Q

ROI for CRM in three years

Tom Pisello offers guidelines for measuring return on investment ROI following a CRM implementation, and explains the variables for achieving ROI

What do you think is an appropriate time frame for measuring CRM ROI accurately? Do you think it changes from industry to industry? How? Can you provide some examples?
The time frame for measuring ROI (ROI = net benefits of a project / total project investment) has traditionally been anywhere between three years and five years for typical IT projects, with rare instances of seven to 10-year analyses for investments with large capital outlays such as extensive ERP-reengineering initiatives.

Because typical projects have most of the costs up-front and rely on benefit projections over time, the benefits

in outgoing years work to offset the initial cost. Visibility in near term costs is often very clear, while benefits in outgoing years becomes progressively fuzzy year over year – thus the risk that benefits are overstated and accumulate in error over longer periods of time – making a marginal investment seem much better during the planning stages if the time horizon is too long for the analysis. Shorter time horizon analysis are less risky because market conditions, competitive influences and company conditions are easier to predict in the nearer term, two to three years out versus five to seven years away. Using a shorter time horizon for analysis, if the ROI numbers (ratio of net benefits / costs) are impressive in the short term, they will typically be even more so in the long term.

For most CRM projects, I recommend that the company use a three year analysis horizon past the initial deployment period. If a project is a Software as a Service (SaaS) or simpler CRM solution and it is going to take only two to six months to implement and deploy, then the analysis should be a three to four year analysis. If the CRM project is a large one with much integration and custom development, with design, development and deployment taking 12 months or more, the analysis time horizon is more likely going to be four to five years.

Regarding when the project should reach break even, where the cumulative costs exceed the cumulative investment – this should occur for a CRM project somewhere sooner than 12-16 months after deployment. Projects with longer payback periods than this are susceptible to not achieving payback because slight cost overruns, aggressive benefit projections or changing business conditions can alter the predictions on payback – and in fact turn conditions so that the project may not achieve breakeven. If the CRM project requires a large up-front investment and the payback period is therefore outside of these guidelines, dividing the project into phased investments where each phase is deployed and reaches payback prior to the starting of the next phase can help to mitigate risk and create a self funding project.

This was first published in October 2006

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