Medical Device Link.

Originally Published MX March/April 2004

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Using three CRM initiatives, medtech executives can immediately improve the bottom-line performance of their companies.

Adam Honig

For every three consultants, there seem to be four opinions on how an organization can benefit from implementing business strategies based on customer relationship management (CRM). These opinions typically come with a slew of buzzwords and catch phrases—360-degree view of the customer, cross- and up-selling customers, wallet share, increasing customer loyalty, and other such language. And most of the analyses attempt to show that CRM can help the company to sell more of its products and services.

On the contrary, supporting sales growth is not the top benefit that CRM can deliver to medical technology companies. Certainly, increasing sales is at the head of most companies' agendas. The $75-billion U.S. medtech market did, in fact, grow an estimated 6.3% during fiscal 2003.^1,2 But that growth was dependent primarily on the success of new products brought to market. A new CRM system can indeed improve sales productivity, but product innovation is the engine of additional sales. The company that provides the ophthalmologist with the best device for performing a pupillary membranectomy will get the sale, not necessarily the one equipped with the most sophisticated CRM resource.

Three functionally specific CRM initiatives can, however, help medtech organizations improve their bottom-line performance. These CRM processes can be implemented to:

• Increase sales revenues by controlling discounts, not sales volumes.
• Decrease operational costs by streamlining order fulfillment.
• Decrease manufacturing costs by improving forecasting ability.

Such initiatives frequently can bring about performance improvement in as little as six weeks.

Companies generally are most successful with CRM when they implement a series of smaller projects with very specific goals, rather than a complete system all at once. The Gartner analysis group (Stamford, CT) recommends that companies "think strategically, while investing tactically," and that they identify the small steps necessary to accomplish broader goals.³ As one recent article memorably described it, "Trying to implement global CRM across the entire organization at once is like trying to eat a pizza whole, instead of by the slice: If you manage to not choke and have to abandon your effort, in the end you'll feel bloated and so overstuffed that you won't be able to do anything productive until well into the digestion process."⁴

CRM Defined

Before examining in detail the three specified CRM areas that are the focus of this article, let us first define the term customer relationship management. Customer relationship management is a business strategy that company leaders employ to coordinate customer-facing business functions. Executives typically head down the CRM path with the goal of accelerating business growth, optimizing corporate operational efficiency, maximizing customer valuation of the company offering, or achieving some combination of these outcomes.

In thinking about CRM, it is essential to consider the people, the business processes, and the technology involved in each customer interaction. Many company executives tend to assume that CRM is simply a matter of managing the installation of data management technology. Nothing could be further from the truth. Although technology is quite often an important component of a CRM strategy, a company that focuses entirely on technology is sure to achieve suboptimal results.

Company executives ought also to understand CRM as a series of tactical solutions within a strategic framework. Such an approach to implementation is greatly preferable to a big-bang approach in which the company undertakes too many initiatives at once. CRM is most effectively implemented in short, manageable phases, each of which is intended to solve a very specific problem. The return on investment (ROI) of targeted productivity-enhancing or cost-reducing initiatives can be realized immediately. Meanwhile, each initiative is a building block for the establishment of a broader, enterprisewide CRM vision.

Figure 1. The relationship between gross margin and profitability as charted using figures taken from 2003 financial statements of six representative medical device companies. (click to enlarge)

Profitability-minded company executives should focus on increasing their gross margin. There is no better indicator of net profitability than the gross margin (see Figure 1). Because every extra dollar earned in gross margin typically falls directly to the bottom line, the most efficient way to increase bottom-line profitability is to increase that margin. The three CRM initiatives discussed here can contribute directly to improving gross margins.

Controlling Discounts

Developing a structured, automated process for handling discounts extended to customers can have a significant and immediate favorable effect on a medtech company's gross margin. Most sales organizations in this industry traditionally have focused more on increasing the quantity of their sales than on improving sales quality. That approach may be wrong-headed. Medtech company executives might do better to focus on using CRM in the following five key areas to improve company discounting and pricing structures.

Price Construction. A strategic pricing team made up of people from all parts of the business organization can be employed to establish optimal list prices for the company's products. This team should be charged with not only setting list pricing but also establishing and maintaining a standard approach to discounting. This would notably include the customer negotiation process. The strategic pricing team should also establish the plan for communicating the new pricing structure to sales operatives in the field.

Price Targeting. All customers are not equal when it comes to setting and negotiating prices for them. By setting price targets on an account-by-account basis, a company will have a much higher likelihood of maximizing margin on each sale. The best way to set price targets for a particular account is to have access to data regarding an existing customer's past purchases, the competitive situation, the current financial situation of a prospective customer, and any customer's future purchasing potential.

Price Negotiation. Companies gain higher sales margins when they have a formal process for escalating discounts and for obtaining management signoff on discounting decisions. The availability of historical analytic data that can show management past wins and losses based on price greatly enhances sales professionals' ability to negotiate pricing arrangements in competitive situations.

