Is E-Learning Worth It?

NPV Analysis for E-Learning Projects

Part 1 Benefits
Draft 3.0
January 16, 2004

Prepared by:

Rick Humphress

ICS Multimedia Inc.

770 Ritchie Hwy., Suite W15

Severna Park, MD 211146

www.icsmultimedia.com

Phone 410.975.9440, Fax 410.975.9445

 Table of Contents

Executive Summary 3

Introduction 3
The E-Learning Project 4

Demonstrating the Return on Investment 4

Direct Revenue Benefits 6

Indirect Revenue Benefits 11

Direct Cost Benefits 14

Indirect Cost Benefits 21

Salvage Value 25

© 2003 by Rick Humphress

All rights reserved. No part of this work may be reproduced in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise, without the prior written
permission of the copyright holder.

Is E-Learning Worth It? ICS Multimedia Page 2 of 27

This white paper is the first of a three part series. In this document, I present the Net Present
Value Equation and outline the Benefits for an E-Learning project. In Part 2 Costs, I develop a
cost estimation technique that quantifies the cost side of the equation. In Part 3 Sample
Analysis, I offer two sample analyses as well as the primary research that served as the
foundation for the overall whitepaper. RH

Executive Summary
This whitepaper presents a Net Present Value (NPV) framework for analyzing the revenue and
cost benefits from an E- Learning project. The framework helps generate a Return on Investment
(ROI) that any company can use to compare an E-Learning project to the rest of its portfolio of
investment decisions.

Using field research accumulated in 2003, the whitepaper classifies E-Learning revenue and cost
benefits. It, then, provides a detailed analysis of now to derive all of the components of an NPV
analysis. These components include Total Benefits, Total Costs, Salvage Value, and Discount
Rates. In the final sections, these components are all woven together in two Sample Analyses.

This document contains two helpful Addenda. Addendum A presents the primary research used
to construct the framework. Addendum B outlines the relative amount of production work a
company can expect for each of four levels of E-Learning interactivity.

Introduction

E-Learning is technology-enabled learning performed outside the classroom that uses the
Internet to organize the traditional manual processes of learning management and assessment.
By contrast, classroom learning uses traditional learning concepts within a physical location and
relies on staff to manage the user bookkeeping [www.brandonhall.com]. As the pace of business
accelerates and as every business seeks to decrease its costs while increasing its competitive
positioning in the world economy, the management and dissemination of knowledge becomes
more imperative. As one analyst states, “Knowledge is your most important raw material.
Knowledge is your most important source of added value. Knowledge is your most important
output. If you are not managing knowledge, you are not paying attention to business” [Stew
109]. E-Learning addresses the imperative to improve this knowledge value chain.

While nearly every company wants to improve knowledge management, getting such a project
into an approved budget is another story. One of the chief concerns we hear from our prospective
clients is that they lack a good template for cost justifying their E-Learning projects. Surely,
they say, we can learn from other companies who have successfully investigated E- Learning.
Can’t we incorporate their experiences into our analysis? This whitepaper attempts to provide
just such a framework. It describes a model that any organization can use to construct a business
case for an E-Learning investment. It can be used at any time during your project: (1) at the
beginning to kick-start the effort; (2) in the middle to justify continued funding; and (3) at the
end to assess whether the project met or exceeded its initial goals.

E-Learning projects have the reputation of being hard to justify. Despite the imperative to
improve knowledge assets, even skillful project managers can find weak support in the executive
suite. Why? Clients tell us they face the following obstacles. First, executive managers show a
strong preference for investments that directly affect balance sheet items. Indeed, executive
compensation rewards, almost exclusively, the short-term improvement of the accounting bottom
Is E-Learning Worth It? ICS Multimedia Page 3 of 27
line. It takes a special executive to listen to an investment proposal that enhances the value of
the firm’s intangible assets (people, knowledge, customer and supplier value chains, etc).
Second, the full benefits of a comprehensive E-Learning project may not accrue to the
organization for a year or more while nearly all of the costs are front loaded. Many executive
managers face business pressures that work against decisions with these time horizons, no matter
what the eventual return. Last, other busine ss areas with long-standing investment patterns have
more experience and sophistication in presenting their business case to executive managers –
and, consequently, they get viewed as more important.

