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TCO: A Surprisingly Misunderstood Metric

by Reza Soudagar | SAPinsider

January 5, 2010

When companies evaluate CRM solutions, they often focus on TCO — but calculating this metric is not as easy as you may think. In this article, you’ll learn how to minimize your TCO and maximize the value of your CRM investment.
 

When companies evaluate different customer relationship management (CRM) solutions that all seem to promise similar capabilities, they tend to hone in on one key question before making a decision: What’s the total cost of ownership (TCO)?

However, answering this question is not easy. In the current economic climate, companies are looking more closely than ever at how much solutions cost and how much value they can bring to the business.

While TCO can be an indicator of a solution’s value, too many companies oversimplify the metrics to determine it. As a result, companies often end up with costly solutions that don’t align with their business strategies in the way they had hoped.

In the following sections, I’ll show you the factors that make TCO such a difficult metric to calculate. And I’ll also introduce you to a new approach to evaluating and selecting CRM solutions that will help you minimize your TCO and maximize the value of your investment. 

Why Classic TCO Models Don’t Work

Classic TCO models focus on the cost of CRM software licenses, hardware, implementation services, in-house support, and — in the case of software-as-a-service (SaaS) offerings — the benefits resulting from categorizing part of the overall cost as an operational expense. These models calculate TCO over a three-to-five year period. This calculation is then used as the key metric to make investment decisions.

The problem with this calculation, however, is that it assumes a linear progression of TCO over time. While this is quite accurate in the short term (one or two years), TCO actually drastically increases in the medium term (the three to five years that the traditional TCO model is trying to encapsulate) because new cost elements emerge (see Figure 1).

Figure 1 Calculating TCO with traditional metrics often overlooks two key factors that lead to added expenses: Lost Opportunity and Complexity Tax

The following factors make TCO a complex metric:

  • The dynamic nature of business, competition, and customers. An organization’s CRM business processes and CRM systems have to be frequently modified and extended to stay relevant. These modifications might be very small after the initial go-live, but they will continue to increase as the business evolves.
  • The complexity and rigidity of the underlying systems and technologies. Today, many specialized CRM systems support a narrow scope of processes in a given silo — for instance, they may support campaign management processes in the marketing silo or trouble ticket management in the service silo. Over time, you’ll likely need to modify your CRM processes and systems, which means you will have to build or modify integration points into other systems. The more integration points that are introduced or modified, the harder — and therefore, the more expensive — it becomes to make further changes to your CRM processes and the underlying systems that support them.

These factors contribute to two overlooked cost elements in the TCO model, which I call the Complexity Tax and Lost Opportunity.

The Complexity Tax

A Complexity Tax manifests as business requirements change over time and IT systems are progressively modified to keep up. These modifications mean additional integration points, new workflows, configuration changes, and customization. Each change makes the system more complex and makes the next change even more difficult and more expensive. What may seem like a simple change in this environment can cost more than expected — this is the Complexity Tax. Over three to five years, a significant portion of your CRM investments will be subject to this tax.

Lost Opportunity

Lost Opportunity is a direct result of the complexity I just discussed. This complexity not only increases costs, it also increases the time it takes to deliver CRM capabilities that will meet the business’s needs. In some cases, the CRM solution becomes so complex that it is incapable of delivering on business requirements without major overhauls. This makes an organization less competitive and inhibits its ability to capitalize on market opportunities. If left unchecked, the Lost Opportunity could become so significant that it erodes an organization’s competitive position and leads to a loss of customers and revenue. 

 As a result, a CRM point solution that appears rather inexpensive to implement and own (based on a traditional TCO calculation model), could end up costing much more in the long term if it cannot minimize the Complexity Tax and avoid Lost Opportunity. Some of the best-run businesses have already recognized this fact and have developed approaches to minimize their TCO and increase the value of their CRM systems (see sidebar).

How to Determine What You Really Need from CRM — and How Much That Costs

The most effective way to minimize TCO is to first take a holistic look at all of your company’s CRM initiatives and requirements and then classify these in a Pain-Gain Matrix (see Figure 2). This classification helps facilitate the dialogue between business and IT executives and enables the organizations to align and reduce the two major elements of TCO — the Complexity Tax and Lost Opportunity — down the line.

Figure 2 Companies can use a Pain-Gain Matrix to get a full picture of what they're looking for in a CRM solution

The trap that many organizations fall into is focusing primarily on quick wins — CRM initiatives that are relatively easy to implement and have high immediate return. These quick wins are certainly important, especially to help ensure user buy-in and provide immediate business benefits, but a company must not lose sight of more strategic initiatives, which have the highest business impact and will create long-term differentiation and higher shareholder value.

This by no means implies that one should sacrifice the quick wins and shift focus completely to large and time-consuming projects. Instead, to minimize Lost Opportunity and Complexity Tax problems, we recommend considering the impact of these quick wins on the company’s strategic initiatives.

Once your company has made its Pain-Gain Matrix and determined a strategy to harmonize its quick wins with its strategic initiatives, it must find a CRM solution that can support both. For example, let’s say a company has determined that an opportunity management system would provide a quick win by helping the sales organization develop consistency among sales professionals and give sales executives better visibility into quarterly sales. There are many systems that can deliver this capability quickly and cheaply.

However, let’s say the same organization has also determined that one of its strategic imperatives is to improve the ability to feed pipeline and forecast information into a manufacturing and resource planning (MRP) application — resulting in significant savings across the value chain. Then the company would know before it even began evaluating CRM solutions that it would require a platform that not only delivered pipeline management, but also delivered the complex MRP integration out of the box.

By developing a holistic view of all CRM requirements beyond the quick wins, organizations can select a CRM platform that has the best functional fit, deals with complex integrations out of the box, and can grow with their business. This reduces both Lost Opportunity and the Complexity Tax, thus minimizing TCO.

Uncover the Real TCO of CRM Solutions

Companies spend millions of dollars implementing CRM point solutions and integrating them with the rest of their enterprise applications in the hopes of achieving higher revenue, better margins, and lower cost. But point solutions that aren’t backed by a solid strategy are doomed not to deliver on these promises. 

If your company is re-evaluating its current CRM solutions or has decided that it’s time to assess new CRM solutions, we strongly recommend first making a Pain-Gain Matrix to determine what your company really needs out of this solution, and then figuring out which solution can support your needs.

And if you’re considering using SAP CRM (see sidebar), SAP has developed tools — such as a value calculator — and methodologies to help quantify how much your CRM point solution might really be costing your organization. We can also help you quantify the total cost savings your organization can achieve by leveraging SAP CRM in concert with your SAP ERP employment.

For more information about evaluating CRM solutions, visit www.sap.com/crm

Reza Soudagar (reza.soudagar@sap.com) has over 15 years of experience in business consulting and the development of CRM solutions. He is currently a Senior Director of CRM Solution Marketing at SAP. Reza previously led CRM product management at Oracle and was instrumental in the development of Oracle’s CRM suite. Reza joined SAP from Accenture, where he focused on CRM strategy, IT effectiveness, and application strategy. He holds both a bachelor’s degree and a master’s degree in electrical engineering from the Swiss Federal Institute of Technology and has completed an executive education program at Harvard Business School.

 

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