There are many CRM solutions available to the mid-market today. According to a 2012 Buyerzone study, 56% of businesses that market to other businesses use CRM software of some kind. Dynamics applications, like Dynamics CRM are becoming the products of choice for the mid-market. They’re well suited for companies that have outgrown QuickBooks and other solutions geared to small businesses. The larger, more comprehensive packages such as SAP or Oracle might not make sense for mid-market companies or subsidiaries, and can increase costs while providing no additional value. These programs can be needlessly complex, resulting in confusion and convoluted implementation practices.
Anytime a company begins the process of evaluating a new enterprise system, whether CRM or something else, it’s important to determine all of the direct and indirect costs of a system, also known as total cost of ownership (TCO). TCO goes beyond the initial purchase price or implementation cost to consider the full cost of an asset over its useful life. TCO and return on investment are frequently confused and misused, but they actually must be used together to properly evaluate any new system. Don’t make the mistake of paying too much attention to costs and too little to benefits. Rather, forecast and compare costs over the life of a project. A proper TCO analysis often shows there is a large difference between the price of something and its long term cost.
Understanding Your Options
Let’s say for example that your company relies on a particular enterprise CRM system that has been used by the company for a very long time and is deeply embedded in the company’s operations. However, the usability and performance are quite poor, and the monthly cost is exorbitant. There are plenty of competitors to this system and the time has come to consider other options.
In order to make this decision, the TCO of each of the potential solutions must be understood. The future costs need to be considered for a set period of time. Let’s consider three options:
- Option 1 – Stick with the existing vendor and stop whining.
- Option 2 – Build a solution internally, perhaps using open source tools embedded in the solution.
- Option 3 – Choose a new vendor, whose systems will range from the inexpensive to the very expensive but will also vary in areas such as customer service, support and features.
Let’s take a closer look at option 2 versus option 3. Many executives are tempted to put their competent IT professionals to work on any and every software solution the company needs. While this might appear to be a good idea, such managers rarely take all of the necessary factors into consideration when making such a decision. Often the cost of building a software solution is even higher than the cost of purchasing one.
There are many reasons why managers today fall into the trap of building software solutions in-house.
- Management often views its employees as free. They think, “Well, I have these people on my staff and I’m paying them anyway so I’ll just make them build it.” Budgets for people are always much higher so the idea of employee-built solutions being the better option might be reinforced from a budgetary perspective.
- The ongoing support and maintenance cost of automated systems is often underestimated by managers. Software breaks all the time, even when you haven’t changed anything. Many companies overestimate their ability to maintain a solid backup and restoration infrastructure for the inevitable day that a disk drive goes bad. Cloud software providers are pretty good at keeping their own infrastructures up and running, and highly available.
- If a company had a bad experience with a software vendor in the past, executives may be hesitant to follow the purchasing route again. Unfortunately, some vendors raise maintenance costs too rapidly or sell a solution that is too impractical to be used, which amounts to shelfware. In order to avoid this, companies must use forethought in the contracts they initially sign with the vendor.
- Opportunity cost is generally ignored because the lack of a time tracking system leads to the lack of understanding of per-person, per-project profitability. In other words, there is only one most profitable thing that a particular employee can be doing right now for the company. Building an in-house time tracking, customer relationship management or issue management system is almost certainly not it.
These issues tend to steer managers away from purchasing software solutions, a practice that can be quite beneficial for companies. An important step for managers to take when making the build or buy decision is to ask themselves the following questions:
- How reliable is the vendor? Ask for customer references and follow up on them.
- Which option is more affordable? Managers should obtain a quote from a vendor and then estimate the internal cost of rolling out, integrating, configuring, customizing, maintaining and supporting the software.
- Is the solution something you can create and implement faster than the vendor can deliver it to you?
- What will your IT professional or department learn from creating the application? Is it something that will promote your company’s mission in the long run, or is really just a distraction from more relevant work?
The answers to these questions factor into the TCO of any solution that you’re considering.
Putting the TCO Calculation into Practice
The purpose of TCO for CRM solutions is to provide a complete scope of project costs, including those costs for technology, processes and people. Given that CRM technology costs include a great deal more than just the purchase price of the system, one good method for CRM solution TCO calculations is to be meticulous about collecting all the appropriate and associated costs for the project. Another good option is to take a baseline measurement of all pre-project costs for each option, before selecting one, to have a point of comparison.
ROI should also be considered as it is the complete financial analysis of the CRM solution’s costs and benefits – not just a list of projected benefits or a simple payback calculation. Essentially, any benefit could be part of the analysis, including intangible or soft-dollar benefits. In calculating solution benefits, consider improvements in efficiency and effectiveness, as well as cost savings. If your project has them, predict improvements in intangibles, such as strengthening customer loyalty and increasing brand recognition. Remember, however, to use both TCO and ROI to evaluate any solution, and not to focus too much or too little on either the costs or benefits side.
About the Author:
Curt Finch is the CEO of Journyx. Founded in 1996, Journyx automates payroll, billing and cost accounting while easing management of employee time and expenses, and provides confidence that all resources are utilized correctly and completely. Curt earned a Bachelor of Science degree in Computer Science from Virginia Tech. As a software programmer fixing bugs for IBM in the early ‘90’s, Curt found that tracking the time it took to fix each bug revealed the per-bug profitability. Curt knew that this concept of using time-tracking data to determine project profitability was a winning idea and something that companies were not doing – yet… Curt created the world’s first web-based timesheet application and the foundation for the current Journyx product offerings in 1997. Learn more about Curt at http://journyx.com/company/curtfinch