Courting the fickle customer

According to research from International Data Corporation (IDC) Canada, only 42 per cent of surveyed Canadian companies, including three levels of government, financial institutions, telecom and retail, have a CRM strategy. Most companies dedicated a low, six-figure dollar amount to a CRM strategy. Alister Sutherland, director of software with analyst group IDC Canada, describes the outlook for CRM in Canada as a high-growth area with a compound annual growth rate from 2001 to 2005 of 47.5 per cent, at which point it will have risen to an almost $2 billion market. He has been quoted as calling CRM as a practice area “one of the largest drivers of solution spending and concern in the business community.” IT Focus asked Sutherland to elaborate.

IT Focus: To date, how well are Canadian financial services performing in the CRM realm?

Alister Sutherland: We haven’t fielded any primary research to discover that, but I can tell you this – that the traditional best-of-breed CRM providers, most notably Siebel (Systems Inc.), Pivotal (Corp.) and companies that have made their business on CRM are taking on the market horizontally as opposed to having deep vertical expertise. And interestingly, the one market that really does require an awful lot of deep vertical industry expertise from a demand point of view is financial services. This is because they have some very specific requirements, especially when you look at wealth and portfolio management where (what they do) is so different from other industries.

However, some companies have emerged that specialize in that area, notably a Toronto company called x.eye Incorporated. It has tailored its CRM product exclusively for the financial services market and is not at all interested in any other industry. They seem to be gaining quite a bit of traction and have had some recent fairly big wins. We actually did a bulletin on them because we think they are an emerging company and they’ve got some good prospects.

Another one would be YOUcentric, which is based in Charlotte, N.C. YOUcentric – which was recently acquired by J.D. Edwards – had three verticals that it was focused on, which included some expertise in the financial services market. In fact, one of its major clients before it was acquired by J.D. Edwards was Bank of America.

So there are some specialist players that have gained some traction in that market generally speaking, but I think what’s also interesting is that the enterprise players like PeopleSoft (Inc.), SAP and so on, have broadened their footprint and either acquired, or built organically their own CRM offerings. So that’s going to change the complexion of the market because these guys are going to fight tooth and nail to move their install base over to their own CRM solutions.

IT Focus: What approach is more advantageous for the major CRM customer?

Sutherland: It’s an integration issue. If all of your back-end systems are based on SAP, for example, their marketing mantra is that it’s much easier to integrate a solution that’s already on the same platform than to try and integrate across platforms.

When CRM first started to gain some attention it was with this whole concept of best-of-breed. Best-of-breed is now giving way to what we call ‘super suites’ which have supply-chain management, HR, back-end systems, control systems and front office applications – including CRM – all on one common platform.

IT Focus: You have suggested in other interviews that CRM can fill a gap where conventional methods of customer retention fail. How does this work?

Sutherland: It costs seven to nine times more to acquire a new customer that to retain an existing one. That said, our research shows that consistently, 60 to 80 percent of clients who defect are either satisfied or very satisfied with the company they are doing business with.

IT Focus: Yet they defected?

Sutherland: Yet they defected. So the whole concept that ‘once you’ve got a customer the way to keep them is to keep them completed satisfied’ is not necessarily the case. Customers are fickle. Sometimes they just want a change. Sometimes it’s convenience or the best deal at that moment. Basically this stat says to me that customers are not loyal – just because you bought a Sony television and you were completely satisfied with it does not mean you’ll buy another one.

IT Focus: Does this customer fickleness spill over into financial services?

Sutherland: Probably less so. If (you as) a customer (have) a lot of money being managed by a particular company and you are happy with the performance of that company, I’d say, (fickleness is) much lower. But of course you will move if you are unsatisfied so financial services is an industry that really does have to rely on satisfaction and performance – performance is the key.

IT Focus: And how does CRM fit into the picture?

Sutherland: To step back a bit from financial services, there’s been a lot of propaganda by the CRM proponents about ‘customer lifecycles management’. There’s no such thing as customer lifecycle management – that’s a load of bulls_ _ _ . In my view, unless you’re in the warranty business, customers don’t have a lifecycle beyond birth and death. The real issue is ‘customer value management’. And that’s a very inwardly focused, rather than an outwardly focused activity of trying to discern which customers are earning you the most profitability. It has nothing to do with the rate they buy from you or the amount they spend. If someone spends $100 with you, but it costs you $101 to do business with them then you haven’t made any money. So just because they happen to be frequent customers, or even loyal customers doesn’t mean to say that they are necessarily high-value customers. From the perspective of management, the high value customers are those that earn you the best profit.

Returning value to stakeholders by driving net new revenue is much harder to do in the current economic climate. So most companies are focusing on improving profitability by controlling costs, and improving effectiveness and efficiency. And one of the ways to do that, certainly, is to be able to drill down and find out who your most valuable customers are, service the daylights out of them, and figure out how to do more business with them.

IT Focus: Will we see increased spending on CRM in Canada?

Sutherland: Even though we do see continued growth, we are predicting it to be a bit slower than earlier estimates, but still a healthily growing market. That said, it’s still in the low hundreds of millions, not the billions.

Interestingly, our research also shows that 65 percent or so of respondents across the board are somehow dissatisfied with their CRM solutions. We think that there are a number of reasons for that, but a key one is that they are implementing it on a point-solution basis rather than as an encompassing strategy. And in order for that negative perception about the effectiveness of CRM to improve over time, that is going to have to change.

For the service providers and the vendors who can effectively articulate and deliver value, the benefits that are realized by the clients who actually adopt these solutions will be more obvious, and their satisfaction levels will improve. Once that happens it will also provide a competitive advantage to those who have effectively managed the process and are actively realizing the benefit from it.

For the most part, it’s very difficult to draw a direct correlation between a CRM solution and a return on investment. It’s quite convoluted – so how do you measure and realize these benefits in the overall scheme of an organization’s operational profitability? Those are challenges that industry, and particularly financial services, is going to have to address. It’s an industry that’s very much driven by profit because it’s undergoing some transformation as well – moving away from strictly commission-based revenues to a much more annualized revenue base. And so that’s going to become an increasingly critical issue for these folks.