CRM Failureand the

Are your CRM undertakings lost in a sea of failed or uncompleted projects?

CRM Failure and the

Seven Deadly Sins BY SUDHIR H. KALE

We’re all

familiar with the seven deadly sins—gluttony, sloth, pride,

lust, envy, anger, and greed. Yet the awareness of these sins has not prevented some of the spectacular corporate excesses that we have witnessed in recent times with the likes of Enron, Arthur Andersen, and WorldCom. When it comes to specific projects such as customer relationship management (CRM), most executives aren’t even aware of the sins that could potentially spell disaster for their careers and for the company. Thomas Carlyle, the influential Victorian writer, once said that the greatest of human faults is to be conscious of none. This maxim is particularly applicable to the CRM projects that are so eagerly embraced by many companies all over the world. With worldwide expenditures on CRM rapidly approaching the $100 billion mark, it’s time to understand what accounts for so

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MM September/October 2004

Losing sight of customers

Focusing solely on technology

Ignoring customer lifetime value

Lack of management support Undervaluing data analysis

Underestimating change management

Inflexible business processes


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EXECUTIVE

Done properly, customer relationship management (CRM) results in business relationships

briefing

that bestow a source of sustainable competitive advantage. Yet most organizations report dismal results from CRM initiatives. Successful CRM initiatives should steer clear of the

seven deadly sins in CRM implementation: viewing CRM as a technology initiative, lacking customer-centric vision, not understanding customer lifetime value, having inadequate top management support, underestimating the change management involved, not re-engineering business processes, and underestimating the difficulties in data mining and data integration.

many failures in the CRM arena. Estimates of CRM projects failing to achieve their objectives range anywhere from 60% to 80%. Visit any software systems graveyard and you’ll find remains of abandoned or incomplete CRM projects. Brainchildren of top consulting firms and Fortune 500 companies, these CRM undertakings represent a disproportionate amount of the skeletal remains of failed IT ventures. What is it about CRM that makes it so susceptible to failure? What mistakes are made along the way that cause so many CRM projects to falter? In the January/February 2002 issue of Marketing Management, Lawrence Crosby and Sheree L. Johnson write, “The company’s effectiveness in building customer relationships simply depends on too many largescale, organization-wide enabling conditions to be considered anything but a business strategy.” In other words, CRM mandates a synergistic combination of interdepartmentally construed strategies, programs, and processes. It is the weakest link in this combination that will determine the ultimate success or failure of CRM. The reasons for this are many. We shall restrict ourselves here to the seven most common blunders. Here, then, are seven takeaway keys to avoid failure. The reasons for unsatisfactory CRM outcome are (1) viewing CRM initiative as a technology initiative; (2) lack of customercentric vision; (3) insufficient appreciation of customer lifetime value; (4) inadequate support from top management; (5) underestimating the importance of change management; (6) failing to re-engineer business processes; and (7) underestimating the difficulties involved in data mining and data integration.

Conceptualizing CRM as Technology The feedback I receive at many marketing conferences suggests that most managers view CRM as the technological magic bullet that will dramatically improve their bottom line. Nothing could be farther from reality. CRM, devoid of its portrayal as a panacea for all the inefficiencies of business, is nothing but the practice of the old-fashioned marketing concept with a view to maximizing the retention of your valued customers. Information technology is the conduit that aids in practicing and perfecting your marketing practices but, in and of itself, technology does little to further customer retention. It’s the internal customers of a company (i.e., your employees) 44

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who bring about customer retention, not technology. That’s why we see superior people achieving quite outstanding results even with mediocre technology. Mediocre people invariably deliver mediocre results regardless of the technological superiority at hand. Companies, enamored by the technological prowess of their CRM systems, invariably get distracted from the tasks that the technology is supposed to perform. Attention shifts from the people providing the technology to the features of technology. The result is that the IT department, not marketing, is given the implicit mandate of coming up with an optimal strategy. Given the lack of understanding of customers and markets, people within IT invariably get lost in volumes of customer data void of strategic insights. As one expert at a 2002 Insight CRM seminar concluded, “Hunting dogs can be thrown off a scent by dragging a pungent fish across their path. Just as easily, companies trying to understand their customers better can head off in the wrong direction because they have been distracted by the powerful technological capabilities of customer relationship management systems.”

