CRM&ROI

KEL232

MARK JEFFERY AND ROBERT J. SWEENEY

ROI for a Customer Relationship Management Initiative at GST

Overview

When Robert Davis of data warehouse technology provider Teradata entered the management conference room of telecommunications company GST Inc., he was welcomed by Mark Johnson, GST’s CFO. Johnson had a big smile on his face and greeted Davis with an enthusiastic, “Hi Bob, good to see you.”

Three years had passed since Davis proposed a data mart consolidation pilot program for GST. The results exceeded even the most optimistic forecasts and management was thrilled. In fact, the program’s documented return on investment (ROI) prompted GST to consolidate its remaining forty-five data marts into an enterprise data warehouse (EDW). The new EDW had a documented ROI of 65 percent and had resulted in $27 million in savings in just one year. Johnson was eager to learn how GST might further leverage the company’s $32 million infrastructure investment to help grow top-line revenue.

Erica Kolks, GST’s vice president of marketing, arrived at the meeting a few minutes later. Kolks had come to GST ten years earlier, shortly after obtaining her MBA from the Kellogg School of Management. She joined the management team with an impressive background in marketing and more than fifteen years of experience in the telecommunications industry. Through the years, Kolks had made several recommendations that helped GST better compete, especially in the growing wireless market.

Now that Kolks had arrived, Johnson asked Davis to begin the meeting by discussing how GST might maximize marketing investments and improve sales revenue. Davis replied that the next natural step would be to leverage the new EDW for top-line growth with customer relationship management (CRM) solutions. Johnson suddenly looked perplexed, as this was not what he had anticipated. “We already have CRM—the sales team sold me on funding CRM some time ago, and I have no idea what return we are getting on the $3 million I dump into it every year,” he said.

Kolks explained that four years ago Jill Newberg, vice president of sales for Region 2, and Dominique Arnold, vice president of sales for Region 3, had convinced Johnson that GST needed CRM. That investment had resulted in an updated call center and a new sales force automation tool.

©2006 by the Kellogg School of Management, Northwestern University. This case was developed by Professor Robert J. Sweeney of Wright State University and Robert J. Davis of Teradata, a division of NCR, in collaboration with Professor Mark Jeffery. Cases are developed solely as the basis for class discussion. Some facts within the case have been altered for reasons of confidentiality. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e- mail [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management.

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Kolks added that although the CRM investments seemed to be worthwhile, it was not what marketing needed. She explained that they needed to identify which customers should be targeted for new service offerings, determine how to cross-sell/up-sell the most profitable mix of product offerings, and maximize return from their marketing investments. Kolks clearly wanted to analyze customer behavior over time and have the ability to respond more quickly to detailed customer information for enhanced decision making.

Johnson did not want to acknowledge that the CRM investments had any payback, despite Newberg’s and Arnold’s beliefs to the contrary. “Since performance metrics to determine the ROI were not established during the adoption phase and have not been monitored throughout the implementation, the calculation of ROI at this point is pure speculation,” he declared. Johnson looked to Davis, hoping he would steer the discussion toward new possibilities.

Davis could sense the tension. It was obvious that this was not the first time that the ROI of GST’s CRM initiative had been discussed. It was also apparent that CRM was a topic of confusion. “Actually,” he said, “I was thinking about analytical CRM. Your new enterprise data warehouse combined with analytical CRM solutions could improve the take rate of your important marketing programs and the retention of your most profitable customers, significantly contributing to top-line growth.”

Johnson was skeptical, but he knew that Davis had been right about the data mart consolidation program. Kolks liked what she heard and wanted to learn more. Johnson and Kolks concurred; if Davis could demonstrate a believable ROI, GST would be very interested.

Davis was excited with this response and started to map out the next steps. He believed that the first step was to propose a detailed business discovery. Once the business discovery was complete, the ultimate question would be, “What is the ROI and payback for the Teradata CRM solution?” Davis knew his team had a lot of work to do, but he felt confident that this new project would be a success, provided that he could convince Johnson and Kolks it was worth the investment.

Telecommunications Industry

At the close of the millennium, the telecommunications industry experienced significant market changes: an explosion in wireless service demand, deregulation, the elimination of European market barriers, and an ever-growing Internet market. However, once-attractive profit margins were shrinking or disappearing altogether. Consolidation replaced expansion as the industry practice, and the trend of almost unlimited spending for new infrastructure had reversed. By 2001 many viewed the telecommunications industry as “melting down.”

Bankruptcies had been filed and many more were expected. Experts believed the United States and European telecommunications companies, burdened with about $700 billion in debt, would either default on or force lenders to restructure more than $100 billion of this debt.1 The telecommunications crisis was reminiscent of the real estate debacle that befell the savings and loan industry in the 1980s.

1 Peter Elstrom and Heather Timmons, “Telecom Meltdown,” BusinessWeek, April 23, 2001.

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The promise of heightened competition following deregulation proved illusory. Consolidation within the industry, coupled with a dampened enthusiasm by Wall Street, limited available capital for new entrants and negatively affected everything from customer service to spending on new technologies. Although the number of telephone calls and the amount of data transmitted continued to rise, customers demanded lower prices. This combination resulted in modest revenue growth and a declining return on equity. According to Lehman Brothers, return on equity fell from 13.8 percent in 1996 to 5.9 percent in 2000.1 Analysts did not expect the industry to return to the earlier level of profitability for several years.

