PERFORMANCE MEASUREMENT WITHIN CRM

PERFORMANCE MEASUREMENT WITHIN CRM Seminar Paper At the Department of Informatics; Information Systems Research Group University of Fribourg/Switzerland Handed in to Prof. Dr. Andreas Meier; Nicolas Werro (Research Assistant) Fribourg, 2nd June, 2006 Presented by Christian Weber Corinna Hainz Matriculation number 00-209-361 Matriculation number 05-209-853 Grosswiesenstrasse 18 Route du Mont-Carmel 23 8051 Zürich 1762 Givisiez 043 300 27 20 weberch@bluewin.ch Corinna.Hainz@gmail.com

Content: Abstract... 4 1 Definition... 5 2 Overview of Performance Measurement Systems... 6 2.1 Du-Pont-Ratio-System... 6 2.2 Performance Pyramid... 6 2.3 Balanced Scorecard... 6 3 Balanced Scorecard... 8 3.1 Generic Version... 8 3.2 CRM Version... 12 4 Balanced Scorecard Application within Key Account Management (KAM)... 17 4.1 Financial Perspective... 18 4.2 Process Perspective... 19 4.3 Learning and Growth Perspective... 20 4.4 Customer Perspective... 21 5 Problems when controlling CRM projects... 23 6 Conclusion... 25 References:... 27 2

Index of Figures Figure 1: Generic Version of the Balanced Scorecard... 9 Figure 2: Causal links within the BSC / Service Profit Chain... 10 Figure 3: CRM Scorecard... 12 Index of Tables Table 1: Learning and Innovation KPIs... 13 Table 2: Internal Business Processes KPIs... 14 Table 3: Customer KPIs... 15 Table 4: Financial KPIs... 16 Table 5: KAM Financial KPIs... 18 Table 6: KAM Process KPIs... 19 Table 7: KAM Leraning & Growth KPIs... 20 Table 8: KAM Customer KPIs... 21 3

Abstract Customers and customer preferences have become crucial to every company. Since competition and transparency of products and services have increased tremendously, customers nowadays are facing more bargaining power than ever. Companies have focused on traditional accounting measurement tools for a long time: profit and loss statements, balance sheets and cash flow statements. However, these financial measurement tools bear restrictions as they measure past activities, i.e. lag indicators versus leading indicators (Kaplan/Norton, 1997). Kaplan and Norton set up the balanced scorecard (BSC) to deal with some of these shortages and have extended the tool by including the measure of the strategy as well (Kellen, 2002). In this paper, we present the BSC as a possible management tool when measuring the financial performance of companies within the context of Customer Relationship Management (CRM). 4

1 Definition Performance Measurement within CRM can be defined as a process of assessing the achievement of pre-determined objectives of an organization or organizational units through the measurement of indicators. According to Neely (1998, p. 5), It is the process of quantifying the efficiency and effectiveness of past actions. Furthermore, the measurement is not only based on financial but also on nonfinancials: customer satisfaction, employee satisfaction, number of new customer acquired or employee fluctuation. 5

2 Overview of Performance Measurement Systems There are several concepts of Performance Measurement Systems (PMS) included within CRM (Hippner/Wilde 2004, p. 154 et seq.): 2.1 Du-Pont-Ratio-System The Du-Pont-Ratio system is a cohesive system within which the Return on Investment (RoI) can be used as target criteria. It measures how efficiently the company uses its capital to generate profit. However, the Du-Pont-Ratio-System suffers as its figures represent a past perspective. It confirms what has occurred to the organization but may not explain what is currently happening, or be a good indicator of future performance. As a result, it only measures past performance and uses lag indicators. 2.2 Performance Pyramid The idea is to transfer management objectives into all organizational units to obtain relevant controlling information through financial and non-financial indicators. 2.3 Balanced Scorecard The Balanced Scorecard is a method for measuring a company's activities in terms of its vision and strategies. It gives a comprehensive view of the performance of a business. Hence, it also measures future performance and uses leading indicators. 6

Following Werner (2000, p. 455) and Wefers (2000, p. 123 et seq.), the Performance Pyramid and the Balanced Scorecard are strategic measurement systems, while the Performance Pyramid is a static observation system and is able to make improvements in cost, time and quality. The BSC is looked upon more favorably because it goes further than the performance pyramid as it is a dynamic sampling system which identifies the potential innovation and places a larger emphasis on the extent of customer perspective. Therefore, the BSC can be considered as an independent management approach due to the overcome of lag indicators (Bökmann/Gotta 2000, p. 123 et seq.). Since it is one of the most sophisticated and applied approaches to provide crossfunctional measures (i.e. employee satisfaction, customer satisfaction and financial results) in a systematic manner, elaboration is needed on this approach and will be explored in more depth. 7

