Why CRM Fails — and How to Fix It

Customer relationship marketing was supposed to be a “new paradigm,” yielding more loyal customers and much more profit for companies. It hasn’t. What should managers do?

BMW’s investment in CRM evolved as its understanding of how consumers reacted to direct relationship initiatives expanded.

Image courtesy of Flickr user le_huf.

During this millennium, many marketers seem to have bet the family silver on customer relationship management investments with little to show for it, and those marketers are now attempting to justify further investment in order to achieve their original goals. To suggest that they have arrived at this uncomfortable place because they are regarded as unaccountable and financially innumerate,1 or that CRM technologies are immature and consumers simply won’t engage with such new technology, is too simplistic. The problem is more fundamental: Most senior management teams have an unbalanced approach to managing marketing investments, and this is particularly evident in the case of CRM. They focus on the key resources in which they invest capital, such as technology, location and advertising, but ignore the commensurate investment of time, energy and talent to develop the capabilities required to leverage those investments. Of course, this approach to marketing investment is risky: It generates excessive investment before the organization is capable of leveraging it profitably. All of this is a far cry from CRM’s original promise. Do you remember how new forms of consumer relationships were going to revolutionize marketing, rewriting its rules and calling into question decades of scholarship and practice?2 Buying behavior would change as consumers used the information-rich environment to secure better terms of trade, personalize service and join online communities to cocreate solutions with suppliers.3 Marketers, armed with perfect information about consumers, would optimize every marketing cent they spent generating a step-change in marketing effectiveness.

The Leading Question

How should marketing investments be managed for the greatest return?

Findings
  • Develop new capabilities to improve customer relationships.
  • Backfill with capital investment to sustain and embed capability development.

Companies bought heavily into this “new paradigm” thinking: Between 2000 and 2005, organizations spent $220 billion implementing CRM solutions,4 creating a market worth almost $50 billion per annum and growing in excess of 16% prior to the credit crunch.

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References

1. Marketing is indeed hard on itself, perhaps more so than any other function in business, and particularly on the issue of marketing accountability. See M. McDonald, “Marketing: Priority Case for a Reality Check,” Marketing Review 3, no. 3 (2003): 253-271. Despite such harsh self-critique, a growing body of high-quality research links marketing activities to business performance and increased market capitalization. A recent exemplar of this research is S. Srinivasan, K. Pauwels, J. Silva-Risso and D. Hanssens, “New Products, Sales Promotions, and Firm Value: The Case of the Automotive Industry,” Journal of Marketing 68 (Oct. 2004): 142-156.

2. J.N. Sheth and R.S. Sisodia, “Revisiting Marketing’s Lawlike Generalizations,” Journal of the Academy of Marketing Science 27, no.1 (winter 1999): 71-87.

3. J. Hagel and M. Singer, “Net Worth: Shaping Markets When Customers Make the Rules” (Boston: Harvard Business Press, 1999).

4. See A. Payne and P. Frow, “A Strategic Framework for Customer Relationship Management,” Journal of Marketing 69 (2005): 167-176. The estimates of the CRM solutions market are cited from A. Payne, “Handbook of CRM: Achieving Excellence Through Customer Management” (Oxford: Butterworth-Heinemann, 2006). Payne and Frow define CRM in the context of a continuum. The broad, strategic definition of CRM is a “holistic approach to managing customer relationships to create shareholder value,” whereas the narrow definition is about the “implementation of a specific technology solution.” In between the two extremes is the mainstream definition of CRM as “the implementation of an integrated series of customer-oriented technology solutions.”

5. See A.R. Zablah, D.N. Bellenger and W.J. Johnston, “Customer Relationship Management Implementation Gaps,” Journal of Personal Selling & Sales Management 24, no. 4 (fall 2004): 279-295. Zablah et al. provide a meta review of CRM’s very mixed results. In their article they refer to a study by Gartner Group from which we cite our failure rate. Their study is said to be the most authoritative.

6. Information systems scholars are very clear that it is the ability to leverage technology rather than the technology per se that generates competitive advantage; the technology can be bought by anyone, but only a few companies really leverage it effectively. See A. Hughes and M.S.S. Morton, “The Transforming Power of Complementary Assets,” MIT Sloan Management Review 47, no. 4 (summer 2006): 50-58; and J. Peppard, J. Ward and E.M. Daniel, “Managing the Realization of Business Benefits from IT Investments,” MIS Quarterly Executive 6, no. 1 (2007): 1-11. Strategy scholars make similar claims; see M. Zollo and S.G. Winter, “Deliberate Learning and the Evolution of Dynamic Capabilities,” Organization Science 13, no. 3 (June 2002): 339-351; and R. Sanchez and A. Heene, “Reinventing Strategic Management: New Theory and Practice for Competence-Based Competition,” European Management Journal 15, no. 3 (June 1997): 303-317.