Your E-Learning project can surmount these obstacles and compete successfully with the firm’s
portfolio of other investments opportunities - if you rigorously uncover all the benefits and costs.
The cost justification template that follows provides the framework to show you how.

The E-Learning E-Learning Project Tasks Your Company Your Vendors

Project
An E-Learning Project can be
roughly divided into two
phases: the initial analysis and
the subsequent implementation.
The cost justification bridges
these two phases. In the
beginning, it provides the
reasons to undertake the
project. In the end, it serves as
the standard against which the
success of the project is
measured. Throughout the
middle, it serves as the
guideposts for a successful
project. The table on the right
shows how the big pieces
typically fit together.
Creating a thorough Cost
Justification that clearly
assesses the costs and
articulates the benefits
represents the difference
between talking about E
Learning and actually
implementing it.
Realize a Need for E- Sense that your current Discuss best practices
Learning training methods and client experiences
negatively impact either to paint a vision of the
direct or indirect solutions that others
revenues or costs. have achieved
Obtain Executive Receive management Help you assess
Commitment to E- visibility and early- reasonable benefits and
Learning Project stage funding approval the feasibility of your
training vision
Assess initial Begin gathering Site visit to lend
requirements business requirements expertise on the
and constraints gathering of
requirements
Scan for Partners Perform due diligence Provide differentiators
on your alternatives in that separate their
the marketplace company from others
Create E-Learning Plan Task someone to create Retain a vendor to
Document the document that will conduct a Needs
become your formal E- Analysis and create
Learning Plan. your E-Learning Plan
Compete the E-Learning Solicit a fair market Submit initial bids
Plan number of bids for the
work specified in the E-
Learning Plan
Approve Cost Obtain Executive Submit Best and Final
Justification Management agreement Offers
to fund the project
Select Vendor that Pick the vendor Retain a vendor to
Maximizes the Cost supplying the best value implement the E-
Justification proposition according to Learning Plan
your company -specific
weighting of the criteria
Schedule E-Learning Plan Schedule the E- Perform the E-Learning
Implementation Learning Plan elements Plan work to customer
and monitor vendor satisfaction
performance

Demonstrating the Return on Investment

To create profits, firms make strategic investments that generate positive cash flows over the life
of the investments. The inverse is also true. Firms destroy profits by making investments that
generate negative cash flows for their life spans. The most common figure of merit used in
Is E-Learning Worth It? ICS Multimedia Page 4 of 27
calculating return on investment is Net Present Value (NPV). This financial yardstick requires
the following information:
• Project benefits and the timeframes in which they will occur
• Project costs and the timeframes in which they will occur
• Project lifespan (i.e., 1 year, 3 years, 30 years, etc)
• Discount rates for all future cash flows
• Salvage value anticipated at the end of the project

In general, here is how to determine the NPV of an investment decision. First, determine the
cash inflows to be received from the investment’s benefits and their timing. Next, determine the
cash outflows and their timing. Then, determine if the investment has any salvage value at the
end of its useful life. Now, appropriately discount the cash flows over the life of the investment.
Finally, add the discounted cash flows and determine if the result is positive or negative. Here is
an example,

1. Cash inflows assumed to be $10,000 immediately and $20,000 per year in the second
and third year. The project life is three years.
2. Cash outflows are assumed to be $25,000 immediately and $5000 per year in the
second and third year.
3. Salvage is estimated at 25% of the initial $10,000 investment at the end of year three,
or $2,500.
4. Assuming a 20% discount rate for the cash inflows and a more conservative 10%
discount rate for the cash outflows, the cash flows are evaluated as follows:
Y1 Y2 Y3 Total
Cash inflows $ 10,000 $16,667 $13,889 $ 40,556
Cash outflows $(25,000) $ (4,545) $ (4,132) $(33,678)
Salvage $ 1,736 $ 1,736
Total $(15,000) $12,121 $11,493 $ 8,614
5. Considering the cash flows and their timing, the project increases the firm’s wealth by
$8,614 in today’s dollars.

In principle, the firm should accept all projects that have a positive NPV. Where the firm has
mutually exclusive options (such as choosing between Vendor A’s offer and Vendor B’s offer
for the same services), the firm should choose the option with the highest NPV. Where capital
budgets are constrained, firms should consider the Benefit-Cost Ratio (BCR) since it identifies
those projects that have the biggest bang for the buck. For the example above, the BCR is
($40,556+1736)/$33,678 or 1.26. In practice, be sure to consider more than price alone; you
must also adequately assess vendor risk (see Risk Reduction and Vendor Risk in this document).

