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How To Calculate the Cost-Benefit of E-Learning

CommunityTeam's avatar
CommunityTeam
Staff
11 years ago

Most organizations create e-learning as a means to improve employee performance. Courses are supposed to deliver knowledge and skills that make workers better at their jobs. So if e-learning doesn’t improve job performance or the bottom line, most organizations don’t want to invest in it.

That’s why it’s critical to calculate the cost-benefit of your e-learning course before you start to develop it. You want to show ahead of time that the benefits of creating and administering the e-learning course outweigh the development costs associated with it.

Here are a few things to consider when you calculate the cost-benefit of your course:

The Costs

Design, Development, and Delivery

A lot of factors go into calculating the costs associated with designing, developing, and delivering your e-learning course. You might need to see the HR department to help you figure hourly rates for various job titles, and then do some calculations to convert a salary into an hourly rate. Some costs to include are:

  • Software/Hardware Costs: For example, you might need to purchase a new authoring tool, some stock photography, or a new microphone.
  • Development Time: Calculate development time by multiplying developer’s hourly rate by number of hours needed to develop the course. To calculate an hourly rate from a yearly salary, you can use this formula: salary / 52 weeks / number of hours in a workweek.
  • Meeting and Review Time: Include the value of the time of everyone involved with the project: meetings with a manager, the tech department, your SMEs, copyedit, graphic design, etc. Calculate the dollar value of the time spent in meetings with these people as well as the time they devote to the project.
  • Lost Production Time: The time your participants spend taking your e-learning course is called lost production time. Calculate the lost production time using this formula: # of employees x hourly rate x # of hours the training lasts.

These are some of the most obvious costs you need to consider. There might be others, such as organizational overhead and, the cost of setting up an LMS or webpage to host the course.

Once you’ve identified and calculated the costs associated with developing and delivering your e-learning, you need to look at the second part of the equation: the dollar value associated with the benefits of your e-learning.

The Benefits

Benefit of Training

The benefits of training can be tricky to identify and narrow down, but it is possible and very important to do so. To calculate the dollar value of the benefits, you need to identify 1) the specific task that is being taught in the training or e-learning, and 2) the average benefit, in dollars, of improving performance surrounding this task.

Once you’ve done this, multiply the dollar value of the benefit by the number of employees, and multiply that by a time period. When you have both your total costs and your total benefits, you can calculate your Return on Investment (ROI) using this formula:

Having flashbacks to math class? Let me share an example with you to illustrate this more clearly.

Cost-Benefit Analysis Example: XYZ Delivery

You work for XYZ Delivery as a training designer. Over the past few months, an increase in shipping label errors has caused more packages to be returned undelivered. To reduce the amount of errors, the Shipping Manager wants to create a one-hour e-learning module for 50 employees on the proper way to fill out shipping labels. They ask you, their in-house training designer, to do a cost-benefit analysis for designing this module.

First you look at the costs associated with designing, developing and delivering this module:

Now that you’ve looked at the total costs, you need to identify the benefits of training the employees at XYZ Delivery on how to fill out shipping labels properly.

The specific task being taught: How to fill out a shipping label.

The benefit of improving performance for filling out shipping labels: You investigate and identify that, currently, the 50 employees get an average of one error each per week on shipping labels. An error on a shipping label means a package is returned at an average cost to XYZ Delivery of $15 per returned package.

Teaching the employees how to properly fill out the shipping label could save XYZ Delivery $750 per week (50 errors per week x $15 per error = $750). Multiply that by four weeks in a month and by 12 months in a year, and XYZ Delivery can potentially save $36,000 per year if they can reduce the rate of packages returned due to shipping label errors to zero. To calculate the net benefit, we’d then subtract the cost of training from the benefit, $36,000 - $4000 = $32,000 is the total net benefit.  Now let’s plug these numbers into the ROI calculation shown above:

XYZ Delivery can potentially get an 800% return on their money in a year if they invest in this one-hour e-learning module designed to reduce the error rate for shipping labels to zero. It may make sense to leave room for a few shipping label errors—that’s only normal human behavior—so you could edit your calculation to reflect this. Again, this is just a general example to illustrate the cost-benefit analysis more clearly.

Hopefully this simple method for completing a cost-benefit analysis and calculating the ROI of your e-learning course will encourage you to do so for your next project. If you’ve done a cost-benefit analysis in the past and you’ve learned a thing or two that you’d like to share, please leave a comment below. We love to hear your feedback!

You can always sign up for a fully functional, free trial of Articulate software. And don’t forget to post your questions and comments in the forums! We’re here to help. For more e-learning tips, examples, and downloads, follow us on Twitter.

Published 11 years ago
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Career
Project Management
  • SimonBlair's avatar
    SimonBlair
    Community Member
    10 years ago
    Great article, Nicole! Even if your client doesn't use ROI to inform their decision, it's great to have for your own purposes. It becomes so much easier to justify your fee/job/project when you can show that your previous work had an ROI of 800%.

