In-Depth

Deep Discounts Drive CRM Software Glut

Biggest mistake: companies underestimate TCO impact of unused license maintenance

• By Stephen Swoyer
• 03/12/2003

Is your company over spending on CRM? It might well be, according to a new study by analyst firm Gartner, Inc.

Tempted by offers of additional licenses at substantially reduced costs, or by misguided expectations of long-term growth, many enterprises—as many as 42 percent—have over-spent on CRM licenses that will cause their total cost of ownership (TCO) to balloon over time.

The result, says Thomas Topolinski, a VP and research director with Gartner, is that through 2005, businesses that overspend on CRM solutions could incur significant increases in the total cost of ownership of their software. Explains Topolinski: “A buyer will build an ROI model and will turn around and buy more than they originally planned and not recalculate the value of the benefit of the model, and that makes their model inaccurate. What we’re seeing is that they’re overbuying to a level where it increases the TCO by 20 or 30 percent.”

That’s one of the more startling upshots of new research from Gartner, which last week announced the results of a survey of 692 enterprises, 92 percent of which reported investing in CRM software within the 2002 calendar year.

Moreover, says Topolinski, it’s the CRM vendors themselves that are chiefly to blame for customer overspending. “[These vendors] are under an extreme amount of pressure to sell licenses in an environment that is greatly reduced from prior years. Growth is way down: in 2002, new license revenue growth was 19.9 percent lower than in 2001, and that was overall.”

The result, he says, is that CRM vendors often provide customers with discounts to encourage them to purchase more software. This practice is defensible, perhaps, but vendors anxious to push new modules also tempt existing customers with deep rate cuts to purchase software that they don’t really need.

But the most common reason that customers overspend, according to Gartner’s survey data, is because of the belief that they’ll eventually be able to use the extra licenses. For the most part, Topolinski confirms, such purchases are based on unrealistic growth assumptions—especially in the current business climate. “Organizations fail to anticipate that it can cost more to maintain this [unused software] over time, than to incur slightly higher costs during acquisition.”

What’s more, he suggests, CRM vendors are only harming themselves by pushing aggressive marketing practices. In the current climate, Topolinski points out, CFOs are held to much tighter standards of accountability. In this respect, they’re revisiting the ROI experiences of past purchases before they release new funding. “That’s going across enterprises in all areas, not just CRM. CFOs are being held accountable for their past decisions and performance before they release new funds, which is typical within a tight economic scenario. It can become job-delimiting for a CFO.”

One reason that CRM vendors are under pressure to drive up sales is a result of rampant overspending during the late 1990s and in 2000, Topolinski confirms. “People were buying wildly in 1998, 1999 and 2000, but they weren’t implementing everything and they certainly weren’t measuring ROI. It’s the history of buying that’s also hindering sales.”