However, there were bright spots in an otherwise bleak picture. Wireless continued to be a high-demand item and revenue growth was expected in metropolitan markets. According to industry analysts:

The uptick in wireless will also come in spite of rapidly slowing spending on next- generation networks (also known as 3G) designed to dramatically increase the speed of moving wireless data. Rather, wireless carriers will be spending on hybrid wireless local area networks, a more economical way to offer high-bandwidth wireless data coverage in key areas. They’ll also spend to expand current-generation wireless infrastructure and upgrade their networks to accommodate increased customer demand . . . .2

With technologies coming and going, mergers and acquisitions blurring the boundaries between service providers, and fickle customers with a countless array of choices (both for wireless and long distance), the communications environment had never been more challenging. The industry found itself in the unenviable position of scrambling to keep up with a technological explosion while margins evaporated and the regulatory landscape changed. In addition, telecommunication companies faced these conditions in the midst of the worst economic recession in a decade, further lessening Wall Street’s willingness to pump funding into the industry.

And yet, as these challenges evolved, so did the strategies for survival. Fred Harris, Sprint’s vice president for research, architecture, and design, succinctly described the situation for the entire industry when he said, “We are in the business to make money, so our investments follow where our customer demand is.”2

GST Inc.

Located in the southeastern United States, GST operated in the highly competitive telecommunications industry. With 13 million customers in eleven states, 28,000 employees, and annual sales exceeding $6 billion for the most recent year, GST was positioning itself to become an industry leader through its commitment to product innovation and personalized customer service.

GST began in 1903 as Greater Southern Telephone, the region’s third largest incumbent local exchange carrier. Over the years, Greater Southern had changed its name to GST, extended its reach as a competitive local exchange carrier, and was now providing a complete menu of state-

2 Olga Kharif, “Tailwinds in the Telecom Tempest,” BusinessWeek, June 20, 2001.

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of-the-art telecommunications services to its ever-expanding array of business and residential customers. GST prided itself on cultivating unique relationships with each customer based on that customer’s unique needs. The service menu included data and voice transmission capabilities, such as broadband data services and Internet access, delivered over a digital network.

Teradata

Teradata, a division of NCR Corporation, was a leading provider of enterprise data warehousing technology and solutions. NCR had a storied history, dating back to its inception in 1884. In that year, John H. Patterson purchased the National Manufacturing Company, maker of the first mechanical cash registers, and renamed it the National Cash Register Company.

Expanding from mechanical cash registers, NCR evolved into an innovative supplier of advanced point-of-sale and data warehousing solutions, as well as the worldwide leader in sales and shipment of automated teller machines (ATMs). In 1974 the company officially changed its name to NCR Corporation. By 2002 NCR had a global reach, with annual revenues of $6 billion and approximately 32,000 employees.

In 1991 AT&T invested $7.4 billion to acquire NCR and effectively established the unit as its computer systems division. That same year, NCR purchased Teradata Corporation for its advanced enterprise data warehousing technology. NCR became an independent company again in 1997 as a result of the restructuring of AT&T into three distinct companies: AT&T, Lucent Technologies, and NCR.

Teradata, founded in 1984, was based upon the mission of providing high-performance, commercially viable data warehouse technology and solutions. Data warehouse technology enabled large corporations to analyze and act upon customer information previously locked in isolated data silos. Teradata customers included many successful global companies, such as Wal- Mart, Bank of America, 3M, SBC, Delta Airlines, Whirlpool, Belgacom, Harrah’s Entertainment, Royal Bank of Canada, Procter & Gamble, AT&T, Travelocity, and Merck Medco.

Surviving the Storm

To thrive in this new environment, telecommunication businesses needed to understand their customers’ present and future demand. A successful communications service provider would have to analyze detailed customer data to better understand why a particular demand existed and then proactively manage to better forecast what would be demanded. Finally, of course, they needed to meet that demand.

For example, managers needed to ask: How do you analyze a customer’s propensity to buy new or additional bundles of services? How do you predict and respond to events that might lure current customers to the competition? How do you satisfy the customer and maintain double-digit growth while controlling costs? How do you communicate with your most valuable customers to increase the depth of the relationship and important wallet share of that customer? In order to answer these questions, a corporate commitment to shift the entire organization from a product- centric focus to a customer-centric focus would be necessary.

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In addition, all the firm’s resources needed to be optimally managed to maximize value. These resources included the operational aspects of the firm—product supply chain management, enterprise resource management, services supply chain management—as well as the management of the financial aspects of the operations. Decision makers needed a single view of the enterprise in order to get the most out of the resources of the firm. This integrated view would be possible with EDW technology and enhanced with CRM solutions.

Customer Relationship Management

Confusion seems to abound about CRM, from uncertainty about the potential ROI and the competitive landscape of the technology market space, to the basic definitions themselves. CRM should be viewed first and foremost as an organizational strategy to understand and influence customer behavior through continuous communication to improve customer acquisition, customer retention, and customer profitability.

Another commonly used definition places CRM’s focus on identifying the right customer with the right offer, at the right time, using the right channel. Armed with this perspective, CRM therefore should not be considered “product-point” solutions, but rather technology-enabled solutions and associated skills that support the organizational strategy of becoming customer- centric.

In 2002 the market for CRM-oriented solutions was estimated to be $3.6 billion, with a compound annual growth rate of 37 percent per recent analysis compiled from IDC and AMR data. Exhibit 1 is a schematic of the CRM and e-business market.

Exhibit 2 provides more detailed insight into which issues each of the available CRM solutions addresses and where specific vendors were positioned. For example, within the front- office operational segment (Exhibit 2A), marketing automation solutions form the hub of all customer understanding and communications planning. Similarly, customer service and support solutions provide real-time customer understanding via the inbound interactions.

