Sticker Shock

Jun 01, 2001 9:30 PM  By

Pay up or lose: An in-depth look at the soaring costs of electronic customer relationship management

Spending money is no fun unless someone else does it, preferably on you. For the past decade, direct marketers have coughed up huge sums to automate front-end and back-office processes, all with the goal of streamlining operations, saving costs, and winning customers. Now, we’re told, we must shell out yet more to keep that fickle clientele we worked so hard to get — at the very moment when the “R” word is on everyone’s lips and the conversation in boardrooms is turning to cost cutting.

Global firms with annual revenue of more than $1 billion must spend as much as $15 million to $30 million a year on customer contact software and services, or they’ll pay a much higher price later, according to a new report titled “CRM: At What Cost?” by Forrester Research, Inc., based in Cambridge, MA. Smaller companies will also feel the pinch when they try to implement automated customer relationship management applications (see sidebar on page 40).

Forrester’s market analysis depicts a Global 3500 environment in which 45% of the firms are considering or piloting CRM projects, while 37% have begun or completed installations. Although each firm’s industry, products, and customers determine costs, a typical Global 3500 firm’s three-year expenditures for CRM will top $75 million. In 1999, companies bought more than $2.2 billion worth of CRM software from the top ten vendors alone. According to International Data Corporation (IDC) in Framingham, MA, the electronic customer relationship management (eCRM) market will top $11 billion by 2003.

Laying waste

“The thing to keep in mind is that CRM is essentially the technology you use to project the company’s personality. For most companies, that personality is highly schizophrenic.” — Bob Chatham, Forrester Research

“I’ve noticed that companies’ spending on CRM tends to be highly distributed,” says Forrester analyst Bob Chatham, who headed up the study’s research team. “They spend money on call centers, marketing organizations, sales force automation initiatives. All of those expenses tend to occur at, or be dispersed at, the departmental or business unit level.”

Few companies have a top-level executive responsible for customer service, which may be spread across several levels of management and handled separately for online, phone, and retail channels. The lack of focus leads to “a lot of overlapping or potentially wasted spending,” Chatham says. “Some of the integrators estimate that about 20% of the spending is wasted on essentially unneeded tools.”

Firms such as banks and credit companies have an advantage in that most of their information can be captured and represented in an electronic format. “For a manufacturer with a field sales force, it’s much harder. The penetration of CRM drops off dramatically as the relationship becomes more and more physical. You get down into primary production like mining or agriculture, and it becomes a lot less prevalent. What do you need a CRM application for if you’re a farmer with a tractor?”

Switching channels

As retailers prepare their operations for meeting customers’ growing multiplicity of channel access, the smorgasbord of faxes, phone, mail, e-mail, voice over Internet (VOIP), chat, Web-based interaction, and wireless communication demands that companies analyze their response mechanisms and spend wisely.

“My goal was to find out, if you add all of this stuff up for a particular cataloger, manufacturer, retailer, or bank, what these people would likely spend in the aggregate,” Chatham says.

According to the report, catalog retailers “absorb high costs — we estimate in the range of $61.4 million over three years — to build and support customer interaction through call center and Internet-based marketing efforts, in addition to healthy setup and operational fees to build and maintain terabyte data warehouses.”

The Forrester researchers add that “multichannel retailers like L.L. Bean or The Sharper Image must replace shotgun paper-catalog tactics with rifle-shot e-mail-based marketing and defend eroding margins with low-cost self-service.” They can expect to cough up $61.4 million for CRM expenses, “going mainly into marketing’s and the contact center’s troughs.” This compares to $129 million for manufacturers like Caterpillar and Teradyne, and $74.9 million for banks like FleetBoston Financial and Wells Fargo.

Most of the money flows into analytics, data, and system integration. Analytics drive the customer conversation. Data warehouses costing $3 million to $4 million from NCR, IBM, or SAS get a workout as retailers use them to predict cross-sell opportunities and get in sync with shoppers’ buying frequency and habits. To keep customers engaged and to tune their profiles, firms buy dialogue marketing systems from vendors like Revenio and E.piphany to manage millions of simultaneous customer conversations across channels.

Retailers thrive on new leads to grow customer bases, but the cost of keeping customer data clean and fresh drives up operational expenditures to $4.6 million a year, with services from vendors like Acxiom, Harte-Hanks, and Experian Information Solutions. Retailers can’t avoid this expense because consumer data error rates typically range from 1%to 5%.

Channel concentration keeps integration costs lower. At 29% of total cost, retailers’ system integration expenses are lower than those of banks or manufacturers since their channels — mail order, Web, and phone — leverage the same order management and data warehousing systems. But for a retailer like Eddie Bauer or Gap with walk-in stores and in-store kiosks, the cost of purchasing and integrating retail point-of-sale software adds another $5 million to the tab.

Control the urge

To rein in CRM expenditures, multichannel retailers must take the following hard line, according to the Forrester report:

  • Design contact centers for load balancing. Seasonality wreaks havoc: Eddie Bauer’s customer service agent roster balloons from 900 reps to more than 1,300 to handle holiday demand. When its own agents aren’t enough, Bauer dips into a pool of 800 others employed by sister brands Spiegel and Newport News, with the help of call-routing technology from vendors like Rockwell and Cisco, browser-based agent apps from Broadbase, and scheduling software from Aspect Communications.
  • Implement self-service to defend margins. Catalogers’ microscopic margins of 2% to 3% dictate that they ration live agents. Fifty-eight percent of customers check order status — a task easily handled via the Web or e-mail with software from vendors like Kana or E.piphany. As customers breach self-service ramparts, agents must be prepped with access to order status, as 40% of calls are inquiries or complaints, according to the Direct Marketing Association.
  • Be in the right place at the right time with the right offer. JC Penney’s statistics prove that customers who shop across all three channels — Web, phone, and catalog — purchase at a rate of eight times that of single-channel customers.

