With a clear understanding of success drivers, and a defined strategy to link CX improvements to the forms of business value that prospective supporters care about, creating a compelling business case is the final step. Believe it or not, this is the easy part. With the proper homework and relationships, the business case is a summary of what everyone has already agreed to.
What should be in the business case? CustomerThink members were asked that question in an online survey and strongly endorsed what CX experts also say: hard numbers are key. A “cost/benefit analysis showing a positive ROI” was the top-ranked choice of nearly 200 respondents, with 56% rating this factor as “extremely important” in getting approval. The impact on department KPIs was third with a 47% rating.
Figure 5 – Factors in Spending Decisions
Sure, numbers are the most important. But executives can be influenced by other factors (see intangibles discussion, below) and want to know that those involved in executing the initiative will back it enthusiastically. Relationships also received high ratings, including support by the executive sponsor (49%) and endorsement by affected stakeholders (43%).
For complex undertakings, risk must also be considered. How will the CX leader increase the odds that the proposed plan will be delivered on time, on budget? A successful pilot or “proof of concept” can show that the CX program, when fully implemented, is likely to deliver the expected results. Worldlynx Wireless used one pilot store to prove that improved CX cut churn, and to finetune rollout plans to all stores. Once again, CX pros should review other winning internal proposals and see whether these elements are expected.
Finally, of the seven factors survey takers were asked to consider, a “compelling proposal presentation or document” was last on the list with 24% of respondents giving “extremely important” ratings. Still, another 60% rated this factor as “important,” so nearly two-thirds see value in how the business case is packaged.
Methods of ROI Calculation
Thus far, this report has used the term “ROI” generically to mean showing how the benefits of CX improvements compare to the necessary investments. Here’s a brief review of common techniques.
One popular method express ROI as a percentage of net benefits to investments.
ROI = (Benefits – Investments) / Investments x 100
A 300% ROI, for instance, means that the net benefits are three times the investments (capital and operating expenses). Spend $100, get $400 back, and that’s a $300 net benefit or three times the total invested.
What’s missing from this ROI calculation is the time required to get the benefits. Say two potential projects have the same 300% ROI, but one could deliver the benefits in one year while the other takes three years. Absent other factors, the first initiative will be more attractive to executives.
Simple Payback is another way to relate benefits to spending. It answers the question: How long will it take to recoup the initial investment?
Payback Period = Amount Invested / Estimated Annual Net Cash Flow
Payback periods are often expressed in years. Let’s say $200 is invested and the net benefits are $100 per year. The payback period is two years. In technology investments, it’s common to see vendors pitching payback periods expressed in months, to highlight the speed of getting the initial investment back.
Neither of these methods takes into account the time value of money. Costs and returns are worth less and less the further in the future they occur. To address that issue, Net Present Value (NPV) represents the amount by which the expected cash flows of an investment exceeds the initial amount invested, using cash flows discounted by an interest rate. Put another way, NPV is today’s value of expected cash flows minus today’s value of investments over time.
NPV = Sum of (Net cashflow in each period t) / (1 + discount rate)t
The “discount rate” is used to devalue future cash flows. Let’s say the discount rate is 15%. After one year, the net cash flow would be divided by 1.15. After two years, the divisor becomes 1.32 (1.15 x 1.15). One year later, the divisor is 1.52 (1.15 x 1.15 x 1.15). Add up the cash flows, and a positive NPV means the stream of benefits exceeds the stream of investments.
NPV requires a monthly or annual allocation of investments and benefits. It can help executives screen out projects that are heavy on front-end investments with returns that are too far in the future.
Internal Rate of Return (IRR) is another way to factor the value of cash flows over time. Essentially, this involves setting NPV to zero then solving (using Excel or another tool) for the discount rate. Sometimes companies will establish a minimum IRR as a “hurdle rate” for investment decisions.
Which method is best? When costs and benefits are incurred in a year or two, ROI or Payback may suffice. For complex projects with costs and benefits occurring over several years, NPV provides a more accurate picture.
That said, the best ROI method is one that is accepted and used internally for similar programs. This should be uncovered during prior research with prospective sponsors. Get examples of other approved/funded projects and use a similar approach, rather than “pioneering” a new justification methodology.
Potential CX Returns and Investments
Broadly speaking, benefits could include increased revenue, cost reductions or avoidance, and risk reduction (which generally reduces costs, management time, or bad publicity.) What’s included depends directly on the type of CX program envisioned. Here are a few examples from CX experts to illustrate.
Revenue could come from capturing a larger share of the customer’s budget, says Strativity founder Lior Arussy: