How to measure ROI on a new CRM purchase.

ROI calculation has two primary aspects:

1. Estimating Benefits: Here there are tangible and intangible benefits and any quantitative assessment like ROI can only cover the tangible aspects like,

• Reduction in costs due to increase in efficiency
• Reduction in working capital requirement
• Increase in revenue

2. Estimating Costs: Various categories of costs that constitute a typical CRM implementation are,

• One time License costs
• One time Infrastructure costs
• Monthly IT operating costs
• Minor and major upgrade costs
• Annual maintenance charges (hardware and software)

Assessing the Benefits

To assess the benefits it is most important to understand the nature of benefits, there are three types of benefits which can result from any software usage.

1. Reduction in cost due to increase in efficiency – Efficiency has various aspects, reduction in human effort, reduction in time, increase in decision making ability. All these translate to reduced manpower and increase output.
2. Reduction in working capital requirements – Some applications helps us to manage our working capital better. Tighter inventory management, better control on Accounts Receivables, improved co-ordination between Sales, Purchase, Production and Dispatch all lead to reduction in working capital requirement.
3. Tncrease in Revenue – This is an area where most businesses want to focus and get results. Software applications are enabling tools and if properly implemented they help in increasing turnover of a business. Since the direct impact of any application on end sales result is difficult to measure its best if the business heads themselves arrive at a consensus.

All these benefits vary significantly based on factors like

• Nature of business
• Success of implementation as seen by usage of the application

The most pragmatic approach that can be taken to assess these benefits is to have a participation from various Department Heads. The shortlisted applications can be demonstrated to them and their assessment of benefits and timelines can be taken as base. An external consultant is able to help in this assessment if the team is new to such a task. 

Assessing the Costs

With the increasing popularity of SaaS applications like Salesforce.com there are now two distinct options in front of the CTOs. I would like them to classify them as On Premise Applications and Software as a Service based Web applications. The cost structures in these two options are significantly different.

Lets evaluate each cost element for SaaS and On Premise application.

1. License Cost - typical license costs for SaaS applications vary from 10 USD per month to 150 USD per month. License costs for On Premise applications are more difficult to assess as they are linked to number of licenses and vary significantly by scale.
2. Infrastructure Cost - The need to invest in hardware, networking, firewall, database and operating system makes the bulk of investment requirement. These investments are all needed by On Premise applications like SAP, Oracle while SaaS applications would only require investment in computers (if you dont have them already) and internet connectivity.
3. Implementation Costs - Some CRM applications take upto 8 months to implement while some can be implemented in 1 month or lesser. Implementation is an ongoing process and cost estimation needs to consider the overall life cycle not the initial cost only.
4. Monthly IT infrastructure and Operating Costs - The costs of bandwidth, IT support team, Power, Data Center, Outsourced IT Support vendor all will come into this category.
5. Major and Minor upgrades - Typical On Premise applications need atleast one minor upgrade every year and one major upgrade every 3 years. These costs need to be factored in. With SaaS applications the upgrades are typically passed on to the customers with minimal costs.
6. Annual Maintenance Costs - Both hardware and software comes with a 15 -25% cost of AMC. Again this is specific to On Premise applications. SaaS applications would have a subscription cost which can go up at any time.

The actual cost figures for each of these categories would require detailing which is best done with inputs from applications and hardware vendors.

The actual ROI will depend upon the specifics which are different for each business but we can safely say that if the company can work with a standard application SaaS would be a cheaper option and should give a higher ROI.