Price Tracking and Analysis. Any medtech company that wishes to sell its products at the highest possible margins should have a system in place that facilitates the process of sharing relevant sales data with the strategic pricing team.

Price Incentives. Sales compensation tends to have a significant influence on sales behavior. The compensation of both field salespeople and sales managers should be tied to margin delivery, not sales volumes, in order to achieve the end of maximum net profitability.

While implementation of a CRM program encompassing all five of these areas would typically take about a year to accomplish, some areas are quick wins that can start generating improvements sooner. An easy place to start is price negotiation. A company can get results rapidly here simply by creating basic procedures for controlling discounts through a paper- or e-mail–based approval system.

The potential for improvement is exemplified by a large international manufacturer of sterilization equipment that faced significant shortfalls in each of the five pricing enterprises just enumerated. Its gross margin was in the bottom third of its peer group. Executives were informed that the company left an estimated million dollars plus on the table through improper discounting. They were later chagrined to discover that 35 customers had negotiated such good prices that the company was actually losing money on each of those orders.

A CRM solution comprising people, processes, and technology was needed to solve this problem. Considerable change in business processes was necessary to help the sales force curtail its discounting. And in order to successfully effect business process change—as well as compensation reform—substantial employee training had to be conducted. Once these were taken care of, a CRM technology system was implemented to support the new business processes and goals of the organization.

The technology solution in this case included both basic sales function automation—covering account management, opportunity management, and activity management—and, more important, automation of the workflow relevant to the company's new discounting and pricing policies. The result of instituting this CRM program was a 2% increase in gross margin within two years. The effect was to add millions of dollars to the company's bottom line.

Streamlining Order Fulfillment

For many medical device manufacturers—especially those that build orders for installation according to customer specifications—the order fulfillment process is a source of astonishing waste. In the experience of our firm, a loss of 3% of gross margin due to the order fulfillment process is not uncommon.

The superior growth rates enjoyed by many medtech companies have, however, taken attention away from operational efficiency. One result of this has been an unacceptable number of errors in order worksheets. No doubt, in many such cases the game of telephone tag is to blame. Also, small deviations in successive conversations among the customer, salespeople, sales engineers, engineering staff, and the order entry department can have a dramatic cumulative effect on the accuracy of engineering proofs and, ultimately, the finished product. Each interaction involves a direct cost and an opportunity cost. Engineers spending time reworking an order for customer X cannot spend that same time fulfilling a new order for customer Y. The process of rectifying errors alone can cost a company perhaps 0.1 to 0.3% of gross margin.

Another problem can arise when customers are presented with specifications. Their ideas about the order might change. The handling of change orders can be plagued by incomplete information and errors in order entry. The lack of a formal process can add to the likelihood of change orders not being charged to customers. Problems in this functional area can lead to literally giving away 1.5% of gross margin. Time is commonly the enemy in order processing. In many industries—and certainly in the medical device field, where product innovation is rapid and ceaseless—a significant time lag between sale and order can lead to inappropriate product substitution. Customers are often unaware that a product model they are trying to order has been discontinued and replaced with a new, improved, and more costly version since the time of the latest information they have. Because a customer will not have budgeted for a, say, 6% increase in cost between model generations, a seemingly assured sale could be in jeopardy. Even the best discounting strategy in the world cannot prevent the gross margin on such a sale from being lower than expected.

Figure 2. An inefficient customer relations process (the blue box is the only CRM function). (click to enlarge)

Many of these problems stem from the same root cause: not integrating the sales and order processes. Critical to closing the gap between these two functions is a change in the company mind-set. The typical inefficient customer relations process stints on CRM in favor of emphasizing traditional order fulfillment functions (see Figure 2). A better alignment between sales and order fulfillment would take advantage of CRM's potential for making the process more efficient (see Figure 3). The blue boxes in the figures represent CRM functions; the gray boxes represent engineering and production functions.

Figure 3. An efficient customer relations process (the blue boxes are CRM functions). (click to enlarge)

An example of the benefit that accrues from streamlining order fulfillment is a company with $90 million in annual sales that invested $750,000 in a CRM system in order to create a more efficient sales- and order-fulfillment process. The company determined that its gross margin resultantly increased by more than 1.8% within a year and a half. This added $1.6 million to the bottom line. Dividing the return for that project by its cost shows that investing in CRM brought the company an ROI of more than 200%.

Improving Forecasting Ability

Figure 4. The forecast-to-build gap. (click to enlarge)

The vast majority of companies would like to be able to better forecast sales accurately enough to optimize manufacturing costs. Typical limitations of such ability lead to a genuine dilemma: a company may build too much and run the risk of product obsolescence and high carrying costs, or it may build too little and suffer the consequences of non-cost-efficient raw material and subassembly purchasing (see Figure 4). This in turn may lead to possibly having to make more products later at higher marginal costs.