It is important to note that the solutions and vendors are fluid. Exhibit 2B, which identifies vendors within each of these spaces, was developed based on perceived vendor activity in January 2002. Note that if this exhibit were recreated three months or one year later, the players and the solutions would most likely be dramatically different.

As a framework for how technology-enabled solutions and vendors fit together, CRM solutions can be separated into two segments: operational CRM and analytical CRM.

Operational CRM

Operational CRM solutions focus on collecting and managing customer interactions through the various touch points a firm uses for sales, service, and support. These touch points include direct sales, the Web, retail outlets, ATMs, call centers, direct mail, e-mail, fax, etc.

Operational CRM solutions are generally categorized to address marketing automation, sales force automation, and customer service and support. In 2002, Siebel was the most widely recognized vendor of operational CRM systems.

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Analytical CRM

Analytical CRM solutions, on the other hand, help companies gain greater knowledge of their customers through the analysis and modeling of detailed data. These data are collected from various customer interactions throughout the organization. In essence, analytical CRM solutions provide clear customer insight, enabling an organization to take action to strengthen its customer relationships and enhance profitability. Detailed data is leveraged via analytical modeling, thus enabling an organization to proactively serve its customers by adapting to change as well as improving the effectiveness and efficiency of operational CRM solutions.

Exhibit 3 shows the proposed Teradata CRM solution for GST. This CRM solution is positioned in the analytical space and also touches upon marketing automation in the operational segment.

According to Ruth Fornell, Teradata’s chief marketing officer, Teradata’s CRM proposal consisted of:

. . . breakthrough CRM solutions that drive intelligent, cross-channel personalization based upon a common understanding of all customer interactions, resulting in enhanced customer knowledge and increased bottom-line profit.

In order to implement effective solutions that support an organization’s CRM strategy, complementary operational and analytical CRM solutions are required. As of January 2002, it was difficult to find a single vendor that addressed the full spectrum of operational and analytical solutions. Teradata and its analytical application, therefore, were uniquely positioned to address event-driven marketing by integrating with leading operational CRM solutions. Event-driven marketing enables predetermined action to be taken, invoked, or “triggered” as a result of a significant customer event or entry into a new segmentation threshold.

Exhibit 4 describes the linkages between the critical steps in an effective CRM program, from analyzing customer profiles, to building predictive models, through developing a communication plan, to optimizing the deployment of personalized offers resulting in more timely interactions with customers with managed feedback. The strength of the EDW is that it provides a single view of the enterprise and allows a company to better integrate analytical CRM and operational CRM. This integrated strategy is more effective than if either CRM strategy were initiated alone.

Note that an effective CRM program will result in maximum ROI only with better data. The more complete the data, the more complete the analysis and the more profitable the strategy. This complete set of data is obtained via the EDW. As Exhibit 4 illustrates, the EDW supports the entire CRM initiative.

Exhibit 5 reinforces the importance of the EDW. Not only does the EDW facilitate better and faster communication between the firm and the customer, it also helps to improve the firm’s operations. With a single view of the enterprise and detailed customer data, the firm can create strategic and tactical plans to more profitably utilize the firm’s assets and create ever-increasing ROIs.

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KEL232 ROI FOR CRM AT GST

Telecommunications Industry Customer Relationship Best Practices

Exhibit 6 contains industry averages and best practices on several elements within the CRM space. These areas include customer acquisition, customer churn, revenue assurance, network optimization, and data warehousing.

Following are definitions of important terms:

• Take Rate. Within the context of marketing campaigns, take rate is defined as the percentage of the total recipients who accept or “do business with you” as a result of the targeted offer. For example, if you target 100,000 individuals as part of an acquisition campaign, and you realized a 3 percent take rate, you will have added 3,000 new customers.

• Churn. Churn is synonymous with customer attrition. More specifically, churn rate represents the percentage of active customers that voluntarily choose to discontinue use of your service or product. For example, if you had a customer base of 2 million subscribers with an annual churn rate of 25 percent, you would lose half a million subscribers a year. This is a key metric for measuring an organization’s effectiveness at customer retention.

• Lift. Lift is the percentage improvement for a given metric. For example, if you anticipated a 100 percent lift, or improvement, to an existing baseline of a 2 percent take rate using advanced analytical modeling, the resulting take rate would be 4 percent. Lift could also be viewed as a percentage increase in monthly spending.

Within the telecommunications industry in 2002, customer acquisition programs typically occurred monthly, had about a 3 percent take rate, and usually were not based on analytical modeling. Best practices, however, indicated that if multiple acquisition campaigns were run daily, the take rate averaged 6.5 percent, and analytical modeling improved the lift by more than 400 percent.

Best practices saw wireless-customer churn of only 16 percent, an attrition rate approximately one-half the industry average of 29 percent. For long distance, the industry average was 25 percent annually, while best practice only lost 20 percent per year. Customer churn for cable averaged 28 percent; for firms demonstrating best practice, that figure dropped to 7.3 percent.

On average, the industry lost more than 5 percent of revenue to fraud, and companies took 90 to 120 days to detect and remove fraud. In addition, fraud constituted about 15 percent of bad debts. (See Exhibit 6 for revenue assurance statistics relating to fraud management.) Best practices, on the other hand, detected and removed fraud in fewer than three days, thus reducing the percentage of bad debts associated with fraud to 2 percent and the percentage of revenue lost to fraud to 1 percent.

Similar savings could be seen with best practices for management of operational assets. The industry examined monthly data trends, generated monthly engineering reports, and received fifty to one hundred customer complaints per day. Best practice firms in the industry produced daily data trends and daily engineering reports and received fewer than two customer complaints per day.