To maximize the chances of achieving such results, retailers must deploy context servers from vendors like Unica or Miosoft to make a compelling offer regardless of channel.

CRM horror picture show

Poor organizational readiness and a chaotic market set the stage for what the Forrester report calls “a new corporate horror flick: ‘CRM, Son of ERP’.” As the ERP hangover fades and dot-com shares fizzle, a new, deafening buzz is building, the report notes. Forrester searched Dow Jones’ content base of more than 6,000 business publications for references to CRM and found only 442 articles in 1998, but a massive 6,048 last year. The pressure on companies to address their CRM needs is becoming greater as profits tighten and customers look for better deals.

Businesses are simultaneously cutting service costs. As the U.S. economy softens, the report explains, “firms consistently report that cost cutting is their primary or secondary goal. Yet the Net’s promise to cut service costs and boost profits remains elusive, as 41% of online customers prefer the phone as their primary channel, resisting self-service alternatives.”

In Chatham’s view, “a firm’s CRM implementation defines its customer experience: how well employees, partners, and customers meet their goals to solve problems, transact, and learn. But scattered responsibility for the customer experience and an unsettled CRM market will drive three-year costs to $60 million to $130 million for the Global 3500 — unless these firms understand what drives their CRM expenses and adopt a corporate plan.”

Richard Sawyer is principal at Richard Sawyer Associates, a Natick, MA-based public relations firm specializing in CRM and service management. He can be reached at (800) 217-7372 or Paris43@aol.com.

CRM for You and Me

The Global 3500 enterprises have deep pockets, but how do the tens of millions of other firms pay for CRM technology? We asked Elizabeth Herrell, research director at Cambridge, MA-based Giga Information Group, to explain the various options.

“CRM is both an application and an infrastructure,” she says. “We’re talking about optimizing the customer relationship. It’s important not to limit it to the application itself. It includes integrating the customer information across all channels of communication and being able to deliver effective customer service.”

Smaller companies have an advantage in that they may not require complex systems integration, Herrell says. “They may tap into some of the critical customer-facing sales, service, and marketing applications, but that doesn’t mean they have to integrate their entire back-office infrastructure.” Hosted or application service providers can supply the communications infrastructure that supports the application.

Enterprises of a manageable size are also better at integrating eCRM components, thereby avoiding the higher costs of the fragmented implementations common in large companies. “If you have a simpler operation, with many fewer databases to integrate, you’re not dealing with a multi-divisional company that has everything housed in fragmented databases all over the enterprise,” says Herrell. “It’s much simpler to capture and use your customer information. It’s scalable.”

The larger of the original CRM vendors haven’t gone after the small and mid-tier market, so smaller suppliers provide less sophisticated applications that may be more suitable for companies not requiring the degree of functionality that the large applications providers offer. But size isn’t the only criterion, Herrell points out. “It’s always possible that a very small company has a sophisticated need, so they’d require a more robust, highly customized application because of the way they operate.”
RS

Who’s a User

Global 3500 Firms Implementing CRM
In Progress Complete
Transportation 35% 30%
Insurance 28% 35%
Chemicals and petroleum 20% 40%
Financial (noninsurance) 22% 38%
Wholesale 22% 37%
Business services 25% 32%
Technology and telecom 22% 33%
Retail 20% 31%
Intermediate manufacturing 25% 35%
Finished goods manufacturing 12% 35%
Primary production 15% 30%
Services 12% 28%
Electricity/gas/sanitary services 14% 26%
Source: Forrester Research, Inc.’s North America Benchmark Study, 2001
Note: Respondents = 82% of 1,026 firms

Knock Yourself Out

Retail Catalog Company
Typical Firms: Eddie Bauer, Gap, Lands’ End
Employees
(software users)
Call center: 900-2,000
Retail POS: 1,100
Marketing: 300
Number of customers Retail: 3,400,000
Business: 100,000
Customer contact
channels
Primary: phone, store
Complementary: Web, catalog
Dominant issues Maximizing marketing offer acceptance; cutting order management cost
Technology levers Cross-sell analytics; self-service
Estimated total CRM spending = $61.4 million

CRM Runs Amok!

The pressure to invest in CRM runs counter to the reality that organizations are unprepared to tackle the challenges of another ERP-scale technology effort, as the Forrester Report notes:

Diffused responsibility causes redundant spending. Call center executives seek efficiency, while marketers want customers queued by lifetime value. Low top-management visibility and conflicting goals thwart coordinated spending — only 45% of firms have centralized responsibility for CRM strategy (see the June 2000 Forrester report titled “The Customer Conversation”). Mergers add to the confusion as firms struggle to maintain multiple CRM suites in parallel.

A rabbit warren of vendors complicates technology planning. Typical CRM implementations comprise a dozen vendors across marketing, sales, and service, with several overlapping product suites. The chaotic CRM software market distracts vendors like Kana and Broadbase (ServiceSoft) as they rationalize diverse technical architectures resulting from acquisitions.

Closed-loop ROI is rare. Few firms match the analytical horsepower of Harrah’s Entertainment, which uses analytics to track casino customers from campaign to cash — and to build the ROI case for CRM (for a special report on Harrah’s, see the May 2001 issue of Darwin magazine).

Customer profitability can’t be measured easily. Fifty-seven percent of companies are unable to justify CRM investments for this reason. Vendors like E.piphany and Chordiant promise to help, but must first integrate the operational and analytical sides of their product suites.
RS