A Cost-Benefit Analysis On Evaluating eLearning Investments
I’m going to venture a guess that soon you’re going to want to develop effective and innovative learning activities. And to do so, you’ll probably acquire various technologies, hardware, software, and possibly other tools and equipment in order to make this happen.
Most people will say, 'if it’s in the budget, just buy it'. This is true for insignificant, inexpensive purchases, like office supplies, and training materials. But today, many training acquisitions are significant purchases for your organization, like purchasing a Learning Management System, computer equipment, or any eLearning development tool.
These acquisitions require approval from business leaders and financial decision-makers. They refer to these purchases as capital investments, and will either conduct cost-benefit/break even or net present value analysis (see this article link). Here, we'll focus on cost-benefit.
A Cost-Benefit Example
Let’s work through a simple cost-benefit example to provide insight about how decision-makers evaluate these types of investment decisions.
Mary is the President of a company that sells a productivity software for $200. She just announced the release of a new version with some additional features. The company ABC sells a productivity software for $200. The cost to make it is $120 per unit and they are currently selling 4000 units. Mary, the President, just announced the release of a new version with some additional features. Mary believes an eLearning course could help the marketing, and sales teams, increase sales by 700 units in the first year and avoid any work disruptions.
You expect the course, including equipment, technology, content development, and design, to cost $60,000 and ABC currently has $200,000 in fixed cost. Before approving it, she asks you to provide a financial assessment to prove the course makes business sense.
Many training practitioners instinctively say, 'Yes, it makes sense' since sales will incrementally increase by 700 units or, $140,000, for an eLearning investment of $60,000. ABC will be ahead by $80,000. Business leaders, on the other hand, will compare current sales and costs with the projected outcomes.
At the current sales level of 4000 units ABC is earning $120,000 in operating income (column 1). But as soon as you add the additional $60,000 in eLearning fixed costs and the sales increase (column 2), we see ABC losing $4,000 dropping its operating income to $116,000. Naturally, Mary won’t support this decision.
It's at this point where learning practitioners will sell their soul to convince Mary she should do this anyways because learning always makes sense. Well, I hate to burst your bubble but this is a business and learning doesn't always make sense.
It's true, by rejecting the eLearning initiative ABC won’t gain 700 units in additional sales, but they also won’t incur the additional $60,000 eLearning fixed costs. At worst, they’ll maintain the current profit level and possibly gain some sales growth for the new software.
To get Mary’s support for the eLearning course one of two things must happen:
- Find a way to reduce the eLearning development costs by $4,000, or
- Work with the team to increase sales by 50 units.
Doing either one will bring the decision to what leader’s refer to as break-even. Ideally, you want to do better than break-even. That means either decreasing eLearning costs by MORE than $4,000 or increasing sales by MORE than 50 units. Then the eLearning decision is profitable for ABC. Regretfully, you don’t have control over sales but you do have control over eLearning costs.
- Take time to review all of the eLearning course elements from the technology used to the development process.
- Identify what you absolutely require to create and deploy the course.
These are your 'need to have' items. The rest, well, they’re the 'nice to have' elements. And unless you’re able to convince Mary about the tangible benefits they could provide the business, they’re unessential and your budget won’t increase.
Final Words
If you want to learn more, watch for my Spring 2018 Lynda.com course, "Gaining Internal Buy-in For eLearning". If you enjoyed this article, please visit my recent Lynda.com Train-the-Trainer eLearning course designed for both recent and seasoned trainers.
What I provided is a simple example to create awareness about how your leaders make financial decisions. I don’t expect you to become financial professionals. But whenever you have a learning proposal requiring significant resources, I encourage you to work with the internal finance team to build a robust business case. As a bonus, you’ll also impress your leaders even if you don’t get approval. So, please #alwaysbelearning.