7. R. Makadok, “Toward a Synthesis of the Resource-Based and Dynamic-Capability Views of Rent Creation,” Strategic Management Journal 22, no. 5 (2001): 387-402.

8. Zollo and Winter, “Deliberate Learning.”

9. Tacit knowledge is a foundational concept in the resource-based view of the company. Competitive advantage is derived from the combination of company-specific assets (e.g., brands, distribution networks) developed in step with dynamic capabilities to create inimitable resources. The dynamic capabilities result from organizational routines, how-we-do-things-around-here, that distinguish one company from its competitors and are based in employees’ tacit knowledge. Because this knowledge is tacit, competitors cannot acquire it; if they could, the resource would no longer be inimitable. This sets up one of the great challenges for management: How does one manage and leverage that which is tacit in order to develop competitive advantage? A means of addressing this challenge, the importance of which is widely discussed in the literature, is presented by the authors in this paper. See A.W. King, S.W. Fowler and C.P. Zeithaml, “Managing Organizational Competencies for Competitive Advantage: The Middle-Management Advantage,” Academy of Management Executive 15, no. 2 (May 2001): 95-106; D.J. Teece, G. Pisano and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18, no. 7 (August 1997): 509-533; and N.K. Kakabadse, A. Kouzmin and A. Kakabadse, “From Tacit Knowledge to Knowledge Management: Leveraging Invisible Assets,” Knowledge and Process Management 8, no. 3 (July-September 2001): 137-154.

10. CSC, pioneers in re-engineering, found that overwhelmingly, IT-process-led re-engineering was led by the IT function. In none of the companies it surveyed did marketing lead a re-engineering program. See CSC Index, “State of Reengineering Report” (Cambridge, Massachusetts: 1994). IT should not lead large change projects alone; see M. Sumner, “Risk Factors in Enterprise-Wide/ERP Projects,” Journal of Information Technology 15, no. 4 (December 2000): 317-327; and T.H. Davenport, “Mission Critical: Realizing the Promise of Enterprise Systems” (Boston: Harvard Business Press, 2000).

11. The strategy literature makes a clear distinction between individuals’ skills and abilities and the concept of the organization’s capabilities; see the references for Teece et al., “Dynamic Capabilities” and Zollo and Winter, “Deliberate Learning.” For a knowledge-based perspective on this issue, see R.M. Grant, “Toward a Knowledge-Based Theory of the Firm,” Strategic Management Journal 17, Special Issue (winter 1996): 109-122.

12. P. Kotler, “A Generic Concept of Marketing,” Journal of Marketing 36, no. 2 (April 1972): 46-54.

13. D. Peppers and M. Rogers, “The One to One Future” (London: Piatkus, 1994).

14. C. Shapiro and H.R. Varian, “Information Rules: A Strategic Guide to the Network Economy” (Boston: Harvard Business Press, 1999).

15. R.S. Achrol and P. Kotler, “Marketing in the Network Economy,” Journal of Marketing, 63 (Special Issue 1999): 146-163.

16.  Further explanation of the research behind this analysis can be found in S. Maklan and S. Knox, “Dynamic Capabilities: The Missing Link in CRM Investments,” European Journal of Marketing 43, no. 11/12 (2009): 1392-1410.

17. To “back,” for example, the New York Yankees to win the World Series, one would bet that they will win. To “lay” that bet, one would bet that they do not. Traditional bookmakers laid bets while ordinary bettors backed. Online exchanges allowed private bettors to lay bets for the first time.