How do you determine the numbers that go into the formula? The balance of this book describes
constructing a NPV analysis for an E- Learning Project.

After our firm interviewed 50 organizations on the benefits they hope to receive from an E-
Learning system, we created a convenient framework to categorize these benefits. The benefits
map into four distinct categories (see below).

According to this categorization, benefits either increase revenue or they reduce cost. As the
benefit impacts revenue or cost it does so either directly or indirectly. The rest of Part 1
examines these benefits boxes.

Is E-Learning Worth It? ICS Multimedia Page 5 of 27

Competitive Wins Soft Productivity

Direct Revenue Benefits
What is the fundamental question of any organization? How do we get more dollars! In
particular, the goal is to produce cash returns that exceed the cost of capital invested. If you
work for a profit-oriented organization then these excesses are either plowed back into the
business or distributed to shareholders. If you work for a non-profit organization then these
excesses allow you to increase your level of service and insure your long term survival. While
improving cost, productivity, asset utilization, and risk positions are important bottom line
considerations (I address them in Part 2), top line revenue growth remains the paramount aim of
every organization.

To grow revenues, organizations adopt a posture or orientatio n to the market. Philip Kotler has
identified five market orientations that exist to varying degrees in society today. Production
orientation is an old strategy centered on the concept that consumers care only about availability
and cost. The focus in this orientation is to increase production efficiency and distribution.
Product orientation focuses on the quality, performance and features of the product. Managers
concentrate on improving these over time. Selling orientation means that customers will not
ordinarily purchase enough of the product and so the organization must prod them with
aggressive selling and promotional efforts.

These three orientations represent "old school" thinking and are slowly being replaced by two
more enlightened "new school" orientations. Marketing orientation stresses that the organization
must define a target market and determines its needs and wants. The goal of the business is to
satisfy these needs and wants better than anyone else. Societal orientation advances the
marketing orientation further by considering not only the customer's needs and wants but those
of society as well.

For old school organizations, the analysis presented in this book will probably not mean very
much. For new school organizations, howeve r, this book contains many creative ideas about how
they can use training in the form of computer-based e-Learning to satisfy the needs and wants of
their target markets to build revenues. In addition, much of the rationale for e-Learning
contained in Part 2 of this book (reduced travel, better regulatory compliance, and reduced
employee turnover) manifestly services the broader interests of society.

In constructing the e-Learning Net Present Value equation, organizations must be able to show
either revenue enhancement or cost avoidance. The only way that e-Learning will support the
goals of the business is if it contributes in one or both of these areas. Below I outline six revenue
enhancement benefits to e-Learning that satisfy customer needs and wants:
• Training Add-on
• Training Product
• New Competency
• Competitive Differentiation
• Competitive Table Stakes
• Training that Pulls through Sales

Along with each benefit I offer a suggestion on how to calculate the amount of revenue
enhancement your organization can expect to receive. Please keep the following points in mind
as you think through the examples:
Is E-Learning Worth It? ICS Multimedia Page 6 of 27
Estimation of relevance and magnitude of cash flows requires an exercise of judgment and
perspective. I hope you will agree that I have exercised these faculties properly.

I have for the most part used the “with-without” principle in determining the relevance of cash
flows. Under this method, imagine two worlds: one with and one without an investment in e-
Learning. Any cash flows that are different between these two worlds are relevant to the Net
Present Value equation.

Predicting the future cannot be done with perfect certainty. I have used expected value analysis
and Monte Carlo simulation to minimize error but error cannot be eliminated. The only way to
know for sure the magnitude of the revenue enhancement benefits is to measure them after the
fact.

Consider adopting an approach that "solves for the benefit". In other words, leave the benefits
term in the Net Present Value equation as a variable, determine the amount that your budget will
allow you to spend, set NPV = 0, and then solve for the total benefit. Then, examine each of the
12 Training Benefits and decide if a reasonable person would conclude that enough benefits can
be found to "balance" the equation.

Benefit 1: Training Add on

Do you sell a product to which a paid training module can be added?
If you produce software, can your users benefit from training that features software simulation?
If you perform services, can your users benefit from a training that they can use long after your
engagement has ended?
Do you sense a market for Employee Performance Support Systems (EPSS) that help your
customers do their job better or faster?

