here, it is important that every phase in the project is accompanied by suitable tools and KPIs.

The company and its environment under the microscope

In the first phase – CRM diagnosis – the company is analyzed. Tools such as the ABC analysis – which enables the actual situation to be determined, and products, customers or suppliers to be weighted – and statistical evaluations, the SWOT analysis (strengths, weaknesses, opportunities, threats) and the CRM index are used here to determine the current situation and the future opportunities with regard to CRM. In this way, it is possible to clarify which requirements the company needs to meet in order to realise its Customer Relationship Management philosophy. Thus the communication structure across departments is evaluated, for example.
In a second step – the market, industry, and customer analysis – a benchmark is used to analyze the company’s environment. Here, it is necessary to clarify the extent to which the customer base is able and willing to participate in the CRM philosophy that is being created – for example by accepting new channels of communication. If, for example, many customers want to talk to a company employee in person, it will not be possible for the company to establish an automated customer information system (“customer self service”).
On the basis of the information obtained from these two phases, company-specific KPIs need to be drawn up. Among other things, this process makes use of the “House of CRM,” a tool that enables a company to analyze the specific interrelationships and to prioritize the various measures within the CRM project. In addition, the non-material values can be analyzed with the help of the Diagnostic Card, which is based on the Balanced Scorecard.
If these steps are carried out consistently and systematically, a return on investment can be calculated quickly that reflects the “ROI QuickWins”. These ROI QuickWins and the other, established KPIs must be determined and verified over the course of the whole project.

www.logicacmg.com

Björn Tiede

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