18. G. Wood, “Flutter’s Departure Leaves Bitter Taste,” Guardian, Jan. 16, 2002.

19. S. Maklan, S. Knox and L. Ryals, “Using Real Option to Help Build the Business Case for CRM Investment,” Long Range Planning 38, no. 4 (August 2005): 393-410.

i. K.M. Eisenhardt, “Building Theories from Case Study Research,” Academy of Management Review 14, no. 4 (October 1989): 532-550.

ii.  The integration of business processes around the needs of individual customers or customer segments as a means of delivering the brand is discussed by M. Christopher, A. Payne and D. Ballantyne, “Relationship Marketing: Strategy and Implementation” (Oxford: Butterworth-Heinemann, 1999); D. Peppers and M. Rogers, “Enterprise One-to-One: Tools for Competing in the Interactive Age” (New York: Currency Doubleday, 1997); and J.N. Sheth, R.S. Sisodia and A. Sharma, “The Antecedents and Consequences of Customer-Centric Marketing,” Journal of the Academy of Marketing Science 28, no.1 (winter 2000): 55-66.

8 Comments On: Why CRM Fails — and How to Fix It

  • pradeephenry | June 25, 2011

    Clear demonstration of why injecting technology — without accompanying business process change — often fails.

    In his New York Times interview, Forrester Research CEO George Colony has a concise statement on injecting technology (nytimes.com) … the phenomenon recurs and I therefore call it the Law of Technology Injection (www.BT.practice.com).

  • Stan Maklan | June 29, 2011

    Yes, merely injecting technology does not guarantee success. We might go even further and suggest not only processes, but capabilities must develop.

  • ian.ryder | November 2, 2011

    Well worth a read….if only to find both violent agreement and disagreement in the same article!!(at least I did!)
    This raises some great questions about CRM, its definition and understanding, neither of which is clear, and also the abilities of Boards to make rational decisions based on what they “hear” and also on what they are fed from their marketing groups.Successful CRM is NOT about technology, although this is what Mr Seibel made his fortune from, and it isn’t even about “..developing the new capabilities necessary to improve customer relationships” as the authors state. Successful CRM is about understanding the customer journey and experience you want to provide, THEN developing the capabilities as they suggest and lastly the overlaying of technology to facilitate those capabilities – where it can add value! Frankly there are quite a few areas of this paper I read and thought “yes!”, and an equal number where I thought “no! I don’t agree…” – if you have any views at all on CRM and marketing capability then this is a must read article which will get your thoughts racing I think – for me, CRM starts and ends with the customer (People are People First)…always did, always will!

  • Stan Maklan | November 8, 2011

    Glad the article provokes such thoughts. I suspect we are largely in agreement about what it takes to make CRM successful, albeit there are definitional issues raised. How one defines CRM has been the focus of numerous articles from academics, consultants and managers. Ian Ryder chooses to define CRM as customer experience; this is increasingly a popular approach and an area in which I am research active. Experience, like CRM, can be defined widely and certainly inconsistently between writers. The really broad definitions (I loath to use the word “holistic”) of experience don’t leave much out and hence become difficult (impossible?) to make operational. Similarly, CRM can be defined very narrowly around customer selection and promotion or more broadly to incorporate customer journey and overall experience. Regardless of definition, I suggest that the core of our article remains valid: build the organisational capabilities that create relationships (experience if you prefer) and then invest in the operational processes and technology that will deliver them consistently and at scale. Organisations that invest first in technology and hope that the capabilities will follow, are more likely to be disappointed with their investment outcome. We suggest in the article that firms first innovate with their customer treatment to build capabilities and then extend from there – that is how we operationalize Ian Ryder’s comment that CRM starts and ends with the customer.

  • Joseph Volcy | March 26, 2013

    Excellent article with some very interesting points raised. But I too believe that a successful CRM is not actually about the technology but more about having a clear understanding of the customer journey and the entire buying process. A successful CRM system should actually be able to make this process more efficient while also creating new opportunities for further business.

    As Stan rightly said, it’s actually quite common to see companies buying complex CRM systems without properly preparing for it. I believe that some of the key points in the initial CRM preparation phase should include:

    - Defining clear objectives (and how the CRM system will help achieve them)
    - Aligning the business operation (across all sectors)
    - Give incentives for employees to use the system (clearly explaining the objectives and the benefits, provide proper training and encourage user buying right at the start)

    A recent study demonstrated that 70% of businesses in Europe have failing CRMs!
    http://www.dnb.co.uk/resources/crm-infographic

    While this might shock a few of us, it’s actually not such a surprise.

    Any views?
    J.

  • B.Zafer Erdogan | March 27, 2013

    Companies need to understand the fact that they can not manage the customer’s relationships, but may be able to manage their experiences. That is why CRM efforts are bound to fail. It is the mindset that counts not the technology…Relationship marketing as understood by Europeans teaches equality of partners rather than company imposing relationships to customers.

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