If the answer to any of these questions is “Yes”, the n you have a direct revenue benefit in
the form of a training add on.

Much of the productive effort in American business centers on making a product and selling it in
the marketplace. This product may be a piece of equipment used in a factory with hundreds of
other components or it can be a stand alone unit. It might be a piece of software that integrates
with an entire information system or it might be a personal productivity tool. The product might
be a service that gets delivered as part of an ongoing campaign or as a one-shot delivery. The
bottom line with these products - equipment, software or service - is this: they are worthless if
people do not know how to use them. Training (knowledge on how to use the tool) is the critical
transforming power that turns wasted investment into proven ROI.

Here are three ways to think about how you can add training on to your existing products and
services. First, observe if any consultants or other third parties offer training on the use of your
products. License this material from them and create a training add on that you can use to
produce incremental revenues. Or, if you have the resources, use your own intellectual property
to create add-on training. Not only will you create an incremental revenue stream, you will also
increase customer satisfaction and the likelihood of further purchases from your customer base.
Second, you can move upstream or downstream in your value stream and create training on
complementary components from your partners. This knowledge sharing not only adds
substantial value to that subset of your customers using the two products together but also
increases the strength of the bond between you and your partner. Last, consider the value of
Is E-Learning Worth It? ICS Multimedia Page 7 of 27
giving the training away for free! Why would you do that? Well, "free" is a magic word with
your customers. If you increase the perceived value of your product by including training at no
additional cost then you can expect increased revenues in your product sales.

Calculations
A conservative estimating rule for the value of this benefit is 10% of the total selling price of
your product. For example, let's say you license a system to 450 customers for about $1000 each
user. Ten percent of this $450,000 amounts to $45,000 or about $100 per user. Your particular
environment may require an adjustment slightly upward or downward. When we simulate an
NPV analysis with this term we will let it vary from 0-10%.

Benefit 2: Training Product

Do you have any specialized knowledge that you can package into training modules and sell to
an identifiable market?
Is there some unique content that you can capitalize and earn direct revenues from your clients?
Do you have partners that you can tap for the content to turn into marketable training assets?
Do you enjoy market leadership such that you can create a certification requirement for the use
of your products or services?

If the answer to any of these questions is “Yes”, then you have a direct revenue benefit in
the form of a training product.

Many firms in America today have veins of golden knowledge deposits lacing their organization
just waiting to be mined. These assets can become a truly staggering source of profits. Consider
that once a training asset has been created, the distribution and marketing costs may fall to as low
as 10% of the selling price. That means that you have generated a product that can sell for a
90% profit margin. Compare that to the returns on other products in your portfolio and you see
why computer based training is a gold rush.

How can you access your organization's untapped wealth of training assets? One way is to use a
creativity tool called Morphological Analysis. Morphing is a technique that allows you to create
a new product by mixing components in a new way. Begin by listing the attributes of the
product or services you offer. Attributes might encompass the whole product or major
subsystems of the product. For example, you might be a one-product company but the product
itself might have many variations. Use these attributes as column headings.
Next, instructional designers have identified five possible learning outcomes that a training
program will achieve. These outcomes are cast in the form of skills that the learner will acquire
as a result of completing the training course. These outcomes are intellectual skills (problem
solving), cognitive skills (thinking), attitudinal skills (positive feelings), verbal skills (facts) and
motor skills (physical abilities). Use these learning outcomes as the row headings.
Now, examine the combination of attribute and learning outcome and brainstorm on all the ways
that you can create a practical training product. It is possible that you can fill out an entire
matrix of training products all of which could generate profit margins approaching 90%.

Calculations
Specialized training content can generate between $100 and $1000 per customer. In exceptional
cases, the “per user” revenues may be much higher although the number of users will be
correspondingly lower. Thus, a reasonable estimate may work as follows: if you identify 5000
Is E-Learning Worth It? ICS Multimedia Page 8 of 27
users in a 100,000 user market (5% uptake) and sell them specialized training at $250 per user,
then you will have generated $1.25M in revenue.

Benefit 3: Selling a competency

Do you want to use ISO 9001 certification to help you generate more business?
What about Software Engineering Institute's Maturity Model, if you are a software developer?
Are you launching a Six Sigma program?