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Finally, considering the industry’s use of data warehouses, on average, one to two operations were supported, with fewer than twenty end users and fewer than ten applications. Firms that fully exploited their warehouses, however, typically handled more than 10,000 end users and ran more than one hundred applications.

A CRM Strategy for GST Inc.

A Single Integrated View of the Customer

Thanks to the data mart consolidation project, GST had made significant progress in bringing together a wide variety of processes and systems to achieve an integrated view of its customers. End users and decision makers no longer had to search for information about the business, customers, or competitors in multiple data silos. One marketing manager commented, “With the new enterprise data warehouse, I no longer have to wait weeks before getting important information on my largest corporate accounts.”

Several marketing managers wanted to understand how to take even greater advantage of the customer information in the Teradata data warehouse. With the EDW they could access customer information quickly, but they lacked the right analytical tools to improve take rates. Davis knew that the Teradata CRM solution could assist in this and other areas.

The Power of Analytics

Davis wanted to clearly position the Teradata CRM solution. Operational CRM is typically only effective when combined with robust analysis and planning tools. Analytical tools enable managers to understand who the customers are, recognize patterns and trends in those customers’ behavior, and then craft communications tailored to individual customer needs.

Davis also wanted to demonstrate the value in making GST’s existing Teradata data warehouse the place to store all customer information (transactional, external, and/or purchased data). The data warehouse could enable the development of new creative approaches to better understand and predict customer behavior. Davis knew that GST’s EDW combined with Teradata CRM solutions would enhance decision making, especially given the dynamic environment in which GST competed. Exhibit 2 and Exhibit 3 illustrate the CRM landscape and an enterprise view of CRM using the Teradata data warehouse. The EDW would act as a bridge between operational CRM (such as sales force automation tools) and analytical CRM (predictive capabilities) for improved business insights.

Davis planned to focus his recommendation on the business benefits of CRM. With appreciation for the internal battles that Kolks might face, Davis prepared a business discovery proposal (see Exhibit 7). The business discovery was an important starting point for GST’s analytical CRM initiative.

The proposal defined a business discovery as a statement of work (SOW) between Teradata and GST. The business discovery would identify the “pain points” most critical to senior management, and then suggest a specific solution based on the findings. During the business

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KEL232 ROI FOR CRM AT GST

discovery, Teradata Professional Services would also collect current financial and operational information and develop a projection of the ROI associated with the proposed CRM solution.

Business Discovery

Statement of Work

The SOW between Teradata and GST is included in Exhibit 7. The SOW details the process Teradata would follow when developing a specific solution. The exhibit describes the Business Impact Assessment as well as the development and delivery of the Business Impact Model. In addition, the project’s duration and the parties’ responsibilities are detailed.

Kolks was successful in selling the business discovery to her peers. She liked that the business discovery would enable buy-in across multiple business units on the most critical business issues, but also knew that she would need assistance in defining metrics for the ROI. Teradata’s business discovery was appealing to GST senior management, as it would assess GST’s standing within the industry and propose a solution to help the company move toward best practices.

Findings

The business discovery process uncovered many facts (see Exhibit 8). Teradata’s review of GST’s five-year strategic plan discovered a growth target for a portion of its customer base. Specifically, GST management believed the company’s 13 million wireless accounts should grow by 5 percent per year and, in an attempt to reach that goal, the company would run monthly campaigns to acquire new customers.

One of these targeted acquisition campaigns involved an analysis of GST’s customer base to create a prospect list of parents of teens between 15 and 17 years old. A direct-mail offer would be made to these prospects, touting a special package on a prepaid wireless phone. For $99, parents could buy the phone and an initial 1,000 minutes of use. The customer would then have the option of prepaying ongoing required increments of time, with options available for $30, $50, or $100. The cost per minute decreased the more airtime the customer purchased. The offer stressed a “manageable plan” (from a cost standpoint) that would provide parents peace of mind and a way to be in touch with increasingly mobile children.

The process for designing and executing all campaigns was the same, regardless of the individual offer’s details. It began with analysis and segmentation of targeted prospects for increased probability of acceptance. A personalized offer was then extended through single or multiple channels, such as direct mail, telemarketers, and e-mail. The results were tracked for continued knowledge of customers and prospects.

GST’s past experience showed that the cost of contacting a single potential new customer was $5. Approximately 3 percent of the potential customers contacted became new customers (i.e., a 3 percent take rate). The average monthly spending by a customer in the targeted group was $42 for the goods and services included in the proposed campaign offer.

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In order for GST to grow by 5 percent per year, it would have to replace any customers lost to churn throughout the year. GST had one of the lowest churn rates in the industry at only 18 percent per year (the average was 29 percent). Therefore, in order to increase the customer base by 5 percent, GST would need to increase new customers by about 23 percent each year.

During the data mart consolidation pilot program, GST had contracted Teradata to study the characteristics of a subset of GST’s customer base and compare those characteristics to customers of other companies before proposing a solution. The original Teradata contract was for $120,000 per year for the second and third years of the pilot program. Davis estimated that 25 percent of the contract cost was linked to the CRM study and the remaining 75 percent tied to collapsing the remaining forty-five data marts into a data warehouse.

In Teradata’s past experience with acquisition programs in the communications industry, it had produced an average take-rate improvement of 8 percent. Although some companies had improved less than 3 percent and others had improved more than 15 percent, Davis believed that these results were tied to unique circumstances within those firms and should be ignored in this analysis. Typically, firms initiating CRM activities for the first time tend to experience a larger- than-average improvement, while firms further along the CRM journey achieve a less-than- average improvement. As a result of the work with Teradata’s Professional Services associates, it was determined that GST was in the early phases of CRM development.

