Classic ROI for learning

by Glynn Jung

In this second instalment of learning analytics, Glynn discusses the classic approach to return on investment (ROI) for learning.

If you take the accountants’ approach to ROI for learning analysis there are five important points to note;

  1. The assumptions made before conducting the analysis are important and you must document them.
  2. It takes more than one ROI model to establish value, and not all ROI models will be valid for a given case.
  3. Collaboration with customers and senior management in identifying Learning benefits is critical; ROI determination is not a one-sided exercise.
  4. It is too easy to fall prey to the temptation to just “play with the numbers” until an acceptable result appears.
  5. Calculators can only “do numbers” – they can’t compute the value of the intangibles.

There are a number of classic approaches to show the financial impact that a given investment (your e-learning project) will have on a business.

Payback

The issue here 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 break-even   Payback is best used to establish relative priority between potential projects.

Accounting Rate of Return (ARR)

This 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 Calculating return on investment and it also considers returns for the entire life of the project.

Net Present Value (NPV)

Net Present Value is best used for long-term projects. It considers the time value of money- 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. NPV can be tricky!

Internal Rate of Return (IRR)

IRR is not as easy for non-accountants to understand or to calculate as NPV. I don’t even understand the terminology let alone the techniques.

Full business impact: the Balanced Scorecard

Many human performance interventions have complex effects on business results. In recent years, the best known method of impact assessment has probably been the balanced scorecard.

The balanced scorecard looks at the effect of a project in four areas:

  1. financial,
  2. customers,
  3. learning and
  4. internal processes.

It is holistic and long-term, and it is forward-looking. Financial results are still an important area considered, but they are not the only element.

If your organisation uses balanced scorecards it may be useful to relate the benefits of your 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.

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