If the answer to any of these questions is “Yes”, then you have a direct revenue benefit in
the form of new corporate competencies.

At their core, businesses can be defined by the everyday individual activities that the constituent
parts perform on its behalf. In fact Michael Porter and others (Cokin, Breaking) claim that
superior business activities generate competitive advantage. They claim that good processes are
value creating assets and that customers will pay a premium for them. If we examine good
processes from a training perspective, we see that training has a direct causal effect. The right
training delivered in the right manner at the right time enhances process value. No training or
poor training erode whatever value your business has accumulated in its good work practices.
Moreover, you must train continuously because these business practices have a short lifecycle.
New employees must receive the initial training, existing employees must receive refresh
training and all employees must receive improved versions of your training.

There are three important quality initiatives firms use to document and improve there business
practices: ISO 9000, SEI CMM, and Six Sigma.
ISO 9000 - ISO 9000 is a set of international standards on quality management and quality
assurance developed to help companies effectively document the quality system elements to be
implemented to maintain an efficient quality system. The standards, initially published in 1987
and revised in 2000, are not specific to any particular industry, product or service. The standards
were developed by the International Organization for Standardization, known as ISO, a
specialized international agency for standardization composed of the national standards bodies of
91 countries. Increasingly, major buying organizations such as auto manufacturers and the
federal government use ISO 9000 certification as a differentiator in procurement. They will
make certain purchases only with ISO 9000 companies and reject the rest. The certification is
becoming "table stakes" for firms to even play in the game.
SEI CMM - The Software Engineering Institute Capability Maturity Model (SEI CMM) for
Software describes the principles and practices underlying software process maturity and is
intended to help software organizations improve the maturity of their software processes in terms
of an evolutionary path from ad hoc, chaotic processes to mature, disciplined software processes.
The CMM is organized into five maturity levels:
1) Initial - The software process is characterized as ad hoc, and occasionally even chaotic. Few
processes are defined, and success depends on individual effort and heroics.
2) Repeatable - Basic project management processes are established to track cost, schedule, and
functionality. The necessary process discipline is in place to repeat earlier successes on projects
with similar applications.
3) Defined - The software process for both management and engineering activities is
documented, standardized, and integrated into a standard software process for the organization.
All projects use an approved, tailored version of the organization's standard software process for
developing and maintaining software.
4) Managed - Detailed measures of the software process and product quality are collected. Both
Is E-Learning Worth It? ICS Multimedia Page 9 of 27
the software process and products are quantitatively understood and controlled.
5) Optimizing - Continuous process improvement is enabled by quantitative feedback from the
process and from piloting innovative ideas and technologies.

Essentially, moving up the maturity levels requires an increased attention to detail and further
elaboration of basic processes. The improvements required to progress upwards depend on
training employees on the key processes.
Six Sigma - Six Sigma is a methodology that provides businesses with the tools to improve the
capability of their business processes. This increase in performance and decrease in process
variation lead to defect reduction and improvement in profits, employee morale and quality of
product. Six Sigma quality is a term generally used to indicate a process is well controlled, (±6
sigma from the centerline in a control chart). The term is usually associated with Motorola,
which named one of its key operational initiatives "Six Sigma quality." When I worked at
Motorola in the early 1990's, training was deemed a key success criterion for the company.

Calculation
Distinct from the cost cutting and operational efficiencies generated by these programs, each can
offer a direct revenue benefit. If the major part of your value proposition to the market is an
internal competency, then training on that internal competency contributes directly to revenue
generation. For instance, let's say that you do not have ISO 9001 certification but you estimate
that acquiring it would generate $50M in additional revenues from new contracts given only to
vendors with this certification. You will not receive the appropriate certification without
extensive internal training. In some cases, the entire revenue depends on everyone receiving the
training, and in those cases, all of the additional revenues can be considered a direct revenue
benefit of training.

Is E-Learning Worth It? ICS Multimedia Page 10 of 27

Indirect Revenue Benefits
Benefit 4: Competitive Differentiation
Do your direct competitors offer training products?
Do you sense that training can represent a differentiation between your firm and your
competitor?
Do you feel pressure from customers to match competitive offers including support services like
training?

If the answer to any of these questions is “Yes”, then you have an indirect revenue
benefit in the form of competitive differentiation.

