Cost Analysis

IVK: Customer Relationship Management

TA3: Cost Analysis

Contributors:

Jeremiah Clinchoc, Scott Sieber, Evan Fraundorfer, Jonathan Hanna, William D’Andrea

According to John Gallaugher, firms spend roughly 80% of their information systems budgets on keeping their systems running (Gallaugher, 2016). MIT’s Andrew McAffee describes how these systems are driving a new level of transformation in business that has not been witnessed in decades. He believes that as companies transition to adopting newer digital tools, they must become extremely familiar with technologies like big data, artificial intelligence, and more (Mcaffee, 2014). McAffee also conveys that it can be difficult to convince stakeholders of the financial justification for a new system. In this analysis, we will dive into our justification for a CRM.

When implementing and supporting a CRM system, firms typically have to pay monthly licensing premiums that depend on the number of users in the system. These fixed-cost premiums depend on the CRM service that the firm chooses upfront. These services range in functionality from a smaller-scale CRM system that may have limits on computing resources and customer support, to large systems that have advanced plug-ins, unrestricted computing requirements, and more concentrated support. The more complex the sales pipeline (number of steps to achieve a sale) a firm has, the more features and functionality required for the CRM. Gallaugher points out that projects like a CRM implementation may fail for many reasons, including badly defined system requirements that allow feature creep during implementation (Gallaugher, 2016). This is why it is important that the CRM system is thoroughly researched and defined early on in the process. The number of employees paid to utilize the CRM would be a fixed cost and would need to be determined upon implementation. Costs that may change include training on the software where Salesforce personnel would train IVK employees. On top of training costs, other variable costs include the prices for upgrades when newer versions of the software are released.

IVK will be investing in Salesforce for a CRM system. The fixed costs would include the purchasing of 75 licenses of the Lighting Unlimited package for $300 per user per month. There are a number of different packages available with SalesForce, but we believe that the Lightning Unlimited package is the best value due to having unlimited access to online training, admin services, and toll-free support. This will allow for the variable cost of hiring a CRM administrator to remain low due to the ongoing support provided by SalesForce.

The estimated variable costs to implement the new CRM system are $150,000. These variable costs would include installing the software, training the employees, upgrading technologies, and hiring a CRM administrator to maintain the software system. The estimated fixed costs to implement the new CRM system are $270,000.  

IVK will be spending $420,000 on the initial investment which includes 75 licenses for the year which is an annual cost of $270,000. The other $150,000 will be needed for implementation purposes such as installation, tech upgrades, and an administrator for the software. In analysis of salary savings, we turned to a study of NAMU Travel Group and their CRM implementation. NAMU’s system reduced personnel costs dramatically and actually improved manager productivity.  Managers saved an average of two hours per week per person in this system. This ultimately allowed NAMU to place their focus on sales and performance (Miller, 2016). We estimated $200,000 per year in salary savings based on five employees on a $40,000 per year salary.

To determine IVK’s ROI, we first needed to calculate their projected cash flow, which was $160,160 per year and can be seen in the chart below. Using these numbers, we were able to first determine their payback. This is the time it will take IVK to earn back their initial investment, which we determined to be 2.62 years. IVK would benefit from a project with a payback period under three years, so this seemed to be feasible for the company. Next, we used a 9% hurdle rate to determine the present value to be $622,964, which produced a net present value of $202, 964. Therefore, IVK will have $202,964 more at the end of year five than they would if they didn’t do the investment. We then examined the internal rate of return, which we found to be 26.2%. With a corporate hurdle rate of 9%, the IRR seems to favor the investment. Lastly, we looked at the profitability index. We used the present value of cash flow at 9% and varied our initial investment, confirming a 1.48 PI. This shows that for every dollar IVK invests in this project, it returns $1.48 in today’s dollars. In looking at the four ROI methods, we’ve determined that this is a good financial investment for IVK.

New order Processing system
Project return/saving	Year 0	Year 1	Year 2	Year 3
Salary Savings                (5 RIF)		200,000	200,000	200,000
Processing Fee Reduction
Depreciation/ amortization		67,200	67,200	67,200
Total Cost Savings		132,800	132,800	132,800
Profit before taxes increase		132,800	132,800	132,800
Taxes at 30%		39,840	39,840	39,840
Profit after Taxes		92,960	92,960	92,960
Add back depreciation		67,200	67,200	67,200
Projected Cash Flow		160,160	160,160	160,160

Expenses	Upfront	Year 1	Year 2	Year 3	Year 4	Year 5	Total/ 5 years
Salesforce user Costs		270,000	270,000	270,000	270,000	270,000	1,350,000
Integration	50,000						50,000
Implementation	50,000						50,000
Training	0						0
Administrator		50,000	50,000	50,000	50,000	50,000	250,000
Maintenance		10,000	10,000	10,000	10,000	10,000	50,000
Total Expenses	100,000	330,000	330,000	330,000	330,000	330,00	1,750,000

References

Gallaugher, J. (2016). Information systems: a manager’s guide to harnessing technology [5.0]. Retrieved October 07, 2017, from https://scholar.flatworldknowledge.com

Malamut, C. (2014, April 22). How Much Does CRM Software Cost? Retrieved October 07, 2017, from https://blog.capterra.com/much-crm-software-cost/

McAfee, A. (2014, May 15). Leading Digital Transformation. Retrieved October 17, 2017, from http://krm.usinternet.com/materials/21431_HBR_05152014_McAfee_Digital_Transformation_v5.pdf

Miller, J. A. (2016, December 08). How to conquer a CRM monster. Retrieved October 17, 2017, from https://www.cio.com/article/3148271/customer-relationship-management/how-to-conquer-a-crm-monster.html

How to select the right Salesforce Lightning edition. Retrieved October 17, 2017, from https://www.salesforce.com/content/dam/web/en_us/www/documents/datasheets/DS_SalesCloud_EdCompare.pdf