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ROI Still Matters, Sort Of and Other Considerations for the Year Ahead

online columnist Denis Pombriant     Column published in DMReview.com
January 6, 2005
  By Denis Pombriant

Does ROI still matter? It is always dangerous to write an obituary while the subject is still breathing but .... If we are not actually going to say ROI as a buying criterion in CRM is dead, then at least let us say that the nursing staff is a bit worried.

We say ROI matters, but our actions tell us something very different. When it is time for companies to show what is important by revealing where they invest their resources, ROI for CRM is pretty low on the priority list. In a report we published in November, more than 62 percent of those responding said they performed a baseline study before implementing CRM. You might ask why this is relevant but it is. You can't possibly perform ROI analysis if you don't know your starting point. What was heartening about the 62 percent is that it is 12 points higher than any previous analysis.

Still, when we asked the second half of the question only 30 percent said they bothered to calculate their ROI on CRM. That's only about half of the companies that went through the bother of baseline analysis. You might ask, "What's going on here?"

In a nutshell, these ratios hold up pretty well with earlier studies, and our conclusion based on a 50 percent fall off is that for many companies, ROI analysis is too hard to do. Part of the reason ROI is receding in importance is that CRM costs are getting under control. In the early adopter phase of the market, project costs were routinely in the millions and overruns were common. But today, smaller companies with tighter budgets rule the roost and downward pricing pressure in the form of hosted solutions and more tightly packaged traditional solutions are restraining costs. To net it out, the CEO does not see a million dollar bogie from a CRM cost overrun on the balance sheet so the problem is going away.

Here are some other emerging topics that I think will have an impact on the year ahead.

Hosted Applications Continue to Grow and Diversify

It used to be that hosted meant one thing - sales force automation (SFA). But the number and kind of hosted applications coming out far exceeds SFA in breadth and scope. We are finishing up a report right now on the subject of cutting-edge applications, and the majority of them are hosted and they operate in niches that you may not have considered before. For example, there are hosted applications that manage a company's customer references and others that automate and analyze the sales process and insert salespeople at the most opportune time.

I have identified a new class of on demand applications which I refer to as Web Necessary for the way they tightly integrate the Internet into their value propositions. Marketing applications are especially prone to using the Internet as a weapon, and many companies are getting important value from them. I expect Web-based marketing applications should proliferate.

Late last year, I heard a venture capitalist say he'd just made his last investment in a software company that licenses its products. The graffiti, as they say, is on the wall.

More Established Software Vendors will Bite the Bullet and Begin to Offer Hosted Solutions

Given the last point, this one is a no brainer except that I am amazed that more CRM companies have not already followed Siebel's lead into on-demand computing - especially in the wake of Salesforce.com's and RightNow's successful IPOs. One of the tough things about evolution is that it is so slow that we often miss it. We see the before and after pictures clearly, but the transition state frequently eludes us even when people like Clayton Christensen (The Innovator's Dilemma) show us in great detail the anatomy of change. Well, this is the transition-state year, and companies without a hosting strategy will need to find one quickly or find a new way to make a living.

Customer Loyalty Replaces Customer Satisfaction

One of the incongruities of the last few years in CRM is that many vendors were able to publish high customer-satisfaction rankings from their customers in the face of the high churn rates we were also observing. Cynics said some of the surveys must have been rigged given their observations. But the reality was far simpler and reflects a truth as old as surveying - it all depends on what you ask and how you ask it.

In the satisfaction case, we blithely ignored the difference between customers who feel they got "fair dinkum" as the Aussies might say, and those who were satisfied-to-the-point-of-wanting-to-buy-more. The last category is called "loyal," and it is really what every vendor wants more than anything for the simple reason that loyal customers buy more. On the flip side, satisfied customers might simply be stuck and waiting for the day they can fly the coop.

Walker Information released an important quantitative market study at mid-year 2004 that shows the difference and what it means to revenues and margins. Smart companies are digesting this report and will act differently in 2005.


For more information on related topics visit the following related portals...
CRM and ROI.

Denis Pombriant is the founder and managing principal of the Beagle Research Group, a CRM market research firm and consultancy. Pombriant is a well-known thought leader in CRM who publishes frequent research and is often quoted in CRM Magazine, CRMDaily, DestinationCRM and many other journals. In 2003, CRM Magazine named Pombriant one of the most influential executives in the CRM industry. Pombrinat's new report, scheduled for release in January 2005 is: "WizKids: Taking CRM to the Next Level." You can reach him at denis.pombriant@beagleresearch.com.


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