In addition, the report indicated that with better data, firms could target customers likely to spend more per month than the average customer. For example, the data might indicate married couples with two phones and children spend about 20 percent more on a monthly basis than the typical customer spends. In addition, these same couples might exhibit an attrition rate one-half that of the typical customer. A targeted campaign, therefore, could be designed to attract more married couples with children. Similar campaigns could be designed around single parents, couples without children, retired people, or company CEOs. If the buying experience of a cohort of current customers was something the firm would like to replicate, better data would make that possible.

Teradata suggested GST could expect average customer spending to increase by 10 to 32 percent. The business discovery cautioned, however, that while GST might attract customers with increased spending habits, the competition for these customers would be intense, and projected revenue for new customers beyond one year should be highly discounted.

The Teradata Professional Services team suggested the following items be included in the product service offer: 500 from anywhere/to anywhere monthly minutes, 24/7 worldwide calling, and 1,000 peak-time monthly minutes of Internet access through the handset, laptop, or television. Standard with any offer were call forwarding, call waiting, instant paging/instant messaging, and voice mail. Dan Wymer, chief accounting officer, determined the gross margin on those items would be 40 percent.

Given the nature of the products and services being offered (telecommunications), Teradata concluded that GST could begin receiving new-customer revenue in the month following the campaign. In addition, past experience had taught the company that the initial contract between GST and the new customer would be for one year. For example, a campaign run in January would produce a new customer in February. That new customer could be expected to maintain his/her level of spending through the following January. The first acquisition campaign would be initiated one month after the Teradata proposal was adopted.

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GST Financial Data and the CRM Project Implementation Costs

The one-time and ongoing charges for hardware, software, and Professional Services for the CRM proposal implementation are contained in Exhibit 9. The immediate payment (time equals zero, or T = 0) for hardware and software for the Teradata CRM solution was $1,500,000 and $2,500,000, respectively. Annual maintenance and upgrades would be 12 percent of the list price for hardware and 18 percent of the list price for software. These charges would be billed at the end of each quarter. Professional Services’s immediate charge (T = 0) for the implementation was $1,000,000. The contract called for an additional 20 percent of the original charge per year for consulting, to be billed monthly.

The contract between GST and Teradata called for an initial commitment of three years for consulting and hardware and software maintenance. GST could shorten or lengthen the contract at its discretion. The penalty for shortening the contract was a payment equal to one quarter’s worth of the ongoing costs for hardware, software, and consulting. The contract could be extended for a maximum of one year at the same rate quoted in the original contract.

Davis realized that for Johnson and Kolks to accept the ROI analysis, a detailed breakdown of the implementation project was not necessary. For the business-discovery ROI analysis, it was safe to assume the up-front implementation costs occurred at time zero, even though in reality these costs would be spread over a few months. The weighted average cost of capital for GST was 14 percent, but for projects determined to be riskier than average, a 16 percent required return was used. For projects determined to be less risky than average, a 12 percent return was required. The appropriate tax rate was 38 percent.

The Professional Services Team Meeting

Davis convened the Professional Services team meeting on Thursday morning with a rather startling announcement:

Well folks, we have a week. I have committed our team to present the Business Impact Assessment to Mark Johnson and Erica Kolks next Thursday at 11:00 a.m. . . . I know we will be ready. We’ll be ready or we’ll lose the opportunity!

After a brief pause to make eye contact with the team, he continued:

And by ready, I expect our analysis to be thorough. We should be answering Mark Johnson’s questions long before he has had a chance to even think them up. The business discovery process has been completed. You have the results in front of you. Now all that is left is to resolve the remaining issues, calculate the ROI, and write the report.

Davis went on to explain that he would like to position the proposed acquisition campaign within the context of an overall CRM solution strategy that would include other key business benefits. He wondered aloud to the team, “Should the financial analysis account for valuable cross-sell/up-sell opportunities facilitated by the investment in the infrastructure for the proposed acquisition program?”

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Davis recognized that this was only one of many benefits that the analytical CRM investment could return. Additional benefits included better evaluation of GST’s network capacity, fraud detection, improved retention programs, and more. Davis asked the Teradata Business Impact Modeling team for its suggestions when evaluating these real options.

A second issue Davis brought to the team’s attention concerned the leads for the acquisition campaigns. Developing the profile of an ideal new customer utilizing current customer data was fraught with risk. GST would have access to the demographic data of its existing customers. Ideally, the data would be screened, cleaned, and the appropriate information obtained. This information would provide a sense of the sort of new customers the firm should seek to attract. However, one big question remained, “Where does GST find the names and addresses of potential new customers?”

Up to then, GST was most likely relying on the data reliability of a third-party supplier of mailing lists, but sophisticated analytics are worth nothing if the database employed is incorrect. Davis wanted to know, “What safeguards should be in place prior to initiating a targeted campaign? How should this knowledge of “data reliability” affect GST’s required return?”

The final issue the team needed to resolve was the appropriate time period for the analysis. The team agreed that it would take several months for the hardware and software to be in place, and so a one-year timeframe was unreasonably short. They could never expect such a quick payback. On the other hand, the team also knew that if the analysis continued far enough into the future, the mathematics alone would probably produce a rather decent ROI. Davis needed his team to make a decision and be prepared to defend its position in the meeting on Thursday.

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E-Business ($25 billion/34%)

ERM/SCM ($22 billion/34%) CRM ($3.6 billion/37%)

Back-Office Operational Analytical Front-Office Operational

Enterprise Resource Management

Product Supply Chain Management

Services Supply Chain Management

Back- Office

Analytical

Front- Office

Analytical

Marketing

Sales

Customer Service

E -C

om m

er ce

Exhibit 1: Estimated CRM, E-CRM, E-Business Revenue—Compound Annual Growth Rate for 2003 ($ in billions)

Source: Tara Kaskocsak, marketing specialist, Teradata, a division of NCR.

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This document is authorized for use only by Wanrong Xu in 2020 Marketing Analytics taught by Martha Troncoza, Pepperdine University from Jan 2020 to Feb 2020.

ROI FOR CRM AT GST KEL232

Exhibit 2A: CRM Segment Definitions and Business Objectives

E-Business ($25 billion/34%)

ERM/SCM ($22 billion/34%) CRM ($3.6 billion/37%)

Back-Office Operational Analytical Front-Office Operational

Enterprise Resource Management

Product Supply Chain Management

Services Supply Chain Management

Back- Office

Analytical

Front- Office

Analytical

Marketing

Sales

Customer Service

E- C

om m

er ce

Enterprise Portals

Communications/ Queuing

Customer Service & Support

Marketing Automation

OLAP PersonalizationAnalyticsModeling

Supply Chain Management

Enterprise Resource Planning

Sales Force Automation

Provide Enterprise View at Interface

Manage Integrated Communications Across

All Channels

Provide Real-Time Customer Understanding Via Inbound Interaction

Manage Personalization Rules Across All Channels

Own Customer Understanding and

Support All Operational CRM Applications

Intelligent, Actionable, Closed-Loop Customer

Understanding

Own Reporting and Analysis Infrastructure

Shift to Demand Chain to Align Suppliers and Partners

Around the Customer

Align Organization Around the Customer

Own Front-Office Channels and Customer Understanding

Form Hub of All Customer Understanding and

Communications Planning

14 KELLOGG SCHOOL OF MANAGEMENT

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This document is authorized for use only by Wanrong Xu in 2020 Marketing Analytics taught by Martha Troncoza, Pepperdine University from Jan 2020 to Feb 2020.

KEL232 ROI FOR CRM AT GST

Exhibit 2B: CRM Segment Definitions and Competitive Landscape, January 2002

E-Business ($25 billion/34%)

ERM/SCM ($22 billion/34%) CRM ($3.6 billion/37%)

Back-Office Operational Analytical Front-Office Operational

Enterprise Resource Management

Product Supply Chain Management

Services Supply Chain Management

Back- Office

Analytical

Front- Office

Analytical

Marketing

Sales

Customer Service

E- C

om m

er ce

Enterprise Portals

Communications/ Queuing

Customer Service & Support

Marketing Automation

OLAP PersonalizationAnalyticsModeling

Supply Chain Management

Enterprise Resource Planning

Sales Force Automation

Provide Enterprise View at Interface

Nortel, Lucent, Alcatel, Cisco, BEA, IBM

Siebel, Octoane, Silknet, Clarify, Vanitive, Quintus

Broadvision, ATG, Vignette, Net Perceptions

Quadstone, KD1, MarketSwitch, i2,

Broadbase, Accrue, Hyperion, Ithena

SAS, SPSS, UnicaMicrostrategy, Brio, Cognos, Business Objects

Manugistics, Ariba, i2, CommerceOne

SAP, Peoplesoft, Baan, Oracle, Epicor, Lawson

Siebel, Clarify, Vantive, Pivotal, OnyxNCR, Xchange, Chordian,Epiphany, Unica

KELLOGG SCHOOL OF MANAGEMENT 15

For the exclusive use of W. Xu, 2020.

This document is authorized for use only by Wanrong Xu in 2020 Marketing Analytics taught by Martha Troncoza, Pepperdine University from Jan 2020 to Feb 2020.

ROI FOR CRM AT GST KEL232

16 KELLOGG SCHOOL OF MANAGEMENT

E-Business ($25 billion/34%)

ERM/SCM ($22 billion/34%) CRM ($3.6 billion/37%)

B

Exhibit 3: Position of Teradata’s Solution within CRM Space

ack-Office Operational Analytical Front-Office Operational

Enterprise Resource

gement

Back- Office

Analytical

Front- Office

Analytical

Marketing

Sales

Customer Service

E -C

om m

er ce

C om

m un

ic at

io ns

M an

ag em

en t

C om

m un

ic at

io ns

M an

ag em

en t

Mana

Product upply Chain

gement

S Mana

Services upply Chain

gement

S Mana

Note: The dark line denotes the Teradata analytical CRM solution.

For the exclusive use of W. Xu, 2020.

This document is authorized for use only by Wanrong Xu in 2020 Marketing Analytics taught by Martha Troncoza, Pepperdine University from Jan 2020 to Feb 2020.

KEL232 ROI FOR CRM AT GST

Exhibit 4: Critical Steps in a Fully Integrated CRM Strategy

Analytical CRMAnalytical CRM

AnalysisAnalysis Communication, PersonalizationCommunication, Personalization

AnalysisAnalysis ModelingModeling OptimizationOptimization

PersonalizationPersonalization

CommunicationCommunication

InteractionInteraction CRM

Front-Office Operational CRM

Front-Office Operational

Sales

Customer Service

E -C

o m

m e rc

eMarketing

Business Intelligence Business

Intelligence

OLAP

Data Mining

Reporting

Enterprise Active Data Warehouse

Enterprise Active Data Warehouse

This exhibit shows schematically the linkages between an enterprise data warehouse and a fully integrated CRM strategy. The EDW is essential to executing the CRM strategy.

KELLOGG SCHOOL OF MANAGEMENT 17

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This document is authorized for use only by Wanrong Xu in 2020 Marketing Analytics taught by Martha Troncoza, Pepperdine University from Jan 2020 to Feb 2020.

ROI FOR CRM AT GST KEL232

Exhibit 5: Evolving the Decision-Making Environment to Achieve Greater ROI

Single view of the business Detail-level data Unlimited growth Strategic, tactical, and event-driven decision making Significant cost savings

Customer Relationships

Demand Chain

Supply Chain

Financial Operations

Business Process Management

E-Commerce

Industry-Specific Operations

Marketing

CRM Front-Office Operational

Customer Service

Sales

E -C

om m

er ce

Enterprise Data Warehouse Environment

B et

te r,

Fa st

er O

pe ra

tio na

l A ct

io ns

ERP/SCM Back-Office Operational

Enterprise Resource

Management

Services Supply Chain Management

Product Supply Chain Management

B et

te r,

Fa st

er C

us to

m er

C om

m un

ic at

io ns

18 KELLOGG SCHOOL OF MANAGEMENT

For the exclusive use of W. Xu, 2020.

This document is authorized for use only by Wanrong Xu in 2020 Marketing Analytics taught by Martha Troncoza, Pepperdine University from Jan 2020 to Feb 2020.

KEL232 ROI FOR CRM AT GST

Exhibit 6: Telecommunications Industry Averages and Best Practices Business Driver Industry Averages Industry Best Practices Customer acquisition campaigns

a. Quantity of campaigns a. Monthly (12/year) a. 20–50 per day b. Take rates b. 0–5% b. 5–8% c. Lift with analytical modeling c. n/a c. 442%

Customer churn a. Wireless a. 29% a. 16% b. Long distance b. 25% b. 20% c. Cable c. 28% c. 7.3%

Revenue assurance a. Lost revenue to fraud a. 5–6% a. 1% b. Days: fraud detect-to-remove b. 90–120 days b. 2–3 days c. Fraud % of bad debt c. 15% c. 2%

Network optimization a. Data trending a. Every 30 days a. daily b. Engineering reports b. Every 30 days b. daily c. Customer complaints c. 50–100 per day c. 1–2 per day

Data warehousing a. Organizations supported a. 1–2 a. Entire enterprise b. Average number of end users b. 5–20 b. >10,000 c. Average number of applications c. 1–10 c. >100

Adapted from “Communications Strategies and Best Practices” by Jack Knapp, director of marketing, and Carol Martin, marketing specialist, of Teradata, a division of NCR.

KELLOGG SCHOOL OF MANAGEMENT 19

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This document is authorized for use only by Wanrong Xu in 2020 Marketing Analytics taught by Martha Troncoza, Pepperdine University from Jan 2020 to Feb 2020.

ROI FOR CRM AT GST KEL232

Exhibit 7: Statement of Work Between Teradata and GST Inc. This Statement of Work (“SOW”) between Teradata, a division of NCR Corporation (“TERADATA”) and GST Inc. (“GST”) is

for services to be provided to GST by TERADATA in connection with Business Impact Consulting.

1. Project Scope/Services 1.1 Scope. TERADATA will have its consultant(s) review and analyze GST’s current financial and operational results and will

facilitate a meeting to discuss TERADATA’s findings and make recommendations. TERADATA will interface with a person appointed by GST to sponsor the work (“Business Impact Assessment Sponsor”).

TERADATA will provide the following: • Business Impact Assessment • Development and Delivery of Business Impact Model

1.2 Business Impact Assessment. TERADATA will interview a number of GST employees to collect current financial and operational information and develop a projection of the return on investment (ROI) associated with the proposed solution. TERADATA will provide a presentation of Business Impact Assessment findings to GST.

1.3 Development and Delivery of Business Impact Model. TERADATA will leverage the knowledge gained from the Business Impact Assessment task to develop and deliver a detailed Business Impact Report and a GST-specific Business Impact Model for further analysis and use. TERADATA will provide a presentation of the anticipated financial results and overview of the Business Impact Model.

2. Project Deliverables TERADATA will provide a written report covering its findings and recommendations from the assessment services. The report

may cover areas such as:

Business Impact Assessment • An Executive Summary • Recap of Business/Operational Impact Findings • Financial Impact Report Business Impact Model • Development of a GST-specific Business Impact Model based on TERADATA’s impact model(s) • Restricted access to customer-specific Business Impact Model (Microsoft Excel Version with access to formulas locked)

3. Project Duration 3.1 The parties anticipate that TERADATA service delivery will begin on 7th January 2002 (“Start Date”) and be completed within

approximately 4 weeks from the Start Date (“End Date”). Should the Start Date be postponed due to a delay in the execution of this SOW, or nonavailability of GST personnel, the End Date may be extended. GST will grant this extension with no penalty to TERADATA.

3.2 GST recognizes that any delay that GST may incur in providing to TERADATA the technological and human resources, data, and necessary information for the execution of the objectives of this Service may, in turn, generate a delay in TERADATA’s provision of services. GST also recognizes that the provision of information that is inexact, incomplete, and/or different from specified requirements may generate similar delays. When these delays result in an increase in Service cost, TERADATA will inform GST of any impact to cost, schedule, services, or Deliverables.

4. Responsibilities 4.1 TERADATA will provide the resource described in this SOW. GST will work with TERADATA to provide the services called

for in this SOW and, as reasonably requested, will provide the required personnel to complete the services.

4.2 GST will provide TERADATA personnel and third-party vendors with safe and reasonable access, working space and facilities (including heat, light, ventilation, electric current, and outlets), convenient fax access, local telephone extensions (including outgoing analog telephone lines for modems), computer space, and other necessary physical facilities for TERADATA and third-party personnel.

4.3 GST is responsible for the identification and interpretation of any applicable laws, regulations, and statutes that affect the existing GST application system or programs that TERADATA will have access to under this SOW. It is the responsibility of GST to assure that the systems and processes meet the requirements of those laws.

20 KELLOGG SCHOOL OF MANAGEMENT

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KEL232 ROI FOR CRM AT GST

Exhibit 7 (continued)

4.4 GST is responsible for the articulation and approval of the business requirements driving the definition of this phase of the service. Additionally, GST is responsible to provide all the necessary data elements (customer-specific responses) required to adequately assess the impact of the solution on its business. Any information provided regarding the return on investment of the Project is a nonbinding estimate only.

4.5 The services to be provided by TERADATA include only what is expressly described in the SOW. The services and Deliverables excluded from the present contract include, but are not limited to, the solution of any problem originating from the quality of the data used to develop the Business Impact Model.

5. Personnel 5.1 TERADATA and GST will assign personnel to execute the roles required for this Project. Such personnel will constitute the

Project Team. Actual individuals assigned to the Project may fill different combinations of roles. TERADATA and GST will make available additional personnel as needed.

5.2 Roles required for this SOW are as follows:

TERADATA Roles • Business Impact Modeling Analyst • Professional Services Consultant GST Roles • Business Impact Assessment Sponsor • Departmental-Level Executives • Business Users

5.3 During the performance of this SOW, and for a period of one year thereafter, GST agrees to not employ, make an offer of employment to, or enter into a consulting relationship with any employee of, or subcontractor of, TERADATA who is directly involved with the delivery of services under this SOW, except upon the prior written consent of TERADATA, as stated in the Addendum.

6. Payment 6.1 TERADATA will perform the services specified in this SOW for $30,000, made up of 15 days professional services at $2,000

per day. GST will be billed on a monthly basis.

6.2 This price does not include travel and living expenses or the price for products, software, Third-Party Deliverables, or maintenance.

6.3 Travel and living expenses, including travel time to and from GST locations for TERADATA and its subcontractors, will be invoiced on a monthly basis. GST will pay all invoices in accordance with the Master Agreement.

6.4 All taxes incurred and all duties assessed on the products and services, except for income taxes levied against TERADATA, are GST’s responsibility.

6.5 The total amount billed to GST against this SOW for both services and expenses will not exceed $50,000.

7. Change Control Process Any changes to this SOW, including scope, services, fees, etc., will be made in a written document signed by both parties.

8. Deliverable Completion Sign-Off 8.1 Deliverables will be considered accepted upon delivery. GST Program Sponsor will complete a “Deliverable Completion Sign-

Off Form” for each Deliverable or billing milestone.

8.2 If GST requires rework or modifications beyond the Deliverable scope as provided in this SOW, TERADATA will be entitled to an adjustment in price equal to TERADATA’s standard price for the additional work and a corresponding adjustment in the Project schedule. The Change Control Process will be followed to determine the impact of additional work required and both TERADATA and GST will agree to this work before it begins. Such rework or modifications may not be limited to the affected Deliverable and may include items such as regression testing or integrating the affected Deliverable into the overall solution.

KELLOGG SCHOOL OF MANAGEMENT 21

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ROI FOR CRM AT GST KEL232

Exhibit 8: Summary Findings from the GST Business Discovery Relevant to the Proposed CRM Acquisition Campaign

Finding Values How many customers are considered relevant for the proposed CRM program? 13,000,000

What is the annual growth target for the relevant customer base embedded in the strategic plan? 5%

How frequently does GST run acquisition campaigns? Monthly On average, what does it cost GST to contact one customer? $5 Historically, what is the current average campaign take rate for acquisition campaigns by GST customers? 3%

What does Teradata suggest as the anticipated lift in the acquisition campaign take rate? 5%

Currently, what is the average monthly revenue per GST customer for the relevant customer base? $42

What does Teradata propose as the anticipated increase in average monthly revenue per customer? 20%

What is GST’s average incremental gross margin percentage on the goods and services offered through the campaign? 40%

What is the appropriate tax rate for the analysis? 38% What is GST’s appropriate required return for the analysis? 16%

Exhibit 9: One-Time Costs, Ongoing Charges, and Cancellation/Extension Fee for Hardware, Software, and Professional Services

One-Time Costs—Payable at T=0 and Depreciated Using Straight-Line Depreciation 1. Hardware (nodes and disk array) 1. $1,500,000 2. Software 2. $2,500,000 3. Professional Services (consulting) 3. $1,000,000 Ongoing Maintenance/Upgrade Fees—Billed at the End of the Month 1. Professional Services (consulting) 1. 20%/yr of one-time cost, paid monthly Ongoing Maintenance/Upgrade Fees—Billed at the End of the Quarter 1. Hardware 1. 12%/yr of one-time cost, paid quarterly 2. Software 2. 18%/yr of one-time cost, paid quarterly Cancellation/Extension Fees 1. Cancellation fee 1. Payment at time of cancellation totaling

three months of ongoing PS, hardware, and software charges

2. Extension fee 2. Billed at current rates—maximum one-year extension

22 KELLOGG SCHOOL OF MANAGEMENT

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