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.

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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

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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.

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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

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Copyright © 2005 SumTotal Systems, Inc. All rights reserved. SumTotal

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