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Calculating the Return On Your e-Learning Investment A White Paper Prepared by SumTotal Systems
ACCELERATE PERFORMANCE. ACCELERATE PROFITS.™
Introduction Building a business case for e-learning that is centered around a quantifiable, reliable, and compelling estimate of the Return on Investment (ROI), is an essential element of the SumTotal Systems value proposition. The key to producing a credible ROI lies in ascertaining the hard cost and revenue impact. This paper provides guidelines for quantifying the hard benefits, soft competitive benefits, and individual learner values that are important in developing a complete picture of the total return on investment. A SumTotal e-learning solution is expected to deliver a significant ROI in the first twelve months. An ROI analysis should include the following four categories of potential benefits: Hard cost savings vs. alternative solutions Hard revenue impacts vs. alternative solutions Soft competitive benefits vs. alternatives Soft benefits to individuals vs. alternatives This paper defines these benefit categories and provides a primer on the mathematics of the ROI calculation.
Hard Cost Savings Hard cost savings are typically quantifiable in financial value terms and can be easily estimated or measured. When rolling up the total hard cost savings, consider the following factors: 1
Travel — Traditional instructor-led training (ILT) requires personnel to travel to one central location. The hard travel savings are easy to calculate. Take the sum of airfare, hotel, meals, car rental, etc. and multiply by the headcount number. In many cases, this alone yields a 400% ROI.
2
Facilities
3
Instructor fees
4
Printing, distribution and storage costs
5
Re-training for growth and turnover, refresher courses, content updates, etc
6
Reduction of customer support costs — Start with the average cost per minute for support calls
Hard Revenue Impact Hard revenue impact is the total revenue value of the solution that can be estimated or measured. When rolling up hard revenue impact, consider the following factors: 1
Lost revenue (opportunity cost) — Inadequately trained sales personnel.
2
Increased productivity — More revenue producing days per sales rep or other customer facing personnel. Determine the revenue value of a sales rep’s day by dividing total annual revenue by the number of selling days by the number of sales reps.
- 2/5 -
3
Shorter time to product deployment — Reducing the training ramp expands the front end of a product life cycle, resulting in increased revenue.
4
Increased revenue — Increasing the sales effectiveness of selling partners.
5
Increased revenue opportunities — Delivering fee-based training and/or certification to customers, partners, and suppliers, and the ability to deliver more revenue-generating courses to more customers.
Soft Competitive Benefits Soft competitive benefits are difficult and sometimes impossible to quantify and measure, but they can be as compelling as hard cost savings and hard revenue impact. Typically, the business case for an e-learning investment starts with ROI calculations based on the hard cost savings and revenue impact. The soft competitive benefits are then layered on top of the business case to provide a more complete view of the total return. When developing soft competitive benefits, consider the following values: 1
Immediacy — Since education is treated as an ongoing process and not an event, knowledge transfer is always only a web browser away.
2
Consistency — Automated, technology-based approaches to large-scale knowledge transfer are inherently more consistent in their delivery than human interaction, which can vary from trainer to trainer and instance to instance.
3
Certification — Web-based e-learning is a cost-effective medium for certifying knowledge on a large scale.
4
Closed loop system — Improvement with each iteration.
5
Experts performing their jobs — Not teaching classes.
6
Knowing whether employees, customers, and partners are getting it.
7
Increased morale gained from simultaneous training — “We’re no longer last on the list down here in South America.”
Individual Values Individual values are benefits that are experienced at the individual learner level. They represent an additional category of soft benefits that should not be ignored in understanding the complete business impact of an e-learning solution. Individual values include: 1
Mass customization — No wasted time
2
Persistence of learning — Just-in-time (JIT) activities
3
Motivational aspects — Knowing where I stand
4
Clear learning priorities
5
Knowing somebody is watching my progress
- 3/5 -
The Mathematics of the ROI Calculation Three data points are required: 1
The time period — Typically one year.
2
The investment — Typically includes the price of the software licenses, professional services, and maintenance over the time period of interest. Also includes non-SumTotal costs such as courseware conversion/development, other professional services, and additional systems and software licenses which may be necessary.
3
The return — This is the sum of the cost savings and revenue enhancements gained from the SumTotal solution, as derived from the answers to the questions outlined above.