The example here is a global manufacturer that knew its poor forecasting range of barely two months was having a negative impact on its bottom line. This company took a phased approach to planning and implementing a CRM solution, one of the objectives of which was to increase gross margin through improved forecasting ability. Within five weeks a single repository for all customer information was created, and basic contact- and lead-management capabilities were available to the 30 sales and marketing staffers. Within three months the company's CRM system was enhanced to include more-robust reporting capabilities that gave management a clearer picture of expected revenue eight months in advance. And within a year executives determined that, for each additional month of pipeline visibility, the company experienced an improvement of 0.25% in gross margin. An overall increase in gross margin of nearly 1.5% was attributable to this single benefit of CRM implementation, and after only one year.

Where to Begin

Some medtech company executives may recognize their own problems in the examples cited here. Others may be interested in exploring a broader set of issues in order to find their own best ROI from CRM implementation. In either case, corporate managers are advised to go through a thorough planning process so as to ensure that all the benefits, challenges, and conflicts CRM can bring the company are uncovered.

This planning, this charting of the corporate CRM road map, does not have to get in the way of quickly achieving the benefits of CRM implementation. A prudent plan can be developed expeditiously—the speed depending on the degree of due diligence—within a matter of weeks, not months. Executives building a solid CRM strategy need to develop five principal components of that strategy: CRM direction, CRM readiness, technology validation, program definition, and the business case.

CRM Direction. Company executives must attain a consensus regarding the business rationale of CRM and the outcomes desired from its implementation. Goals should be as quantifiable and tangible as possible. "Increase gross margin by 2%" is a goal whose achievement can be determined by measurement, unlike "have a 360-degree view of our customers."

CRM Readiness. This high-level assessment will help identify the organizational, business process, and technical elements of the company that must be in place in order to achieve desired CRM outcomes. The company's organizational structure and operations, sales methods and customer service culture, and technical architecture are among the elements of infrastructure that may be prerequisite to CRM-based success.

Technology Validation. Most CRM programs do require that a technological component be installed to help the company achieve its business goals. Evaluation and selection of such technologies should take place, however, only after the company has identified its strategic direction and established its organizational requirements.

Program Definition. This overarching plan should encompass specific parameters for each phase of CRM implementation, including which business units will be assigned which system functions and the time frame and deployment approach for implementation.

Business Case. The business case should demonstrate very specifically how the company will increase its profitability through a CRM program. To avoid the lure of wishful thinking, it should be constructed from high estimates of the net total cost of ownership on the one hand, and soberly realistic business benefits on the other.

Conclusion

CRM is not a one-size-fits-all business optimization strategy. Implementation can take whatever shape makes sense for the realization of established organizational goals. The key is to approach attainment of the CRM vision by phases and to cherry-pick achievable elements that address the most critical needs first.

Along the way, executives should work to determine the ROI of each specific element within the overall program. If the company's CRM program provides more-accurate visibility into its pipeline, for instance, executives should make a point of discovering how such a change affects the bottom line.

When expenditures for software, hardware, and services are taken into account, a company can quite easily spend upward of $750,000 on a comprehensive CRM program that integrates worldwide sales and order-processing organizations. The scope of the program should be proportional to the company size, however. CRM can be as simple as instituting new processes that enable the company to more effectively handle customer discount arrangements or restructure sales compensation around margin rather than volume. To be effective, such incentives certainly require proper planning, communication, and training; but they do not require the support of a $750,000 CRM system.

Whether the company CRM program is large or small in scope, executives need to have very specific—and realistic—expectations of outcomes attributable to their institutions. These expectations should be defined in the early planning stages. It is well worth the effort at that time to perform a quick but thorough road map exercise in order to optimize direction setting, goal planning, and organizational alignment. Making use of such techniques will greatly improve the chances that the company will achieve a positive return on its investment in CRM initiatives.

References

1. "Medical Market Analysis," (Chicago: RAK Associates, 2004); available from Internet: www.rakassociates.com.

2. U. S. Medical Technology Industry Fact Sheet, 2002 (Washington, DC: AdvaMed, 2003); available from Internet: www.advamed.org/publicdocs/fact_sheet2002.pdf.

3. BL Eisenfeld and SD Nelson, Management Update: Use CRM Best Practices to Achieve an Edge (Stamford, CT: Gartner, 2003).

4. L Picarille, "The ABCs of Global CRM," CRM Magazine 31 (February 2003): 28; available from Internet: www.destinationcrm.com/articles/default.asp?ArticleID=2835.

Adam Honig is president of Akibia Consulting (Westborough, MA), a CRM consultancy focusing on the medical device manufacturing sector.

Illustration by JONATHAN EVANS

Copyright ©2004 MX