Four CRM Strategies for Adapting to the Changing Economy

Four CRM Strategies for Adapting to the Changing Economy

IT leaders' top priorities are to grow customer loyalty and to increase profitability, says a CRM magazine/A.T. Kearney survey. Here's how to achieve those goals in uncertain times.

by Mike Gorsage, Bob Haas, and Eddie Barker

The business imperative for 2003 is top-line growth initiatives that increase customer profitability. According to a new CRM magazine/ A.T. Kearney survey, the two leading factors driving companies' CRM strategies are increasing customer loyalty and retention, and maximizing customer profitability.

How do companies achieve these goals in an uncertain market? The pending economic recovery will have different effects on companies that have tailored their CRM programs to the new economic realities. Winners will be those that capitalized on the downturn and prepared for increasing the value of customer relationships.

Companies that want to lock in customer loyalty and maximize profitability need to employ four CRM tactics: 1) build a customer growth strategy upon a CRM foundation of strategic intent and cost management; 2) avoid the CRM whipsaw effect; 3) don't buy into the technology silver bullet; and 4) measure satisfaction with CRM. These tactics will ensure that CRM programs can successfully adapt to the pending changes in the economy.

Build a Customer Growth Strategy
Businesses must build top-line growth strategies upon the foundation of their CRM programs by ensuring that strategic intent and cost management measures are institutionalized. Many companies have not determined strategic intent or have not focused on developing clear metrics to measure performance. Yet many have done some cost-cutting within customer-facing functions and lowered their cost-to-serve just to reduce the overall cost of sales. These cost-structure changes should be modified to invest in these fields of CRM so that growth strategies gain some early wins, no matter what state the economy is in.

As the economy turns into recovery, the winners are likely to be those who have not only stabilized their customer service and sales costs, but those who are improving the effectiveness of customer retention and loyalty programs. Improved customer segmentation, customer satisfaction, and service strategies should be tailored in downturns and expanded in upswings, but need to remain long-term goals of any successful CRM program.

Avoid the Whipsaw Effect
Senior management commitment is critical to the success of any major corporate initiative. CRM is certainly no exception. In fact according to the CRM magazine/A.T. Kearney survey results, IT decision-makers ranked executive sponsorship as the most important factor for maximizing the return on their CRM investments. If CRM initiatives are not in the CEO's agenda, then investments in these initiatives have a much lower probability of success.

Additionally, because CRM is a fundamental shift in the way a company does business with its customers, rather than just a one-time e-business initiative, it requires continuous leadership support over multiple years. This type of long-term senior management support can only be achieved and maintained if a long-term strategic plan is developed. The time frame also requires the strategic plan to have built-in contingencies for the ups and downs of the business cycle. Without this type of flexible strategy, companies get caught in a CRM whipsaw: overinvesting in one year and then cutting to the bone in the next. The result is unrealized investments, squandered opportunities, and a loss of employment for the CRM champion. The whipsaw may affect users as well. Employees whose new customer-centric behaviors enable CRM success can get caught in the whipsaw if communications about customer strategy and CRM processes are not clear or consistent throughout changes in the business cycle.

Don't Buy in to the Technology Magic Bullet
The CRM vendor landscape is changing rapidly. Placing all bets on a single vendor or technology can prove disastrous. The unstable economy has caused a vendor shakeout. It has reduced the number of CRM vendors, but also has enabled the strongest companies to survive with the best integrated offerings. Strong vendors, after acquiring or merging with smaller niche vendors, still have to refine the resulting integrated offerings. Even so, research indicates software functionality is not the prime factor in selecting a CRM vendor. Financial viability and ROI remain the most important factors in selecting a vendor, and reflect the fact that the best-of-breed approach in recent years has left a number of companies holding the bag of unsupported applications.

The focus on vertical expertise has also been increasing. Companies stung by the challenges and high costs of customizing standard applications are demanding that the major vendors of the CRM world ensure that vertical customizations are prebuilt into the application they install. Customers are focusing on implementing the best vertical application available. This shift has also been pressuring vendors that have not caught up with the verticalization wave or have poorly packaged and standardized their industry experience within applications.

Measure Satisfaction With CRM
Measuring CRM success has often been elusive, but it is possible to measure satisfaction with CRM. Companies have often measured success either by ROI or by changes in customer satisfaction to justify CRM benefits. Although capturing ROI and preventing CRM budget expansion is important, the CRM magazine/A.T. Kearney research indicates that 60 percent of companies claim their CRM initiatives met or exceeded expectations. Of the rest, 25 percent did not set expectations. So for the moment, there appears to be more satisfaction with CRM projects than not.

However, ROI generally measures the internal return of a technology/ process or organization improvement project. In the survey, external measures like customer satisfaction, retention, and profitability--often the best indicators of how well customers view their overall relationship with companies--were selected by only 37 percent, 33 percent, and 22 percent respectively. This leads to two possible conclusions: 1) given the challenges of deploying CRM initiatives and effecting customer change, companies may be assigning lower levels of expected success without engaging their customers; or 2) companies are embarking on expensive CRM initiatives without understanding the drivers of their customer satisfaction, retention, and resulting profitability. In either scenario, companies are shortchanging themselves by reducing the future value of their customer relationships and placing the long-term success of those relationships at risk.

From an internal perspective, ROI was the dominant metric used to measure returns, though notably 21 percent of respondents didn't know how their companies measured return. As for time-to-return after project completion, most of those surveyed were split between the six- to 12-month time frame and more than one year. This is on average longer than most e-business initiatives, and reflects the fact that CRM often involves multiple channels and functions undergoing organizational, process, and technology changes.

Given the complexity and level of investment in CRM, companies need to ensure they understand the drivers of value in their customer relationships before they embark on major initiatives, as well as build robust business cases for internal measures of CRM success.

Plan for Growth
Up to 44 percent of companies do not have a strategic plan in place, although many respondents are planning or implementing CRM initiatives. Those that do not have one in place are likely to be out of position to reap benefits from CRM. As benefits from CRM take longer on average than benefits from e-business, there will be a lag between the companies that have a plan that can execute and those that will need to start a strategic plan. Developing a CRM strategic plan takes one to two quarters, which is about the duration of catch-up that companies without a current plan will face. While cost reductions will provide a sound CRM foundation, the real benefits come from top-line growth--and these gains should be pursued within a CRM program no matter which way the economic pendulum is swinging.

Those companies that don't have a sound CRM strategy should use the current economic downturn to begin developing their strategy to include both short- and long-term scenarios with ranges of ROI for different CRM initiatives. Then, depending on how and where the economy improves, their focus will be on executing against the best scenario. Those with plans should prepare their customer-facing units for the economic recovery ahead and ensure that the organization is aligned with incentives for growth. Those companies with initiatives on hold should have implementation plans drafted so they may ramp up quickly when CRM budgets are restored.

It is this advanced planning--along with building a customer growth strategy, avoiding the CRM whipsaw effect, avoiding the technology silver bullet, and measuring satisfaction with CRM--that will increase customer loyalty and retention and maximize customer profitability.

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