SPECIAL REPORT: Blindsided
The hidden costs of CRM
When IT professionals start comparing CRM vendors to common criminals, it’s safe to assume that they’re unhappy over costs.
At one religious nonprofit that uses a donor management program, the last four years have brought a 400% increase in per-user license fees. “The joke around the office is that [the vendor] is like the neighborhood crack dealer,” says the outfit’s IT director. “The first sample is free but after that you’re hooked.”
Then there’s the case of Fiera.com, a consumer-goods Web site that specializes in the Latin American and Spanish-speaking markets. But Fiera can’t blame its cost overruns on its vendors.
When Fiera launched its CRM project in August 1999, its initial IT budget was around $2.75 million. This covered an order and content management system and e-store capabilities, according to Rich Pirrotta, Fiera’s vice president and general manager for e-commerce.
But it wasn’t until the company was heavy into online sales that it realized it needed additional tools, such as Personify Inc.’s customer behavior analytic software. That added another half-million dollars to the bill.
Then Fiera discovered it also needed new payment-processing software, which brought the grand total to $4.5 million. This happened after the firm observed that nearly half of its Mexican customers were abandoning their shopping carts at the point of sale when they realized that the only option for payment was with a credit card.
The problem was that the existing software didn’t allow them to send post-dated checks, be billed or send money orders. The new system allowed Fiera to implement direct deposit and COD mechanisms.
Fiera sees these spiraling costs as a hazard of being in the e-commerce business. Pirrotta estimates that the firm’s current level of technological investment should hold the company for around five years, with an additional outlay of between $600,000 and $1 million for upgrades and expansions.
Sometimes upgrades pay for themselves. In return for its half-million dollar investment in Personify, the company was able to gauge the effectiveness of some of its online traffic providing expenditures. In one case, it was able to renegotiate a $1.7 million contract down to $600,000 after it was able to prove that the volume of leads being provided did not justify the cost.
When it comes to hidden costs, however, few firms can match Eddie Bauer, which undertook an expensive implementation program — twice.
In 1996, Eddie Bauer had a thriving catalog business and healthy retail sales. At the time, the Internet was “on the radar but as a blip,” says Trudy Desilets, the company’s director of customer information and systems. Online data was integrated into the catalog sales database, but the catalog and retail files were housed separately.
The company saw that it had to house all of its customer information in a single relational database, and so it started. It took 10 months and $5 million to integrate the files and add a campaign management tool. When it was finished, Eddie Bauer had a total view of the customer. It was able to receive information on regional demand patterns, and how multichannel shoppers perform on a year-over-year basis.
Unfortunately, that tool was hard to use. In addition, notes Desilets, “We really did not know what types of questions we were going to ask. It was so exciting for us to be able to get at the data without having to write a COBOL or SQL query. We couldn’t imagine [asking] a question that would be different tomorrow.”
The system was implemented in July. By December, the firm decided to spend another $5 million and do it all over again.
One problem was that its data warehouse was not configured to support any of the campaign engines on the market. Moreover, improvements in campaign management software allowed firms to improve and streamline their processes.
For example, earlier systems for pulling data out of the warehouse required code writers. But this need was eliminated by a new generation of programs with graphic interfaces, query wizards and other tools.
With that in mind, Desilets revised Eddie Bauer’s data model and installed a campaign manager that would be accessible to more people within the company.
This time, the rollout took a bit longer — two years. But the firm was able to hold costs in line, thanks in part to growing competition in the CRM tool market. Moreover, the cost of data storage had dropped and hardware capacities had grown, allowing Eddie Bauer to purchase significantly stronger machines at similar costs. “I think we were very fortunate,” says Desilets.
One firm that held its CRM spending to the dime was Honeywell. Its first foray into CRM was launched by its Phoenix-based Business and Aviation division in 1999.
The first thing Honeywell did was hire a pair of implementation experts: Richard van Rensburg, former manager of eBusiness, and Rick Click, former director of eBusiness. Their experience enabled them to stay within their $2 million budget.
“Bring in the consultants and you can’t control your costs,” says van Rensburg. “There are usually only a handful of things people need compared to what they are offering you. A lot of times they give you the pill, you swallow it and it turns into a watermelon.”
Van Rensburg also realized that keeping to a schedule was essential to keeping within budget. “Marketing, finance and operations will argue with you until the bitter end on details,” he says. “Put a stick in the sand first. Build functionality from a business cycle point of view and do the last 10% to 20% with them. If you don’t, it will be 12 months later and you will still be arguing over look and feel.” Often, he says, internal customers don’t know what they want because they have not marketed on the Web.
Implementing the system was only half of the process. As part of its budget, the division also set aside $100,000 for Pittsburgh-based entigo, which coordinated its customer-facing Web activities, to retrain Honeywell’s 45-person customer service staff.
But entigo was responsible for only one part of the system because van Rensburg prefers to spread responsibility for CRM operations among a number of vendors. “You are able to give yourself more flexibility in the pieces you snap into it,” he says. And custom-building a system allows the end user to keep the maintenance expertise inhouse, which represents a substantial cost savings.
“That’s where vendors make their money,” van Rensburg continues. “Not in selling you the software package — in getting you to update it. That’s 80% of your cost. You are not spending $2 million in 2001, you also have to project out $1 million for each year thereafter.”
Sometimes costs go up because of circumstances beyond control. Take the case of Quality Stores, a Muskegon, MI-based lawn, garden and farm supply retailer. The initial CRM effort was challenging enough. A consultant assisted in incorporating two of the firm’s programs — What’s In Now and AgAdvantage — into the third, ThankQ.
But that seemed minor when the company merged with CT Farming Country, Des Moines, IA, in February 2000. The merger quadrupled the number of customer names it had to deal with from 175,000 to 700,000 and required integration of the two separate systems. Obviously, the merger occurred before the firm had filled out a 56-question survey from NuEdge Systems Co., which assisted in implementation.
“We were not prepared for that kind of growth,” says Karen Stapel, Quality Stores’ customer loyalty manager. “Up until now, the system has been freezing up a lot. It’s PC-based. We are switching over to a new server this month.”
Because the company did not want any potential transition glitches to be apparent to its customers, it will be running the two systems side by side until the data transfers are completely smoothed out. Stapel estimates that this process added 20% to its budget, which was taken from another line item.
The company also had to invest in software that allowed it to perform data hygiene functions on its newly merged database, and bring some records into a structure that would allow the company to take advantage of postal formatting regulations. But the list integration was an anticipated expense, and Quality was able to budget for it.
A hidden cost of implementing its CRM system came after the hardware and software were installed. The program is activated by a UPC symbol on a keycard. Earlier programs had been activated by customer phone numbers, so the company had to insist on customers using their cards to avoid ID numbers being mis-keyed by cashiers. But a problem was quickly brought to Stapel’s attention. “We made the key fob longer than the average key. Men complained.” The company reissued its cards in 1998 and, says Stapel, “It’s been great ever since.”
