Effective CRM requires ABC

Customer relationship management (CRM) is now almost a mandatory part of the information architecture of any financial institution but few organisations in the financial services sector maximise its potential.

One of the main reasons for this is the failure to create an enterprise-wide, coherent CRM strategy that connects all parts of an organisation and is understood by all employees. A lack of consistent customer information and communication between employees in the customer relationship chain leads not only to customer misunderstandings, but also to the lack of buy-in from users.

CRM is a combination of strategy, tactical actions and information systems aimed at focusing attention on customers in order to serve them better. This is done by organising, aligning and integrating the organisation's processes all the way from the point of customer contact through the organisation.

The benefits gained by CRM have to impact the profitability of the organisation so it is important to be able to identify how to retain satisfied customers with high lifetime values. This means that the CRM information must include customer profitability and lifetime value.

However, this is where things start to go wrong. If the desired outcome of CRM is (more) profitable customers, it pre-supposes that we can measure customer profitability which, in turn, means accurately measuring customer revenue and all attributable customer costs incurred throughout the organisation. What is more, this must be done at customer segment and individual customer level.

Understanding customer-facing activities, the true costs of undertaking them and the customers themselves, is essential before an effective CRM programme can begin. The source of this information lies within another management tool that has been with us for some time - activity-based costing (ABC).

ABC takes the hit and miss out of the costing process. The method is simple:

  • identify resources in the company that have a cost or financial value - people, assets etc;
  • identify activities in the company;
  • determine how each type of resource is consumed by an activity and allocate the cost of these resources to each of the identified activities using a rational consumption method;
  • identify the factor that drives each activity;
  • determine the volume of each driver associated with each customer, product, service or channel of distribution;
  • allocate costs to customers and products on the basis of driver volumes.

Direct cost therefore means all costs associated with resources consumed in the production or delivery of a product or service for and to the customer, and the development and maintenance of the customer relationship. This includes sales activity, most marketing activity, call centres, customer service activity, production, distribution and logistics, invoicing and debt chasing, purchasing, supply chain management and much more.

Indirect costs then become those associated with maintaining the business - for example, management and fiscal reporting, accounting, budgeting, legal (except where related to customer or product issues) and auditing.

There is a growing recognition among practitioners of CRM that it is time to dust off ABC and take a fresh look at how it can provide the necessary information.

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