Measurement and accountability are the order of the day in most organizations, and the chosen method for delivering that order is return on investment (ROI) analysis. ROI is a standard tool in a manager’s kit, to be deployed when needed.
ROI is not required for every project. For small jobs, it is overkill – if the analysis costs more time and money than the project (and it can), it isn’t worth doing the analysis. ROI is not a tool that you can use to prove the value of ALL e-Learning. Your organization probably provides guidelines that identify when an ROI analysis is required. The key is to remember that ROI is a tactical tool, not a strategic weapon.
In this tutorial, you will see an overview of the various methods used to evaluate the level of return to expect from an e-Learning project, and a general guide to when to use these methods.
It is important to keep in mind that ROI is not an absolute, simple, black-and-white test of tangible value. You won’t be doing it on the back of an envelope, and most of the “ROI Calculators” that you see online are worthless.
Even when you have done your due diligence and used the appropriate method to calculate the expected return, getting decision-makers to accept your analysis requires presentation, negotiation, collaboration, compromise, and persuasion. Think of it as a consensus-based process.
Here are five important points about ROI analysis:
- The assumptions made before conducting the analysis are important and you must document them.
- It takes more than one ROI model to establish value, and not all ROI models will be valid for a given case.
- Collaboration with customers and senior management in identifying e-Learning benefits is critical; ROI determination is not a one-sided exercise.
- It is too easy to fall prey to the temptation to just “play with the numbers” until an acceptable result appears.
- Calculators can only “do numbers” – they can’t compute the value of the intangibles.
ROI models
There are several standard financial models for assessing the tangible return on investment in e-Learning. These are explained in detail, with examples, in an article published April 14, 2003 in Learning Solutions, titled “Doing the Numbers: Return on Investment for e-Learning.” In this tutorial you will find a general introduction to the models, and a short discussion of models for evaluating the intangible or “soft” benefits of an e-Learning project.
Classic approaches to tangible value
These approaches show the financial impact that a given investment (your e-Learning project) will have on a business. There are five of these. Understand that the results are not consistent from one model to the next, even on the same project with the same set of assumptions. Different organizations require use of different models. Talk to your CFO or the executive in charge of accounting to learn which of the models to use. You may find it prudent to use more than the mandated model.
Payback
Payback is sometimes called “breakeven analysis.” It is the most widely-used measure for evaluating potential investments. The issue isn’t profitability, it is “How long will it take to get all the investment back?” Payback analysis results are expressed in months or years. This is calculated as the net investment amount divided by the average annual cash flow from the investment.
The payback analysis is easy to use and easy to understand. However, it does not take into account the time value of money (which is addressed by another model, Net Present Value, or NPV). Payback also does not consider the financial performance of the investment after breakeven.
Payback is best used to establish relative priority between potential projects. Most organizations have standards for payback. A company may require payback in 36 months or less. If one project has a payback of 24 months and another project shows payback of 30 months, in general the company will choose the project with the shorter payback.
Accounting Rate of Return (ARR)
Accounting rate of return is another simple method for calculating the return on a major project. It gives a quick estimate of a project’s payback, supports comparisons between projects, and it also considers returns for the entire life of the project. It has two serious weaknesses, however: it uses only income data instead of cash flow, and it does not consider the time value of money.
To compute the accounting rate of return, subtract the annual depreciation (using the “straight-line” method) from the annual cash inflows and divide the result by the initial investment.
Net Present Value (NPV)
Net present value is best used for long-term projects. It considers the time value of money. That is, it expresses future cash flows in terms of their value today. While this is the strength of NPV, it also means that this method is not appropriate for projects that do not have clearly defined cash flows, or when the benefits of the project are not financial.
Net present value is the present (discounted) value of future cash inflows minus the present value of the investment and any associated future cash flows. The result will be either positive or negative, in dollars. All other things being equal, when comparing NPV for two different projects, the bigger NPV indicates the project that should be chosen.
NPV can be tricky. Read the April 14, 2003 article and example carefully!
Internal Rate of Return (IRR)
This is sometimes referred to as the “hurdle rate” and it tends to be favored by accountants and finance executives because it takes into account the time value of money. The IRR is the discount rate that results in a net present value of zero for a series of future cash flows. Effectively, it gives a breakeven rate of return – the discount rate below which an investment gives a positive NPV. The IRR is used as a go/no go measure, and it works well for analysis of e-Learning projects.
IRR is not as easy for non-accountants to understand or to calculate as NPV. Spreadsheets make it easier, but you would still be well-advised to work with your accounting group to set up the analysis.
Expanded ROI analysis
We often see ROI expressed as a percentage, rather than as months, years, dollars, or discount rate. This is also an accepted method for analyzing the financial results of a project, calculated by dividing the cumulative impact on profit and loss (P&L) by the projected depreciated cost of the project. Generally an organization will be looking for a return rate that falls into a specific range. If the rate is below the range or above it, the project will probably be rejected.
There is a complete example of an expanded analysis in the April 13, 2003 article.
Full business impact: The Balanced Scorecard
Many human performance interventions, including e-Learning, have complex effects on business results. The classic measures just outlined are not completely effective at capturing the true business value of these projects.
In recent years, newer approaches have been devised that help to assess the intangible value and results of business interventions and investments. Some companies have adopted these, and some have not, but most executives are familiar with the concept. The best known method is probably the balanced scorecard.
The balanced scorecard looks at the effect of a project in four areas: financial, customers, learning, and internal processes. The approach is holistic and long-term, and it is forward-looking. Financial results are still the most important area considered, but they are not the only element.
Relate the benefits of your e-Learning project to each of the four areas of the scorecard. Show how the program objectives relate to the objectives and important questions in each area. The emphasis is on process, not on metrics.
See the extended discussion in the referenced article.
The bottom line
ROI is an important concept. Managers of e-Learning must understand it and be able to use it to describe the business value of projects.