There are three ways to calculate the ROI: 1
As a percentage — If you gain benefits equal to $1,000,000 in 12 months on a total investment of $250,000 in the same time period, the ROI can be calculated as follows: If, Return = Payback - Investment ROI = [(Payback – Investment)/Investment)]*100, or in this case: [($1,000,000-$250,000)]/$250,000*100 = 300%
2
As a ratio—Divide the return by the investment. $1,000,000/$250,000 = 4:1
3
As a time to break-even—Determine the number of days, weeks, or months it will take to break even on the investment. Time period to break-even = (Investment/Return)*Time Period ($250,000/$1,000,000)*12 months = (0.25)*12 = 3 months or 90 days
Conclusion ROI analysis must be used in context of a broader evaluation framework because it is just one of several financial measurement tools that can be used to support an investment decision. You may want to complement your ROI financial measures with other methods that address the key limitations of ROI metrics. For example, ROI does not factor in risk and does a poor job accounting for intangible rewards. Other financial methods include net present value, scenario planning, and options theory. If used properly within the context of a “balanced scorecard” evaluation framework that factors in non-financial decision criteria, ROI can be an invaluable tool in your e-learning investment decisions. ROI is particularly effective at: Facilitating investment prioritization by making hard number comparisons between investment options, allowing decision-makers to focus on the intangible benefits separately. Setting investment screening thresholds. Imposing some discipline on the part of vendors and decision-makers to support business impact claims by taking a more methodical and quantifiable approach to business justification. Enforcing an understanding of the top/bottom line business impact of the investment since it is impossible to complete an ROI analysis without understanding the potential impact on cost and revenue generation.
- 4/5 -
About SumTotal Systems, Inc. SumTotal Systems Inc. (NASDAQ: SUMT) is the business performance and learning technology industry’s largest single provider of technologies, processes and services. Formed by the merger of industry pioneers Docent and Click2learn, the company is uniquely focused on helping organizations harness and manage mission-critical intellectual power to solve real-world business problems and produce significant bottom-line results. SumTotal has helped accelerate performance and profit for more than 600 of the world’s best-known companies, including Microsoft, Cingular Wireless, Vodafone, Lucent, Accenture, Cendant, Harley-Davidson, Wyeth, Wachovia and D & B. SumTotal Systems is headquartered in Mountain View, CA, with offices throughout the US, as well as London, Paris, Heidelberg, Sydney, Tokyo and Hyderabad, India.
To learn more about how SumTotal can work with you to help maximize business performance, please visit our Web site at www.sumtotalsystems.com
US Office
Europe Office
SumTotal Systems, Inc. 1808 North Shoreline Boulevard, Mountain View, Ca 94043, U.S.A. Phone: +1 650 934 9500 Toll-free in the US: +1 866 SMTOTAL Fax: +1 650 962 9411 [email protected]
SumTotal Systems, Ltd. The Innovation Centre 225 Marsh Wall Docklands London E14 9FW UK Phone: +44 1189 232746, Freephone: 0800 917 7309 Fax: +44 2075 174201 [email protected]
Copyright © 2005 SumTotal Systems, Inc. All rights reserved. SumTotal Systems, the SumTotal Systems logo, Click2learn, the Click2learn logo, Docent, the Docent logo, Aspen, and the Aspen logo, are trademarks of SumTotal Systems, Inc. All other company and product names are the property of their respective owners.
- 5/5 -
ACCELERATE PERFORMANCE. ACCELERATE PROFITS.™
Introduction Building a business case for e-learning that is centered around a quantifiable, reliable, and compelling estimate of the Return on Investment (ROI), is an essential element of the SumTotal Systems value proposition. The key to producing a credible ROI lies in ascertaining the hard cost and revenue impact. This paper provides guidelines for quantifying the hard benefits, soft competitive benefits, and individual learner values that are important in developing a complete picture of the total return on investment. A SumTotal e-learning solution is expected to deliver a significant ROI in the first twelve months. An ROI analysis should include the following four categories of potential benefits: Hard cost savings vs. alternative solutions Hard revenue impacts vs. alternative solutions Soft competitive benefits vs. alternatives Soft benefits to individuals vs. alternatives This paper defines these benefit categories and provides a primer on the mathematics of the ROI calculation.
Hard Cost Savings Hard cost savings are typically quantifiable in financial value terms and can be easily estimated or measured. When rolling up the total hard cost savings, consider the following factors: 1
Travel — Traditional instructor-led training (ILT) requires personnel to travel to one central location. The hard travel savings are easy to calculate. Take the sum of airfare, hotel, meals, car rental, etc. and multiply by the headcount number. In many cases, this alone yields a 400% ROI.
2
Facilities
3
Instructor fees
4
Printing, distribution and storage costs
5
Re-training for growth and turnover, refresher courses, content updates, etc
6
Reduction of customer support costs — Start with the average cost per minute for support calls
Hard Revenue Impact Hard revenue impact is the total revenue value of the solution that can be estimated or measured. When rolling up hard revenue impact, consider the following factors: 1
Lost revenue (opportunity cost) — Inadequately trained sales personnel.
2
Increased productivity — More revenue producing days per sales rep or other customer facing personnel. Determine the revenue value of a sales rep’s day by dividing total annual revenue by the number of selling days by the number of sales reps.
- 2/5 -
3
Shorter time to product deployment — Reducing the training ramp expands the front end of a product life cycle, resulting in increased revenue.
4
Increased revenue — Increasing the sales effectiveness of selling partners.
5
Increased revenue opportunities — Delivering fee-based training and/or certification to customers, partners, and suppliers, and the ability to deliver more revenue-generating courses to more customers.
