In the past, many companies have invested in CRM systems to increase customer loyalty and make them more competitive. Yet there is a great deal of ambiguity when it comes to measuring the benefits of such investments. The cost-effectiveness of CRM investments was at the center of a survey carried out among insurance companies by Cambridge Technology Partners in conjunction with the Department of Information Systems at the University of Erlangen. And the results of the survey portray a inconsistent picture. Following the introduction of CRM solutions, some companies are on the whole satisfied with their achievements, though others say in retrospect that
Goal number one: Increasing customer loyalty
The insurance companies examined as part of the study anticipated as a matter of priority that their CRM investments would increase customer loyalty and business from existing customers. Other goals mentioned included cutting customer service costs and improving the quality of customer and partner data. Areas such as service centers, Internet/e-commerce and customer selection were the main focus of these CRM projects. And although other CRM topics, such as complaints management or field service systems, were rated as important, they were given much less priority.
- <sum> no indicators were defined in the area of CRM to determine whether goals were achieved
- <sum> they are unclear of the benefits actually achieved by utilizing CRM
- <sum> employees do not know how to work with the solution properly, meaning the economic effects remain unsatisfactory
- <sum> customized software developments incur high follow-up costs
- <sum> additional investments are required in order to reach goals
The results of the study show that companies never or only partially measure the benefits of CRM, thereby not only throwing away the opportunity to establish the actual value of the CRM investment, but also the chance to identify and resolve any weaknesses. What’s more, technical shortcomings mean that benefits are often not achieved. The reason behind this is that, although many companies have already invested extensively in technical components, they have generally refrained from integrating the CRM solutions in their existing system landscapes. And it also seems that employees are either not accepting the systems at all or have reservations about certain aspects of them.
In the projects carried out in the area of service centers, increasing competitiveness and customer loyalty were the main priorities among all the companies surveyed. Yet their expectations were not met. No company was able to confirm that, after project completion, such increases were achieved as a result of the customer service centers they had introduced. Nonetheless, all companies surveyed are still planning further investments in CRM. And although, in the past, customized developments were preferred in many areas of CRM, but particularly in the service center sector, the trend here is now toward standard software.
Based on the results, the study recommends drawing up new models for calculating the return on investment (ROI) for CRM systems. The main requirement for measuring the benefit correctly is first and foremost understanding how the CRM components interact. Identifying success factors for benefit measurement and a balanced scorecard can often form the starting point for this. Employee acceptance is an additional key factor. It’s simply not enough to explain the system in a few short training sessions. In fact, employees should be involved as early as the design phase. And a professional change management strategy will help to actively shape and successfully drive forward the introduction of CRM in a company.
The methods normally used for calculating the ROI tend to be too inaccurate. The indicators used for calculating investment profitability date back to the industrial age. They involve assessing production facilities and calculating the increase in value using the production quantities manufactured in a given plant. In the past, the only assessment criteria used have focused on costs. Methods and instruments for quantifying the actual benefit were as good as non-existent.
Incorporating learning rate and customer value
The study recommends incorporating the learning rate and customer lifetime value (CLTV) in the benefit calculations. The result is an ROI calculation model which forms the basis for an industry-specific assessment of CRM investments, tailored to the requirements of insurance companies. And the learning rate or experience curve is included in this model as a key factor. It shows how successful learning can accelerate work processes. Empirical studies generally offer evidence of learning rates between 15 and 30 percent. The learning rate shows how much faster employees are in using the system at the end of the training phase, compared with at the beginning when they were still unfamiliar with the software.
Using a calculation model highlights criteria, which in the past have not been factored into the benefit measurement, and shows their influence on the ROI calculation. For simplicity’s sake, the model makes the following assumptions:
- <sum> Sales increase during the period in question
- <sum> Costs fall – at first steeply, and less sharply later on
- <sum> A single one-off investment is made
- <sum> The learning rate stands at 20 percent
Calculation model shows savings
For example, if the return from a CRM system is measured in relation to the sales growth achieved, it is recommendable to incorporate criteria such as customer selection, customer loyalty and winning new customers. Customer selection is measured as the average increase in revenue per existing customer. Customer loyalty is reflected by additional revenue per customer and contract and customer acquisition by the new customers attracted in a given period
In the model analysis, no gain was achieved through sales increases in the first period after the CRM system went live. The effects of the CRM system had not yet come online, especially since internal integration problems had initially reduced the benefit derived from the system. From the second period on, increasing gains were recorded in the form of sales increases. This is at first due to the acquisition of new customers, but is later down to the effects of high customer loyalty and customer selection.
Analyzing the effects makes one thing clear – in the initial periods after introducing CRM, cost savings are achieved in particular as a result of restructuring corporate processes and increases in sales enter the equation in the long-term. Gains as a result of lowering costs initially exceed the gains achieved by increasing sales and they only change positions in period five.
Scope for cutting costs can be found in the contact and service phases in particular. The processes in these stages can be greatly streamlined by a CRM system. For example, canvassing costs can be reduced if the CRM system filters out the people with the greatest interest in insurance products from the customer file. Though, the initial large cost savings reduce in the long-term. Additional potential for savings is created by learning curve effects.
In calculating the cost savings for each period it has been assumed that the learning curve decreases over time. Strong saving effects are possible in the initial periods since the employees are able to improve their work speed significantly. Using data selection masks for the first time to have the system search out customers or potential customers can save a lot of time in comparison with the manual selection process used previously. The more often an employee works with the system, the better they will cope with it and the benefits remain high thanks to learning effects. It is assumed in the last survey period that employees are using the system to its full potential and the gain will only increase marginally.
Positive benefit effects from the outset
To simplify the computation model, the invested capital is shown as remaining constant throughout the entire period. Only a one-off initial investment is incorporated in the calculations. This simplification highlights which cost categories are of more consequence than others. The startup costs are actually very high for all CRM implementations since they have to be integrated in ERP systems and employee training sessions have to be carried out. But the indirect costs, particularly costs for end users (end-user operations) can also be high. For example, if the system is extremely complex, employees will need to continue training while working on the system. This prevents them from devoting all of their time to customer care work.
If you relate the gain achieved with the CRM system, consisting of gains from increased sales, cost-cutting in processes and by means of learning curve effects, to the capital invested, you can calculate the ROI for the CRM investment. Taken over a given time, the model calculations only show a low increase in ROI at the beginning, which then increases steadily to reach a peak and then slowly begins to fall back again.
One failure of previous profitability analyses for CRM projects is that they showed no return on investment in the initial years, even though there were positive benefit effects. The sample calculation shows, however, that even in the first period a gain is made from the investment. Yet the ROI is still negative at this point. In period four, the cumulative gains exceed the invested capital and a positive ROI is achieved, so that even at this early date the CRM investment has paid off, measured in terms of sales increases and cost reductions. The benefits from CRM systems are achieved relatively early when factors such as customer loyalty effects and employee learning curves are taken into account in the calculations.