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Understanding CRM is Easy, Measuring Is Not

As financial institutions scramble to attract and retain customers in a fiercely competitive market, many are eagerly looking to customer relationship management (CRM) initiatives and technologies to give them an edge. Although many are finding it is easy to buy into CRM, it is more of a challenge to measure success or failure.

"The traditional ways of measuring a CRM program no longer apply," says Richard McLaughlin, vp CRM and Information Management, Royal Bank of Canada. "It becomes increasingly difficult to separate CRM as a program or a project from just the way you do business. If you are going to do it right, it has to be your business strategy, not a project."

However, he adds, "nor is it fiscally responsible for someone to say ‘it is in our business strategy so we are not going to measure it.’"

How to measure something that should be permeating your entire business is no easy task, but with financial institutions spending billions every year on CRM there is an increasing drive to find tools and strategies to measure its impact. ROI analysis could hold the key, says Meridien Research CRM Research Director Tom Richards, but only if institutions consider intangibles beyond costs-savings and revenue growth.

Richards recently completed a new report for Meridien — "Yardsticks for Managing Successful CRM Strategies" - that tackles the issue head-on

And according to Richards, retail financial institutions will spend nearly $7 billion on CRM, but many firms don’t really understand how to determine what sort of bang they are getting for the bucks.

"People are very frustrated - the dollars that they are spending on their CRM initiatives are huge," agrees Mainspring Research Director Jennifer McKinley. "And people are investing this money without a very clear idea of how they are going to measure the return on that."


The traditional view of ROI, Richard outlines in his report, is to determine "if the investments that we’ve made have actually produced the desired impact." And the impact comes primarily in two ways: cost reduction and revenue enhancement. It is the latter that is more difficult to measure within a CRM strategy, but also of greater importance.

"It is more of what we call an art form and it is often characterized by imprecise measures and anecdotes," Richards says.

To overcome this, Richards says, institutions need to begin experimenting with "cause and effect to begin to understand the relationship that exists in your customer base," as well as risks in assumptions.

For example, Richards says, an institution that has bundled together a number of transaction-based accounts and assigned a single fee to it, rolled it out and then measured success based on the response rate of the targeted customer set is probably missing the point.

"Say the response rate was very high," he explains, "so marketing celebrated their success, but after going back and looking at the group, they discovered that the actual contribution in terms of profitability of the group actually declined over time as a consequence of that program."

The reason for this misconception, Richards explains, gets to the heart of what needs to be recognized about CRM: not all customers are created equal.

"Not all customers will provide equal returns for the same investment, which is how we have to think about it," Richards says. "All other things being equal, customers behave differently."

This tenant that each customer behaves differently actually provides the key for financial services to use CRM to differentiate themselves in a crowded and fairly uniform marketplace. And this is why spending on CRM is so high.

"The industry has come to the realization that the distribution strategy that most of us were chasing through the 80s and early 90s is fundamentally flawed — [although] we all did a really good job of it, we all have branches and ATMs on every corner, call centers and an Internet channel — but there is just no way to differentiate yourself in that environment," explains Royal Bank’s McLaughlin. "You couple that together with products and services that are fundamentally not something you can differentiate yourself on over a sustainable time."


Differentiation, Richards says, comes from managing and targeting behaviors to ensure that financial institutions are not just attracting and retaining customers, but are attracting and retaining profitable customers.

In his report, Richards details the belief that "customers drive shareholder value" and customers determine revenue and cost by their choices, behaviors and by how those behaviors consume resources.

What firms might not have considered, Richards reports, is that "shareholder value is determined almost entirely by the types of customers a company attracts. We believe this provides a new impetus for getting CRM right."

This leads to accepting the premise that the objective of a CRM strategy is to influence that behavior, the report continues, and Richards outlines six tasks that need to be addressed: identify targeted behaviors; measure the impact of shifting those behaviors; size the investments accordingly; categorize and segment customer behaviors for analysis and treatment; track customer performance against goals; and a complete set of tools that facilitate a common language for comparing alternatives, setting priorities and measuring progress.


None of these concepts sound groundbreaking, Richards admits, but the hurdles of integrating technology into an institution to implement this strategy is much more difficult than it might seem. In essence, there is no quick fix.

"A lot of CRM shouldn’t be too difficult to grasp," he explains, "but the issue isn’t the intuitiveness of it. Rather, it is moving a very large institution and shifting its approach, its management style and priorities, the way it organizes work and shifting those dramatically."

The explosion of technology solutions aimed at the CRM market certainly offers important tools for success, but if the people aren’t on board then this is a wasted investment, agrees Mainspring’s McKinley.

"CRM is not just technology solution - technology is going to enable the organization to do that - but to really reap the benefits you need to change the processes and mindset around the organization," she says.

Meridien’s report promotes activity-based costing (ABC) as the best foundation for calculating customer profitability for CRM. This calculates resource usage based on transaction type, and allows an institution to distinguish between different patterns of usage from one customer to another.

Futhermore, firms should also deploy customer lifetime value analysis to determine how a customer’s behavior and profitability will change over time.

This enables an intelligent decision to be made as to how much an institution needs to invest to develop a profitable customer relationship.

The combination of these tools, Richards adds, establishes something crucial to CRM: a baseline of profitability. Once this has been established, questions such as how far can it be lifted, the investment warranted, and the performance of the initiatives can be addressed.


At first glance, Meridien’s report hardly looks earthshattering — most of the concepts, in fact, look obvious. And Richards agrees, but couches his answer with four factors that are inhibiting financial institutions from grasping how to measure CRM.

"The bottom line is this doesn’t sound so new, but if it is not, why don’t we see more of this going on? The answers are fairly simple — there is no agreement on profitability measures. It may sound silly but we have seen instances where profitability measures have actually created conflicts within in the institution."

Second, he says, is the rush to be instantly successful. "Many who start the CRM journey are blinded by the hype."

McKinley agrees — her research has found that implementation of CRM takes two to five years and even if you have good measurement techniques, indications of success take time.

The third factor, Richards says, is that not all firms really know what they want from CRM and unclear objectives and expectations can lead to disjointed initiatives.

"CRM is not something you can do off and on," he explains.

The final factor is implementing the technology and analysis for measurement — "unfamiliar LTV territory."

"It is not unusual for a CRM project to be tossed to IT, and IT is fairly good at understanding cost-saving benefits, but is not in a very good position to understand revenue enhancements and related issues," he says.

Despite the sluggish economy, Richards does not expect spending on CRM to take much of a hit. In fact, a closer eye on the bottom line might help spur firms to plan and measure their CRM initiatives more effectively.

"The technology bust means every dime is precious and there will be a lot of scrutiny on CRM projects and that scrutiny means justify the returns, the what are you doing for me today," says Richards. "The second thing is when budgets get tight, there will never be a more important time to begin to build strategies and to deploy enabling systems to retain customers and to build profitability. If indeed, we are in an economic bust, we are going to start to learn big time about the importance of retention versus continually adding customers that may not pull their weight.