Customer-Centric Vision According to a Mercer marketplace survey, “Establishing and maintaining customer relationships will be the single greatest source of competitive advantage in the 21st century. Companies have had to shift drastically from the old ways of market penetration to this new wave of customer-centric mentality in order to remain competitive.” While most CEOs and marketing professionals espouse the mantra of “customer is king,” true customer-centric vision is seldom seen reflected in their corporate vision. When it comes to CRM projects, companies often forget that the C in CRM stands for customer. Consequently, they realize that their CRM projects don’t yield the results so eagerly anticipated. In his recent book, Why CRM Doesn’t Work (Bloomberg Press, 2003), Fred Newell demonstrates how many CRM initiatives fail because the idea of customer-centricity is at odds with the way many companies work. Surveys of CRM users attest to the soundness of Newell’s diagnosis. A 2002 survey of 219 IT professionals by DMR Consulting revealed that the ability of a company to be “customer-centric” requires much

more than CRM software. In fact, nearly two-thirds of companies with CRM software were apparently no closer to being customer-centric than they were before they installed the software packages. More importantly, the survey revealed that, while non-customer-centric companies met an average of just 53% of their stated goals for the project, companies rated as being customer-centric met 71% of their implementation goals. Clearly, the vision of customer-centrism, which involves an indepth customer understanding and an overriding desire to create a consistent experience for valued customers across all functions, divisions, and communication channels, needs to be the prime driver of CRM projects.

Customer Lifetime Value Relationship marketing constitutes a shift in marketing practice away from transactions and toward customer relationships. The premise behind this shift is that, as a result of exchange efficiencies, long-term relationships are more profitable than short-term relationships. However, the CRM strategy should explicitly recognize that not all relationships are equally profitable or desirable. The focus of CRM should be on serving those customers the best that have the potential of delivering the highest lifetime value to the firm. Customer lifetime value (LTV) is the estimated profitability of a customer over the course of his or her entire relationship with a company. A recent study by Deloitte Consulting shows that companies who understand customer value are 60% more profitable than those that don’t. Thus, understanding and correctly applying LTV is an important factor in increasing a company’s profits. The Pareto Rule, which states that 20% of a firm’s customers generate as much as 80% of its profits, applies in most B2B exchanges. In a recent study, researcher Lisa Watson and I discovered that similar situations also occur in consumer markets. In our analysis of the Australian casino industry, we found that a mere 3% of table game customers in casinos generate approximately 90% of all table game revenues! Harrah’s, one of the most successful gaming companies in the world, successfully capitalizes on the lifetime value concept in its widely touted CRM system. Using players’ clubs (similar to airline frequent-flier programs), the company categorizes its 26 million customers into three levels based on lifetime value: gold, platinum, and diamond. The bulk of the company’s mar-

keting attention is then devoted to the diamond-level customers because those players provide 85% of Harrah’s revenues. According to Gary Loveman, a former professor at Harvard Business School and now the CEO of Harrah’s, the company has thus far spent $500 million on its CRM project and continues to spend $60 million each year on its maintenance. Loveman attests to the payoff of this investment, as do financial analysts, investors, and gaming experts. In order for a company to structure its CRM strategy around customer lifetime value, accurate data on the revenues as well as costs of servicing various customers are needed. This is precisely the principle of activity-based costing (ABC). ABC recognizes that customers are the cause of all business activities. In order to assess the exact costs associated with a customer relationship, ABC seeks to compute the costs of relationship-specific resources deployed in serving that customer.

Management Issues Executives at the very top need to assume ownership of the CRM project in order for it to succeed. Without support and commitment from top management, even the most brilliant CRM undertaking is doomed to failure. Support for CRM is needed in order for the initiative to get off the ground. Without commitment from top management, the CRM vision is unlikely to survive the implementation process intact. According to a 2002 Accenture survey, while business executives overwhelmingly agree that technology has helped them strengthen relationships with their customers, more than half (55%) say that CRM shortfalls can be attributed in part to inadequate support from top management. CRM experts Kevin Murtha and Joe Foley observe that “If you don’t experience change, you are not going about CRM the right way.” Proactive change management is by far the biggest component of CRM success. Effective change management involves a focused internal marketing initiative—selling the vision of change before it is made to happen. Investing in a CRM program is not going to make a nonmarketing driven organization customer-focused overnight. Rigby et al suggest that job descriptions, performance measures, compensation systems, and training programs all need to be made customer-centric before any investment is made in CRM technology. Our own research on CRM failures suggests

With worldwide

expenditures on CRM rapidly approaching the $100 billion mark, it’s time to understand what accounts for so many failures in the CRM arena.


