The Real Cost of CRM

Okay, pop quiz time. What is a surefire way to infuriate your company's chief financial officer? No, the answer is not presenting an urgent request to purchase a six-figure CRM package that the company desperately needs if it wants to stay competitive, or at least afloat.

The correct answer is presenting the CFO with said six-figure proposal that eventually turns into a seven- or eight-figure project.

Unfortunately, that tends to happen with many CRM implementations.

"CRM is not new anymore and so there have been a couple of different approaches to estimating costs that have become accepted," Rob Rose, principal with Deloitte Consulting's CRM practice, told CRMDaily.com.

"But as CRM becomes more complicated, these accepted approaches don't work anymore," Rose added.

Whatever the reason for these unexpected costs -- and we will get to them in a minute -- it is clear that there is a problem. A Gartner Group (NYSE: IT) survey released last month showed that a majority of businesses will underestimate the costs of CRM projects by as much as 40 to 75 percent over the next five years.

No Such Thing as Average

Gartner offered some suggestions, including better use of project management expertise, calculating total cost of ownership over the life of the project, and completing an ROI (return on investment) assessment.

But while these steps are certainly essential, they just begin to scratch the surface. Other costs, such as integration and training, often sucker-punch the most vigilant of budget departments.

Another problem is scope creep -- as a project gets underway, people suddenly realize that more capabilities or applications are needed if the project is going to work as originally envisioned. Or, people take advantage of ongoing IT work to tack on a few extra applications that they always wanted their department to have.

But these are common problems of many IT projects. With CRM, a more fundamental issue is also at work, Rose said.

"Executives are basing the cost estimates of their projects on such metrics as average cost per seat," he noted. "Trouble is, there is no such thing as average -- each project is different depending on the level of complexity involved. But these industry metrics are throwing clients off, and they ask us to explain why they are under or over the industry average when the industry average never meant anything in the first place."

How Complex?

A project's level of complexity is key, Deloitte Consulting said in a recent report, "How to Eat the CRM Elephant."

The company grouped CRM projects into roughly three categories:

1. High complexity, which covers sales, marketing and customer service processes; major application customization; any application with more than 70 screens; and any project that requires more than 10 difficult integrations.

2. Moderate complexity, which includes two of the three categories of sales, marketing and customer service; moderate application customization; and 30 to 70 screens.

3. Low complexity, which means sales or marketing or service; little application customization; fewer than 30 screens; and two or fewer difficult integrations.

The Deloitte report also offered some figures to help companies see if their budget falls in the ballpark. As the report said: "There's nothing revolutionary here. Just some hard-earned knowledge scraped off the scar tissue of our consultants."

According to the report, per-seat costs for high-complexity projects that have 1,000 users start at around US$50,000 and slowly drop to about $15,000 as the number of users increases to 5,000.

Per-seat costs for projects of moderate complexity range from $30,000 for about 500 users to a little over $10,000 for 5,000 users.

And, finally, per-seat costs for projects of low complexity should range from $15,000 for a user group of 100 to $10,000 for 5,000 users.

Nightmares in Integration

Another CRM implementation bogeyman is the integration component of a project. "It is difficult to completely identify all the integration costs at the beginning of a project," Louis Columbus, a research analyst at AMR Research, told CRMDaily.

"But for a CRM project to be effective, it usually has to leverage off the overall inherited technology and databases of the company. Unfortunately, the integration costs usually wind up underrepresented or overrepresented," Columbus added.

There are many reasons why integration costs can spiral out of control. Data standardization and cleansing, for example, is a large and often underestimated cost.

Consider a transportation application. It might refer to shipments in terms of weight, cube, pickup point, destination point and freight class. A fulfillment application, however, might label the same shipment or customer order as SKU, quantity, ship-from, ship-to and value-based.

This data must be reclassified in a uniform manner -- before an integration project begins. Too many companies make the mistake of thinking this can be done after the project is implemented. This usually happens when IT is pressured to complete a project on time. An IT person might know the data being loaded into the system has problems, but with a deadline looming … you get the picture.

Best-of-Breed vs. End-to-End

Another integration issue is the best-of-breed versus end-to-end suite application question.

Most analysts -- and most smart companies, for that matter -- will flat out tell you there is no such thing as an end-to-end application outside of the marketing world. Except for smaller companies that are better served by an all-in-one package, most companies tend to buy best-of-breed applications and integrate them.

One compromise that many companies are making is choosing a CRM module offered by their ERP vendor. As the thinking goes, it will be easier and cheaper to integrate mySAP into SAP's R/3 monster application than, say, Siebel or Kana or E.piphany.

Getting Employees on Board

Another cost that often catches companies unaware is the expense and effort of getting employees to use the system once it is implemented. Training costs can be included in this category. So can the time required to convince reluctant employees to use the application all the time -- and to use it correctly.

As Columbus said, "The cost of rollout can be unexpectedly high if no one is using the application."

But that is another story altogether.