3 Balanced Scorecard 3.1 Generic Version Robert Kaplan and David Norton introduced the balanced scorecard in 1992. It consists of financial and non financials perspectives (Payne 2006, p. 305): The financial perspective It considers how an organization appears to its shareholders and measures the financial performance: RoI, ROCE, shareholder value or cash flow. The financial performance of an organization is fundamental to its success and survival. The customer perspective It focuses on how the customer sees the organization and measures which have a direct impact on customers: time taken to process a phone call, results of customer surveys or number of complaints. The internal perspective It identifies what an organization must excel at and measures the performance of key internal business processes: order lead and delivery time, inquiry duration and cost, average response time for complaints, call center service level or number of units that required rework. 8

The innovation and learning perspective It focuses on how an organization can improve, create value and measures the company learning curve: number of employee suggestions or total hours spent on staff training. Figure 1: Generic Version of the Balanced Scorecard Source: Following Kaplan/Norton (1997) The specific measures (i.e. Key Performance Indicators (KPIs) that are critical to the success of the business) within each of the perspectives will be chosen to reflect the (key) drivers/services profit chain (i.e. employee attitudes, customer satisfaction, financial performance (Payne 2006, p. 286-287)) of the particular business. Strategic goals can be broken down into task oriented objectives and facilitate the perception of correlations. For example, the implementation of a new telephone 9

system as an internal business objective might help the customer objective of reducing response time to telephone calls. In turn, this can lead to higher sales volume because of cross-selling. As a result, the selected objectives are leading indicators of future performance. Causal links Figure 2 shows the causal links within a BSC and the key drivers in the service profit chain. Figure 2: Causal links within the BSC / Service Profit Chain Source: Following Kaplan/Norton (1997), p. 31 Learning & Innovation Employee motivation (KPI: number of suggestions per employee), satisfaction and retention (KPIs: employee satisfaction index, labor turnover rate or sickness rate) can lead to better shared knowledge within learning and innovation. 10

Internal Process In turn, this can direct to a higher process quality and shorter service process time (KPIs: order lead and delivery time, inquiry duration or inquiry costs). Customer This again will increase the punctual delivery and customer loyalty (KPIs: customer satisfaction index, termination and fluctuation rate or cross selling turnover), respectively. Financial Finally, this shows the way to a higher efficiency and lower costs, which in turn leads to a higher profit (KPIs: RoI, ROCE). In short, we see the intra- and interplay of causal-links within the respective perspectives which leads to higher profits. 11

3.2 CRM Version For the transition of the BSC concept to the CRM Scorecard, one has to carry out the following steps (Hippner/Wilde 2004, p. 166): each perspective must be assigned KPIs that are crucial to the service profit chain. After this, one has to analyze the causal-effect-chains on an intra- and inter-perspective level in order to meet the requirement of a consistent and cohesive service profit chain. Figure 3 shows a standard CRM Scorecard. Figure 3: CRM Scorecard Source: Following Hippner/Wilde (2004), p.166 Effect-relationships are represented by arrows. At this point, it is important to mention that each company and consequently each scorecard are unique and nongeneric. 12

Key Performance Indicators (KPIs) In the following part an illustration will be made of exemplary KPIs/ratios in conjunction with corresponding objectives for each element of the above introduced CRM Scorecard. Table 1 demonstrates possible KPIs within the Learning and Innovation Perspective of a CRM Scorecard. Table 1: Learning and Innovation KPIs Source: Following Hippner/Wilde (2004), p.167 13

Table 2 shows possible KPIs within the Internal Business Processes Perspective of a CRM Scorecard. Table 2: Internal Business Processes KPIs Source: Following Hippner/Wilde (2004), p.168 14

Table 3 exemplifies possible KPIs within the Customer Perspective of a CRM Scorecard. Table 3: Customer KPIs Source: Following Hippner/Wilde (2004), p.169 15

Finally, table 4 illustrates possible KPIs within the Financial Perspective of a CRM Scorecard. Table 4: Financial KPIs Source: Following Hippner/Wilde (2004), p.169 16

4 Balanced Scorecard Application within Key Account Management (KAM) As already mentioned the Balanced Scorecard is used in a wide area of businesses, and in many different departments. Most of the managers in major companies use the BSC to implement strategies within their branches. In this example, the diverse use of the Balanced Scorecard will examine and explore in depth some of the important fields of the Key Account Management. As it is well known that the Key Account Management is responsible for the acquisition of customers and their attachment to a company, it is indispensable that the KAM works efficiently. Therefore, they need to figure out in which areas improvements are possible. Thus, the Key Account Managers will use the Balanced Scorecard to analyze the efficiency of the different branches and if necessary, they will try to optimize the processes involved by drawing up a new strategic program. 17

4.1 Financial Perspective To begin with the Financial Perspective and the Key Performance Indicators, which provide information about the strengths and weaknesses of this essential sector in a company, will be examined. This is illustrated in table 5. Table 5: KAM Financial KPIs Source: Following Müller/Zupancic (2002), p.50 The Financial Perspective aims predominantly on the turnover and cost domain. When improving one of these two you must take into consideration that big turnovers are in favor of the company s growth but that profitability might suffer. At the same time this Trade-Off relation also exists for the couple costs and quality. This means that cost savings might as well be realized at the expense of quality. 18

