Thought Leaders
What Makes a CRM Program Win?

Why do an estimated 55 to 75 percent of all CRM initiatives have marginal or negligible impacts? Why are companies like Capital One, with superior customer relationship strategies, earning 40 percent more interest income from customers than rivals?

In a detailed study of customer relationship strategies at more than 350 companies, Professor George Day, who teaches in Wharton's Solving the CRM Challenge program, found that the strength of a company's customer-relating capability and its motivation for engaging in CRM initiatives are among of the most significant factors affecting performance.

Superior Customer-Relating Capability

Of the companies in the sample with a superior customer-relating capability, 33 percent reported much better customer retention rates than competitors, 51 percent had much better sales growth, and 38 percent had much better profitability.

What are the components of a superior customer-relating capability? Based on the study and in-depth investigations of 14 companies, Day concluded that the superior performance of companies such as Capital One came from orchestrating three components of the customer-relating capability:

• An organizational orientation that makes customer retention a priority and gives employees wide latitude to satisfy customers,
  
  
• Information about relationships, affecting the availability, quality, and depth of relevant customer data, and the systems for sharing this information across the firm,
  
  
• A configuration that includes the structure of the organization, processes for personalizing the offering, and incentives for building relationships.

"Our findings confirm that a superior capability is all about how a business builds and manages its organization and not much to do with the CRM tools and technologies," Day said.

Impact of Motivation

The company's motivation for engaging in CRM initiatives was also an important determinant of impact. In his study, Day identified three different motivations that have very different results:

• Strategy-driven: Some managers view CRM as an integral part of their overall strategy to deliver superior customer value through superior service, complete solutions, and a willingness to cater to individual requirements.
  
  
• Reactive: Other firms are copy-cats, who engaged in CRM initiatives because competitors are doing it. These efforts, at best, only level the playing field and rarely provide advantage.
  
  
• Inner-directed: Other companies develop CRM initiatives to address internal problems, such as disparate databases and customer contact points.

"The ones that are strategy driven are much more successful," Day said. "They have higher rates of customer retention, growth, and profitability. For these companies, CRM technologies and initiatives flourish." In contrast, firms with reactive or inner-directed strategies do not fare as well because their CRM initiatives are not integrated into a coherent strategy for relating to customers.

Improving Customer-Relating Capability

Based on insights from the study, Day proposes two key steps for improving the firm's customer-relating capability:

• Invest in understanding customers
  
  
• Change the organizational configuration before installing CRM technology.

A deep understanding of customers can lead to changes in the organizational configuration to better serve them. GE Aircraft, for instance, used its customer knowledge to create a very successful "power by the hour" program, developed after reviewing data collected in its CRM program. Because its customers (airlines) had trouble purchasing expensive equipment, GE created a financing package that allowed GE to hold title to the engine and lease the equipment to customers when and where they needed it.

These customer-driven transformations can have a significant impact on performance. Canadian Pacific Hotels took the time to meticulously understand the needs of customers in its frequent-guest club. The company mapped every step of the guest experience from valet parking to checkout and reconfigured its organization and technology to deliver higher levels of service. It changed information systems, management structures, and incentives to meet or exceed performance standards. After implementing these changes, Canadian Pacific's share of Canadian business travel jumped by 16 percent, without adding any new properties, at a time when the market was growing by only 3 percent.

The research makes it clear that strategy and organizational change have to come before technology. "As the pace of technology has become more evolutionary and the progression of costs becomes more predictable, CRM itself is converting into more of a change management process," Day said. "How you apply your CRM program — which can cost in the tens of millions of dollars — really comes down to how well you can effectively manage a major change initiative."

• Wharton Executive Education
  
  
• The Wharton School

This month's articles:

• Thought Leaders: Insights from a survey of more than 350 companies on successful CRM practices.
  
  
• In the Classroom I: Professor Robert Holthausen on mergers and acquisitions in a time of economic turmoil and corporate scandals.
  
  
• In the Classroom II: Use "discovery-driven planning" to test your assumptions in building businesses.
  
  
• Certificate of Professional Development: A focus on value creation changed the way Schick executive Andrew Chrostowski approached his work.
  
  
• The Last Word: The right knowledge can add value all along your value chain.