Watch out for CRM's hidden costs

Customer relationship management (CRM) initiatives are one of the few areas where IT spending is actually on the rise. Cahners In-Stat forecasts that the $9.4 billion now being spent on CRM will grow to $30.6 billion by 2005. However, much of that money may not be well-spent because companies frequently underestimate the costs of CRM projects. The Gartner Group recently revealed that the majority of businesses implementing CRM projects will underestimate the costs by a whopping 40 percent to 75 percent. Many companies calculate only the most obvious costs for CRM projects, such as software license and consulting fees. In reality, CRM projects have many other costs, such as project planning, training, testing, documentation, data maintenance, software integration, and project management.

The prospect of large, hidden costs is frightening when you consider that CRM projects are already expensive. Gartner estimates that large businesses spend between $30 million and $90 million on CRM initiatives over a three-year period.

The irony is that despite all the money being spent on CRM, many of these projects -- as many as 70 percent, according to the Butler Group -- are failures. (For more, see my earlier column, "Knock-out CRM deployments.") Controlling costs and avoiding failures means knowing where CRM's hidden costs lie. Here are four key areas to examine when budgeting for CRM:

Training. One of the biggest and most costly mistakes companies make is underestimating the complexity and duration of CRM projects. Companies usually need to train staff to understand how to operate the CRM software. Training funds are also needed so that staff can take advantage of new business practices, such as up-selling and cross-selling based on a customer information provided by the CRM system.

Maintaining data. Many companies fail to calculate the true cost of collecting and maintaining customer information. CRM involves a massive data collection effort to identify customers and describe their buying behavior and preferences. Data is not pristine and must be continually maintained to correct entry errors and keep the data up-to-date. For example, data should be updated when customers change addresses or return an order. According to Gartner's Beth Eisenfeld, customer data degrades at a rate of 2 percent per month, which translates to almost a quarter of the entire customer database annually. Poor-quality data undermines the effectiveness of a CRM initiative so it's important to factor in the cost of maintaining it.

Software integration. CRM software usually requires some form of integration to present a complete picture of the customer and to take advantage of that information in sales and marketing efforts. For example, CRM software is frequently integrated with corporate ERP systems to provide access to transaction data. Depending on their IT strategies, companies may choose to integrate CRM applications from more than one vendor to take advantage of the strengths of each. For example, a company might want to complement Oracle's strong sales and service ability with E.piphany's strength in marketing functions.

Project management. It turns out that another source of hidden CRM costs--project management--is the answer to properly evaluating and controlling those costs. CRM projects cannot be effectively managed on an ad-hoc basis. They should be approached as a business strategy first and an IT initiative second. The trick is to thoroughly evaluate the company's customer-service strategy at the outset and then figure out how a CRM project can support this strategy. Gartner's Eisenfeld stresses a project-management approach that includes a total cost of ownership evaluation, an ROI analysis, and a benefits analysis combined with regular tracking of project milestones, resources, and costs throughout the CRM project.

So how much should you realistically expect to spend on a CRM project? Although there is no one-size-fits-all metric, AMR Research recommends that companies planning CRM projects generally budget three to four times the cost of software for implementation, services, hardware, and training. In the end, there is no substitute for thorough planning and project management even though they require extra time and money. But it's well worth it when you consider the alternative--massive cost overruns and disappointing results.

Have you been bitten by a hidden cost after deploying a CRM program? How has your company controlled CRM costs? E-mail Adrian or Talk Back below.