After two years of deep slumber, the CRM market is about to re-awaken. They call it the Trough of Disillusionment--a two-year period during which companies froze their spending on CRM (Customer Relationship Management) software. Instead of the near 100 percent growth rates that marked the giddy years from 1997 to 2000, new license revenue declined sharply last year by 6 percent and by the end of this year will have dropped another 2 percent. Even Siebel, the kingpin amongst CRM vendors, saw its new license revenue shrink last year by 4 percent. Yet at this fall's Gartner CRM Summit in Chicago, there was a sense of renewed optimism. The CRM vendors in particular were buoyed by the fact that the market is poised to rebound, albeit at a more modest compound annual growth rate of 10 percent over the next four years.

While they no longer have quite the swagger they did a few years ago (mercifully), they see plenty of room for growth in the mid-market which remains mostly untapped. But where the greatest attitudinal turnaround has occurred is in the user community.

In the beginning, when CRM applications first began to emerge out of the tidal pools of contact management and sales force automation (SFA) software, companies were enthralled by the idyllic possibilities depicted by the vendors.

Here, all shrink-wrapped and ready to go, was the antidote for their customer service ills. All they had to do was install the software, train their staff and (presto!) they'd be able to cut costs and create happier customers at the same time.

The early adopters immediately discovered it wasn't that simple. No one warned them that patching together disparate systems in order to create a consolidated view of the customer--without which a CRM application is effectively neutered--was going to be so traumatic.

And despite the lofty promises made by the vendors, the software often had to be heavily customized, causing major cost overruns. On top of that, project custodians often failed to set performance baselines in their rush to make the system operational. So when it came time to report on the payback being achieved, no one had any credible answers.

Then last year, Gartner inadvertently caused a panic in the market when they estimated that through 2006 more than 50 percent of CRM implementations would be deemed failures. What they were actually referring to was SFA projects which often encounter fierce user resistance.

But that distinction was lost on potential buyers already spooked by the fiasco in the dot-com sector. Planned spending on CRM applications suddenly dried up as companies retreated to the sidelines in wait of more substantial proof that the investment was warranted.

Now, finally, that evidence is beginning to trickle in. While no one can yet claim they have all the elements of CRM totally right, there are enough companies experiencing noteworthy gains in the crucial measures of satisfaction and loyalty that the skepticism is beginning to fade. The realization has sunk in that improved treatment of customers--which CRM facilitates--is the shortest path to increased revenues and profits.

At the Gartner Summit, a total of 156 companies submitted entries for its CRM Excellence awards. To qualify as a finalist, a company needed to pass a tough set of eligibility criteria encompassing all phases of a typical CRM project, from initiation through to deployment.

The winners convincingly showed that with a carefully structured approach, characterized by strong executive leadership, an uncompromising vision and a willingness to revamp internal processes--combined with an understanding of what matters most to customers--the benefits can quickly accrue.

So what are some of the major lessons learned through this early frontier period?

First of all, it is now widely accepted that CRM is a strategy and not a technology, an observation that has almost become a truism.

Another is that a commitment to organizational change must precede project planning otherwise the CRM system is at risk of being built around flawed processes. And often overlooked or underestimated is the importance of data quality and transferability: how to get reliable data in and out of the CRM system so that better decisions can be made.

But these lessons are merely an introductory curriculum--a means of ensuring project success. Truly meaningful reform will only occur when businesses learn to use CRM technology more thoughtfully.

The next stage of evolution will bring about a radical transformation in the customer management practices of those companies that have graduated into the advanced ranks of CRM. Having built a smoothly functioning front-to-back office infrastructure, they will be positioned to deliver a consistently gratifying experience enhanced by the insights gleaned from daily contacts with customers.

Marketing will be primarily dedicated to the continuous refinement of strategies to improve customer loyalty, requiring companies to regularly ask themselves the following questions:

  • What defines a loyal customer? Achievable goals need to be set around specific measures. These should include both direct and indirect metrics, such as share of total purchases; spending velocity; intention to re-purchase; openness toward new product offers; willingness to refer; and satisfaction with past purchases and service.

  • What factors drive loyalty? The determinants of loyalty usually differ markedly from one customer segment to another. That's why it's so important to identify the right segments and, at a minimum, be absolutely sure what matters to the most valuable customers. Once the loyalty drivers have been ranked according to their importance, the critical gaps between performance and expectations can be identified and the extent of remedial action determined based on a cost/benefit trade-off.

  • What can be done to earn greater loyalty? The hardest question of all--because it often entails development of new products, channel integration, organizational re-structuring, service improvements and process re-engineering. Guided by an exact knowledge of the factors that drive loyalty, those investments can be carried out in a priority sequence that guarantees a financial return.

  • What gains have been achieved? While performance measurement is understood to be critical, it remains a neglected area, due mainly to the complexity of creating accurate tracking systems that support a nested hierarchy of metrics. Regardless of how hard it may be, the development of a relationship scorecard is essential to prove the economic merits of CRM.

More evidence of success is needed before CRM fully recovers from the technology flu currently afflicting the marketplace, but in this new era of relationship marketing the disillusionment that companies once felt will soon turn to a revived enthusiasm for all of the possibilities it has to offer.

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Stephen Shaw is vice-president of strategic services with The Kenna Group, a full-service customer relationship management company. He can be reached at 905-361-4046 or via email: