The ROI of CRM

With C-level executives, CFOs in particular, taking a greater interest in their organizations' investments, pressure for return on investment (ROI) numbers hits the usual functions -- production, sales, human resources and information technology -- and marketing, which is being held to greater accountability for its spending.

Because of this executive involvement in decision making and a lingering distrust of CRM (thanks to the the well-publicized failures of early implementations), CRM solutions need to show a measurable, if not quick, ROI.

"It is an issue we're seeing more in the industry, particularly for an organization that's been struggling to prove its CRM business case," says Kim Collins, a Gartner (NYSE: IT) research director.

On-Demand Answers Short-Term Needs

Nucleus Research, based in Wellesley, Mass., tracks the return on IT investments through vendor engagements and sales . "We've looked at on-demand and more traditional enterprise CRM for a long time," says Rebecca Wettemann, vice president of research at Nucleus.

"What customers are trying to solve is pretty complex, and everyone out there has taken on a greater responsibility in making sure customers are successful," she says, attributing the rapid rise in on-demand offerings to this trend.

Where once San Francisco's Salesforce.com (NYSE: CRM) commanded the on-demand market, Siebel Systems in San Mateo, Calif., and RightNow Technologies (Nasdaq: RNOW) of Bozeman, Mont., now rate higher on Nucleus's scorecards.

"A year and a half ago, Salesforce.com was the only game in town and had the highest functionality," says Wettemann. "On-demand has evolved so much in the past year."

Siebel now ranks first in Nucleus's enterprise and on-demand CRM reports. A year ago, the company placed third overall, behind Salesforce.com and RightNow. In 2005, Salesforce.com fell out of the top three. Microsoft's (Nasdaq: MSFT) Great Plains and Oracle (Nasdaq: ORCL) took second place in the enterprise category.

The evolution is good business for CRM vendors and good fortune for companies still making CRM start-up decisions. "On-demand gives organizations a low-cost entry point to prove a CRM investment to management," says Collins. "It helps align business and IT, too."

However, in the long run, marketers and IT folks who have passed the CRM trial and won annual funding for the solution will find it requires more work than the cost savings is worth. Customization needs that develop as an organization absorbs the value and potential of a CRM system convert the once-low cost on-demand solution to a high-cost investment.

"The on-demand model shifts the pendulum back to IT," says Collins, and the spending required to expand it has the CFO doubting the investment all over again.

Price vs. Long-Term Value

On-demand may complement an enterprise solution, managing a single group not covered by the enterprise implementation, or it may take the place of an enterprise solution. It is cheaper than on-premise solutions and will show a quicker ROI -- three months vs. a widely varying return time for traditional CRM implementations because of the considerable up-front costs -- but Wettemann cautions that companies should not choose it merely because of its price tag.

"The key takeaway is it's not just about doing something cheaper. It's really about using the right technology platform," she says. "Companies are trying to get greater value for their CRM investments."

"In the dot.com burst in 2000, things were overvalued. Companies were spending a lot on IT. Dot.com businesses were not growing and many got burned on heavy investments," says Collins. "That put pressure on management to look at the return from spending."

Now corporate executives want IT or marketing -- whichever clamors for CRM -- to maximize the success that will result from CRM. "They are looking at it not just as a technology but a strategy," she says, because "there is a lot more focus and push for management to be more accountable, and they need to get the value out of a CRM system at the end of the day."

Justifying CRM investment

However, as regulations surrounding corporate America change, marketers and IT advocates of CRM, as well as the CFO, may not have to show shareholders CRM's ROI but its audit trail of data manipulation and resulting success.

"Sarbanes-Oxley has moved CRM from a luxury item to a needed item to enable and support broader growth strategies," says Collins. The marketing resource management applications in CRM systems especially show the value derived from CRM expenses. "That takes some pressure off of management. They can say, 'we need this because it's a compliance tool.'"