Soft Competitive Benefits Soft competitive benefits are difficult and sometimes impossible to quantify and measure, but they can be as compelling as hard cost savings and hard revenue impact. Typically, the business case for an e-learning investment starts with ROI calculations based on the hard cost savings and revenue impact. The soft competitive benefits are then layered on top of the business case to provide a more complete view of the total return. When developing soft competitive benefits, consider the following values: 1
Immediacy — Since education is treated as an ongoing process and not an event, knowledge transfer is always only a web browser away.
2
Consistency — Automated, technology-based approaches to large-scale knowledge transfer are inherently more consistent in their delivery than human interaction, which can vary from trainer to trainer and instance to instance.
3
Certification — Web-based e-learning is a cost-effective medium for certifying knowledge on a large scale.
4
Closed loop system — Improvement with each iteration.
5
Experts performing their jobs — Not teaching classes.
6
Knowing whether employees, customers, and partners are getting it.
7
Increased morale gained from simultaneous training — “We’re no longer last on the list down here in South America.”
Individual Values Individual values are benefits that are experienced at the individual learner level. They represent an additional category of soft benefits that should not be ignored in understanding the complete business impact of an e-learning solution. Individual values include: 1
Mass customization — No wasted time
2
Persistence of learning — Just-in-time (JIT) activities
3
Motivational aspects — Knowing where I stand
4
Clear learning priorities
5
Knowing somebody is watching my progress
- 3/5 -
The Mathematics of the ROI Calculation Three data points are required: 1
The time period — Typically one year.
2
The investment — Typically includes the price of the software licenses, professional services, and maintenance over the time period of interest. Also includes non-SumTotal costs such as courseware conversion/development, other professional services, and additional systems and software licenses which may be necessary.
3
The return — This is the sum of the cost savings and revenue enhancements gained from the SumTotal solution, as derived from the answers to the questions outlined above.
There are three ways to calculate the ROI: 1
As a percentage — If you gain benefits equal to $1,000,000 in 12 months on a total investment of $250,000 in the same time period, the ROI can be calculated as follows: If, Return = Payback - Investment ROI = [(Payback – Investment)/Investment)]*100, or in this case: [($1,000,000-$250,000)]/$250,000*100 = 300%
2
As a ratio—Divide the return by the investment. $1,000,000/$250,000 = 4:1
3
As a time to break-even—Determine the number of days, weeks, or months it will take to break even on the investment. Time period to break-even = (Investment/Return)*Time Period ($250,000/$1,000,000)*12 months = (0.25)*12 = 3 months or 90 days
Conclusion ROI analysis must be used in context of a broader evaluation framework because it is just one of several financial measurement tools that can be used to support an investment decision. You may want to complement your ROI financial measures with other methods that address the key limitations of ROI metrics. For example, ROI does not factor in risk and does a poor job accounting for intangible rewards. Other financial methods include net present value, scenario planning, and options theory. If used properly within the context of a “balanced scorecard” evaluation framework that factors in non-financial decision criteria, ROI can be an invaluable tool in your e-learning investment decisions. ROI is particularly effective at: Facilitating investment prioritization by making hard number comparisons between investment options, allowing decision-makers to focus on the intangible benefits separately. Setting investment screening thresholds. Imposing some discipline on the part of vendors and decision-makers to support business impact claims by taking a more methodical and quantifiable approach to business justification. Enforcing an understanding of the top/bottom line business impact of the investment since it is impossible to complete an ROI analysis without understanding the potential impact on cost and revenue generation.
- 4/5 -
About SumTotal Systems, Inc. SumTotal Systems Inc. (NASDAQ: SUMT) is the business performance and learning technology industry’s largest single provider of technologies, processes and services. Formed by the merger of industry pioneers Docent and Click2learn, the company is uniquely focused on helping organizations harness and manage mission-critical intellectual power to solve real-world business problems and produce significant bottom-line results. SumTotal has helped accelerate performance and profit for more than 600 of the world’s best-known companies, including Microsoft, Cingular Wireless, Vodafone, Lucent, Accenture, Cendant, Harley-Davidson, Wyeth, Wachovia and D & B. SumTotal Systems is headquartered in Mountain View, CA, with offices throughout the US, as well as London, Paris, Heidelberg, Sydney, Tokyo and Hyderabad, India.
To learn more about how SumTotal can work with you to help maximize business performance, please visit our Web site at www.sumtotalsystems.com
US Office
Europe Office
SumTotal Systems, Inc. 1808 North Shoreline Boulevard, Mountain View, Ca 94043, U.S.A. Phone: +1 650 934 9500 Toll-free in the US: +1 866 SMTOTAL Fax: +1 650 962 9411 [email protected]
SumTotal Systems, Ltd. The Innovation Centre 225 Marsh Wall Docklands London E14 9FW UK Phone: +44 1189 232746, Freephone: 0800 917 7309 Fax: +44 2075 174201 [email protected]
Copyright © 2005 SumTotal Systems, Inc. All rights reserved. SumTotal Systems, the SumTotal Systems logo, Click2learn, the Click2learn logo, Docent, the Docent logo, Aspen, and the Aspen logo, are trademarks of SumTotal Systems, Inc. All other company and product names are the property of their respective owners.
- 5/5 -