4.2 Process Perspective Details about the Key Performance Indicators that are crucial from the process approach will be explored. The process perspective focuses on internal process and production goals. Some possible objectives and ratios in Key Account Management are shown in table 6. Table 6: KAM Process KPIs Source: Following Müller/Zupancic (2002), p.50 Optimizing processes means essentially improving process quality as well as reducing processing time. The former could have a negative effect on an effective and efficient production process, while the latter implements low capital lockup and little stock keeping. 19

4.3 Learning and Growth Perspective Subsequently the learning and growth perspective will be taken into consideration. The goal of this part of the Balanced Scorecard is to figure out the long term ratios and the potential of the company to make it more competitive and thus able to survive the competition on the markets. Table 7: KAM Learning & Growth KPIs Source: Following Müller/Zupancic (2002), p.50 In this context for example the percentage of new and established products needs to be scrutinized to be able to identify chances to improve the company s market position. Thus, the company can quickly enhance existing products or verify the necessity for new innovations. Another important point in this connection is to minimize the fluctuation of key players. Keeping them in the company might 20

improve motivation which could lead to a more differentiated, complex and sophisticated output. 4.4 Customer Perspective Finally the customer perspective will be focused on. It concentrates on how the customer perceives the company. To understand this all the customer data gathered in surveys or data warehousing needs to be analyzed. Table 8: KAM Customer KPIs Source: Following Müller/Zupancic (2002), p.50 A very important aspect is to measure customer satisfaction which can cause major problems. In order to achieve a customer orientated performance it is compulsory to find a reliable way to determine how satisfied customers are. One way might be to analyze the time delay between a customer s request and its reply. 21

However the company will probably not be able to realize great gains in the short run, but the increase of customer satisfaction will without doubt allow the company to boost long run returns. 22

5 Problems when controlling CRM projects Initially, the real usefulness of CRM is not remarkable in the short run. A certain period of time is needed to gather information and analyze data. A particular amount of time is required for the implementation of strategic programs and the same can be alleged about a relationship between a company and its customer. Thus, the effects of CRM can only be observed in the mid or long run. As a consequence, the ex ante assessment has to rely on early indicators like customer perception and customer behavior. Obviously these predicted procedures include the usual inaccuracies of future calculations and every statistical analysis can also be manipulated in a certain way. Furthermore, it must be taken into account that an enhancement of the company s value or market position must not necessarily be the result of a newly implemented strategic program, as neither markets nor competition are stable and constant but are subjected to a global network. As a result an improvement can always be a consequence of a change in the market situation. Therefore, the benefit of realizing and applying CRM programs can not be proved and the statements concerning the success of CRM should be considered carefully. Subsequently, as most of the indicators that are crucial to CRM consist of intangible assets, the difficulty of how to measure them can not be denied. Variables such as customer satisfaction and loyalty or employee motivation are very hard to quantify. Nevertheless, one needs to value the soft benefits achieved and this is fundamental to every application of CRM systems. Another major problem is obtaining the required information. Companies dispose of a wide variety of business ratios, a number of which are calculated internal figures. 23

However, CRM aims mainly on alterations in customer behavior. Hence, the customer should be the linchpin of the company s analysis. The problem is that any action the customer makes outside his relationship to the company goes unnoticed. As a result, companies can not complete their database with all the information necessary to be able to calculate the real customer value. Despite the company s attempt to know as many facts and details as possible about their customers, they still have to consider that the use of personal data has legal limits. An individual customer is protected by data protection where they need to agree for there data to be stored and analyzed. Therefore, trying to create a vitreous customer might cause legal problems. 24

6 Conclusion In conclusion, Performance Measurement within CRM needs to have a holistic and cross-functional management approach. This implies the use of financial indicators as well as non-financial ones. The analysis must not only be based on lag indicators but should include also leading indicators. Evaluating the success of CRM activities is crucial to the company as it is possible to identify where improvements can be made. The use of the Balanced Scorecard as the principal managerial tool in CRM measurement is controversial. On the one hand, the BSC makes it easier to present an evaluated strategy and to implement it in a subdivision of the company. It gives a comprehensive overview of the businesses along with its strengths and weaknesses. Aside from, the BSC allows the splitting of tasks and responsibilities, even if the wrong strategy has been implemented. However, the BSC is not the perfect managerial tool that many people would like to have. It is still the manager s responsibility to choose the right data and to interpret it in the appropriate way. Additionally the manager has to set the company s aims, choose a strategy and implement it making it possible to reach those goals. By using a BSC the manager may be persuaded to settle on unachievable goals or to concentrate too much on past indicators, although the BSC is developed to generate potential. Despite of all its disadvantages, the Balanced Scorecard is a useful managerial tool. It might still need further adaptation, but in a business society where the customer has become the most important element, it is indispensable in examining 25

his behavior and preferences. Only by having a realistic idea of its customers needs the company can find new chances and new markets. 26

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