Calculating ROI of e-learning

Welcome to the world of calculating ROI of e-learning! According to a survey, the worldwide market size for e-learning tools was estimated at a staggering $235M in 2002, and is rapidly growing towards a benchmark of $816M by 2006 depicting an annual growth rate of 37%. According to IDC, Worldwide revenues in the corporate e-learning market will cross $23 billion by 2004 and Western Europe will be the fastest-growing e-learning market, with increase in revenues at a compound annual growth rate of 97% from 1999 to 2004. So e-learning is not just a regular online computer based training program (CBT) but is much more than that. E-Learning is the multipurpose, multi-utility, multi-channel training or learning program that can be delivered through the internet, CD-ROMs, Video conference and other delivery vehicles like the intranet. So before you can embark on an e-learning project, you need to make a ROI capture sheet. This will help you to figure out where you stand in terms of investment & returns for a specific e-learning project.

How effective is ROI?

Any e-learning module's effectivity can be measured through calculation of ROI or return on investment. But, is calculating ROI of e-learning that easy and accurate? The question surrounds itself in a shroud and the debate can go on forever. Like any other program or module, Calculation of ROI has its own limitations. The ROI calculation in the normal scenario never takes into account the time value associated with money or the amount of risk associated with a particular e-learning project or investment. According to the time value of money concept, a dollar earned today is always worth more than a dollar that will be earned tomorrow. This holds true if you are considering from a macroeconomic perspective, other investment alternatives combined with the effect of inflation.
Apart from this, the total risk involved in the e-learning project needs to be accounted for through incorporation of all the possible financial outcomes associated with that particular e-learning project. These possible financial outcomes come with the possibilities that the e-learning project will not yield the expected results or will not give a productivity chart that matches to the ROI calculated due to the inherent risks involved in the project. At the end of the day, the calculation of ROI involves multiple parameters like CD-ROM's, employees, overheads expenses etc. ROI is mostly calculated keeping in mind the dynamics of the parameters to a certain degree but the complete transition process cannot be measured. Market dynamics are totally different from our perception. There is a chance of increase in the price of CD-ROMS, increase in expenses of overheads and this can happen mid-year. As a result the ROI figures will change. Another limitation that can not be overlooked is that there is a possibility that ROI calculations might over-value investments since the mathematical equation (ROI equation) favors short-term savings and completely overlooks long-term costs such as maintenance, support, and software upgrades. This problem arises because the standard ROI calculation time period is one year. Hence projects with high cost structures in the future will appear incorrectly and show a higher return because the future costs have not been included in the calculation
There is also a consistency problem associated with ROI calculation. Since there are three different formulae or three methodologies involved, it is often tough to find out which one will be the most accurate keeping in mind the parameters involved.

Effectively Calculating ROI of e-learning

Now that the limitations have been spoken about, let's get on with the calculation and how we can work around it. So how can one achieve a good ROI in e-learning and how can it be effectively calculated? Let's take a peep into the return-on-investment analysis, more commonly known as ROI. The ROI ratio of e-learning can be calculated using three different mathematical formulae:

1. Percentage method

Total (Benefits - Costs) divided by Total Costs x 100 = ROI

For example:
If total benefit = $600,000 & total cost is $350,000 then, ROI is 71.4%

So in other words, one Year ROI = 71.4%

1. Ratio Method
   Return divided by investment
   e.g: $160,000 / $40, 000 = 4:1

2. Break-even Time method
   Time period taken to break-even = (Investment divided by return) X time period
   $40,000/$160,000 X 12 months = 0.25 X 12 = 3 months or 90 days
   This is just the mathematical representation but in the near past there have been a lot of debate regarding the authenticity of this formula. Afterall, one can't really calculate intangible benefits nor can one predict a total cost of the program that will rise above the market dynamics and remain stable. One of the rising problems is that of project pricing.
   If you desire to generate an accurate cost analysis of the entire e-learning program then you need to take into consideration all various direct costs involved in terms of program development, plus all the indirect costs associated with delivery and maintenance of that particular e-learning program. As an example, we can say that the hidden costs of an instructor-led training module would include variable like, student transportation costs, meals, hostel facilities etc. On the flip side of it, indirect costs would be associated with CD-ROMs, internet applications, CBT etc. The most important thing to remember here is that every organization and project is unique in its requirement and hence the cost factor applicable will vary.
   ROI calculation has some pre-requisites, which are both static and dynamic in nature. To start with, it is important to identify where all cost would be incurred.

Gathering baseline data: It is important to gather data or rather make a flowchart that will include data like a) The duration of the e-learning process; b) total students; c) compensation for instructor; d) compensation for students. These are the most basic expenditures that need to be taken into consideration while calculating the ROI of an e-learning program.

D&D: This is more popularly known as the design and development costs and is followed after the basic costs mentioned above have been taken into consideration. This indicates the cost required for the design and development of all e-learning course material or module that has to be implemented. The two options that would bring a change in the cost indicator/factor is a) in-house design & development b) Through vendors

Delivery Cost: After the data gathering and design & development phase, most people or organizations would find the cost variable lurking on the higher side of the expenditure graph. But the truth lies in the comparison of the above two with respect to the delivery cost. Typically, driving factors for delivery cost depends on the following:

Total number of e-learning sessions/classes/modules

Total cost incurred on the instructor (if any)

Total cost per student

Course/e-learning material

Location costs and,

Miscellaneous costs including CD-ROMs, electronic presentations, internet applications etc.

So the factor that brings down the expenditure graph and brings out a better ROI is the number of students undergoing the e-learning program or training. The more the number, the more feasible it is, simple economics. The main factor is the up-front cost incurred in developing a technology based training module (TBT) as opposed to an instructor led training (ILT)

Maintenance: One of the most important of them all is administration and maintenance cost, which includes technical support, technology & content updates etc. Most e-learning modules based on CD-ROM's need technical support or assistance.

Total Cost: Last but not the least is the adding up of all the above verticals to arrive at the total cost. It has been seen over a period of time that the technology based trainings (TBT) have a lower total cost as opposed to ILT's. This total cost evaluation determines the actual financial return on investment (ROI) of the entire e-learning program.

According to a survey, the total corporate spending on training in the United States was approximately $60 billion in 1998, and the sole reason for such a high expenditure amount was owing to the good ROI factor. The return on investment or ROI has tangible and intangible benefits. Some of the tangible benefits according to the type of e-learning program would include a) increase in sales b) increase in customer satisfaction after a customer service program c) reduction in defects by 20-30% in case of a quality control program etc. The result of such programs can quantify for tangible results and the ROI can be measured in terms of dollars and not just ratios or percentages.
While we are talking about tangible results, there are intangible benefits attached to the e-learning programs that qualify for creating a better ROI. These would include increase in employee morale, effective productivity owing to better teamwork, less stress among employees or students etc. They can not be measured yet they can be seen as a total improvement, which will finally come down to performance and productivity, which are tangible results. So in the end, calculating the ROI of e-learning has its own limitations but this also helps in providing a ball park figure of how effectively e-learning can perform and add value to the organization.