    Some other things to consider:
    - people don't tend to make mistakes when they're not working, you'll probably want to exclude holidays/vacation from any calculations based on hours/days/weeks of work
    - don't forget to plan for maintenance/obsolescence: it's harder to attain (and maintain) a positive ROI if your course is only current for a year as compared to a course that stays relevant for a decade
    - as your audience increases, so does the potential ROI (think economies of scale). For example, a 5% cost savings for each of 5 employees may not be worth your effort, but the same 5% across 5 million employees adds up to "real money"

    Andrew, you bring up a good point. When you're dealing with potential gains/losses it gets trickier. Without getting too bogged down in the math (that's what actuaries are for), I suppose you could look at the average cost of a breach in terms of settlements, fines, lost business and reputation damage.
    If you've had incidents in the past (hopefully you haven't!), you could use those numbers, e.g. "Last year, breaches involving mishandling of personal info cost us $5M."
  • jeff's avatar
    jeff
    Community Member
    11 years ago
    Whew, you've got my head spinning Nicole, with all this math I mean...
  • AndrewWinner's avatar
    AndrewWinner
    Community Member
    11 years ago
    Excellent post on a really important topic.

    It's also worth considering how you'd calculate ROI on a project that's designed to prevent a catastrophic event or massive loss. For example, I do some training on company policies such as handling of personally identifiable information. If a mistake was made that opened the company to a lawsuit, it would be end up being quite expensive. You would have to tweak the ROI formula to reflect the value of these kinds of courses.

    That said, a really excellent post on a topic that comes up all the time in our field.

    -Andrew
  • DanShannon-73c9's avatar
    DanShannon-73c9
    Community Member
    6 years ago
    Excellent article, but, if you really want to blow people's minds with the cost of training, you might consider that the customer is not only paying the learners' wages during the training time, but they are also losing the productivity of those workers.

    If a worker is getting paid $50/hour. the organization should try to be making $150/hour as a result of their efforts, for a net value of $100/hour to the organization.

    When that worker is in a class, he or she is no longer adding value. The organization is not only paying $50/hour: they're paying for the lost value the worker should be adding as well.

    That lesson is really costing $200/hour per $50/hour employee.

    Therefore, the learning experience you design had really better be worth it.
  • SimonBlair's avatar
    SimonBlair
    Community Member
    6 years ago
    Hi Dan,

    I like where you're going with that, but I see two problems.

    1: In many roles, and in many organizations, it's difficult to quantify the value an employee delivers (particularly since it can vary greatly from one employee to the next). Unless you're talking about a project with a multi-million dollar budget, it may not be worth the time and effort to calculate with that level of detail.

    2: Your math is off. In your example, the working employee produces a net value of $100/hour, while the non-working one generates a cost of $50. That's a difference of $150/hour, not $200. In other words, the employees are being paid the same, regardless of activity. The only difference is the output.

    Cheers,
    Simon
    • DanShannon-73c9's avatar
      DanShannon-73c9
      Community Member
      6 years ago
      Hi Simon,
      As to the first point, I know I'm in the minority on this, but I believe every organization can develop a value stream map.
      We already do that, but it seems we're just guessing or using market rates.
      Even rough numbers can be incredibly useful. Read Moneyball, if you haven't already (the movie's pretty good too).
      What people thought was valuable in a baseball player turns out to have no significance whatsoever to whether teams won or lost. There was no meaningful way to assess value in organizations where people were being paid millions of dollars.
      As to the math: let's see. (Accounting can be very creative, I'm finding, and it's obviously arguable.)
      - The organization pays a person $50/hour.
      - That person isn't adding the $150 value to the organization while being trained. The organization is taking a hit.
      - Seems like we're out $200? Unless the training is so valuable that it will more than make up for the cost.
      - Conversely, he works for $50/hour and adds $150, for a net gain of $100.
      - So I can either lose $200 or make $100.
      - I guess my real point is that math is hard and it makes my head hurt.
      Thanks for getting me to think more deeply about that.
      Dan
  • farwaarubab's avatar
    farwaarubab
    Community Member
    2 years ago
    Here are some steps to follow:

    Identify the costs: The first step is to identify all the costs associated with implementing an e-learning program. These costs can include software and hardware costs, content development costs, training costs for instructors and learners, and ongoing maintenance costs.

    Estimate the benefits: The benefits of e-learning can include increased learner engagement, reduced travel costs, improved knowledge retention, and reduced training time. It's important to estimate the potential benefits that could result from the e-learning program.

    Assign a monetary value to the benefits: Once you have estimated the benefits, assign a monetary value to them. For example, if the e-learning program reduces travel costs, calculate the amount of money saved on travel expenses.

    Compare costs to benefits: Compare the costs of implementing the e-learning program to the estimated benefits. If the benefits outweigh the costs, then the e-learning program is likely to be a good investment.
  • SarahHipwell's avatar
    SarahHipwell
    Community Member
    5 months ago
    Given that this article is 10 years on, I just wanted to add my 2 cents.
    The value a trained employee brings should be looked at over their entire time with the company, not just while they're being trained. Well-trained employees usually make fewer mistakes, need less supervision, and stick around longer, which cuts down on future costs related to fixing errors, managing staff and hiring new people.

    The digital landscape is evolving at a very fast pace, keeping skills up-to-date is key to staying competitive. Trained employees help the company stay innovative and adaptable.