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that “lack of adequate change management” was the primary cause of failure in 87% of the cases investigated. These findings suggest that without a true customer-centric, outside-in corporate culture in place, the best CRM software is doomed. Initiators of CRM often forget that it’s the people within the organization who make CRM a success. People need to be inculcated in customer service skills and the purpose and functions of CRM. They also must be prepared for the technological changes that will invariably affect the way they work. When it comes to change management, especially training, two protocols need to be in place. The first involves the culture change so essential to make the organization customercentric and ready for CRM. Since employees are the ones who develop relationships with the customers, they need to be trained in the art of interacting, influencing, and servicing customers to optimal effect. The second protocol involves technological readiness. Change management along this vector involves soliciting inputs from all employees as to how they see the CRM strategy in action. In light of new technology, CRM processes will need to be re-engineered. In the absence of maximum buy-in from internal customers (the employees), any CRM undertaking will invariably falter.

Re-engineering Processes A vital aspect of CRM is the embodiment of all processes that take place between an enterprise and its customers in the supply chain. Any company adopting CRM will have to expend considerable resources in the re-engineering of its processes. This applies to processes visible to the consumer as well as those commonly classified as back office processes. A 2001 report by Gartner Research attests that, in any CRM application, the relationship with the customer needs to be viewed and managed in terms of the customer life cycle and formalized processes need to be in place to manage that life cycle. Furthermore, processes need to be created or re-engineered for creating customer insight and leveraging it during customer interactions. To quote from the Gartner report, “CRM calls for a fresh approach to business processes, rethinking how they appear to the customer and re-engineering them to be more customer-centric and deliver greater customer value.” CRM processes are a true test of whether a company is as customer-centric as it claims to be. In process re-engineering, a prioritization of processes is undertaken since not all processes would matter equally to the customer. However, all processes that are set in place should support the customer value proposition. In embarking on CRM, a company should start out by reviewing all major business processes within the organization. This will enable it to understand and highlight those processes that could be performed better with the aid of technology. The re-engineering effort should always be cognizant of the people performing the processes. If users are incapable 46

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or unwilling to perform the processes in their re-engineered form, the whole CRM endeavor will collapse. The “persontechnology fit” is of essence, hence the need for change management and training.

Data Mining and Integration In any organization, heaps of ever-changing customer data reside in various places, from legacy systems and back-office databases to enterprise resource planning (ERP) implementations and CRM applications. These data need to be analyzed in order for them to have any predictive, causal, or diagnostic value. This is the task of data mining. Data integration, on the other hand, deals with being able to link all customer data scattered across the organization and making these data available to a user so as to give the service provider a 360-degree view of the customer in real time. A recent article in InfoWorld magazine focused on how most CRM users are now realizing that integration holds the key to unlocking CRM’s full potential, but are finding the journey quite arduous. In order to facilitate both data mining and data integration, a firm needs to precisely ascertain what knowledge about customers is required in order for it to retain, grow, and delight its most valued customers. Data collection fields and software applications can then be chosen to convert customer information into knowledge. Making this knowledge available to all employees who need it, in real time, is a major challenge in data integration.

Securing Loyal Customers Locking in valuable customer relationships is increasingly emerging as the most prized strategic capability a firm can possibly have. CRM, when correctly visualized and implemented, can uniquely provide an organization with this strategic capability. The seven deadly sins discussed here encapsulate the experiences of companies banished from CRM heaven. Those desirous of a virtuous CRM implementation are well advised to stay clear of these transgressions. CRM could provide you with a valuable asset that does not appear on the balance sheet, but is, nonetheless, essential for survival in today’s competitive world. This asset is loyalty on the part of your most valued customers. In the words of W. Edwards Deming, “…it will not suffice to have customers that are merely satisfied. Satisfied customers switch, for no good reason, just to try something else. Why not? Profit and growth come from customers that can boast about your product or service—the loyal customer. He requires no advertising or other persuasion and he brings a friend with him.” ■

About the Author Sudhir H. Kale is associate professor and chair of the marketing department at Bond University’s School of Business, Gold Coast, Queensland, Australia. He may be reached at [email protected].