Can training help your company win competitive deals that it has historically lost to your
competition? Yes! This competitive advantage is especially strong when the physical product
you market is hard to distinguish on its own. Often service differentiations such as superior
training can make all the difference between winning and losing a customer. One way to think
of this benefit is to keep the following syllogism in mind:
All enhancements sell more.
Training is an enhancement.
Therefore, training sells more.

By the way, if you are adding enhancements that don't help you sell more, stop doing that.

Calculation
How do you assign a value to this benefit? We recommend a two-step process. First, estimate
the profit generated by an average customer transaction. Then, determine the expected value of
the training-profit-benefit by distributing probabilities over the number of incremental sales
transactions it will generate. The sum of the expected values that result will be the expected
value of the training-profit-benefit. If it sounds complicated remember that essentially we are
trying to predict the future. While still a subjective process, this method has many benefits over
previous human attempts such as tracking stars, questioning Delphic oracles and examining bird
entrails.

Profit per New Sale $50,000

For example, consider the firm that
generates on average $50,000 in New Sales where Probability Expected
profit per new customer and Training Differentiated (Total = 100%) Value
distributes probabilities for 0 25% $ -
incremental new sales as shown in 1 25% $ 12,500
the table to the right. 2 35% $ 35,000
3 15% $ 22,500
100% $ 70,000
The person creating this analysis
believed that the likelihood of a new sale from training ranged from 25% for no sales to 15% for
as many as three sales. When the individual calculations are all added the expected value of
training in this scenario is $70,000.

Depending on the products and the size of transactions, one additional customer order due
directly to the presence of a training product can offset the entire cost of the system.

Is E-Learning Worth It? ICS Multimedia Page 11 of 27

Consequently, any subsequent sales generate handsome profits. And here is another way of
considering this issue: If everyone else has training and you don’t then they can exploit this gap.
If you have training and nobody else does, then you can exploit this gap. If you match the
training offering of your competitors then you will have neutralized any advantage and you can
differentiate your offering on other grounds. All three scenarios favor the implementation of a
training solution.

Benefit 5: Competitive Table Stakes

Consider the inverse of the situation described directly above.
What if you lose a customer who defects to a competitor because of poor training?
Do you have clients that ask for online or computer-based training because your competition has
instructed them to ask you this question – knowing you lack the capability?

If this is the case, then you have an indirect revenue benefit in the form of avoiding
competitive losses.

This indirect revenue benefit is especially strong in cases where you sell your client items that
they cannot productively use without training. Proprietary software is a classic example.
Consider what happens when a bank adds a new user of banking software (it could be any
vertical industry). The bank buys an additional software license and then waits for a space to
open up in an instructor- led class either onsite or at some other location. The bank has now
expended funds but does not have a productive employee yet. Customers will naturally want to
reduce the time gap between license upgrade and trained user. A vendor that offers self-paced
training on a CD ROM or over the web offers a compelling value proposition by minimizing the
time to productive employee. Not offering such a capability may cause a customer to defect,
taking their profits to another vendor.

Calculation
How can you assess this benefit? You can use the same expected value method as above. In
some industries, existing customers have a very high value because of the up-sell and cross-sell
opportunities they represent. Other industries have low residual customer value because nearly
all of the revenues are captured upfront with little opportunity for further transactions. In any
case, assess the average profit of an existing customer and then distribute a probability of the
number of defections attributable to nonexistent or hard to schedule training. (See example
under Competition Indirect Benefit)

Benefit 6: Training that pulls through sales

Do you have a complex or conceptual product that you sell to a sophisticated buyer?
Do you operate in a confusing marketplace with multiple direct competitors and several direct
substitutes for your product?

If this is the case and you have unique knowledge assets that clarify this market confusion, then
you have an indirect revenue benefit in the form of pull through training.

Imagine creating an interactive online training presentation that objectively teaches the concepts
underlying your philosophy or technology. Now imagine that a potential customer browsing the
web for information prior to making a buying decision sees this consumer training and decides to
view the material. What effect do you think that this training has on the likelihood that this
buyer will now purchase your product? The probability is markedly higher. An old marketing
adage states that “buyers decide emotionally and justify rationally”. A short, interactive training
Is E-Learning Worth It? ICS Multimedia Page 12 of 27
module can simultaneously excite the buyer about your product and provide the rational
arguments to support a purchase. If your existing training materials allow for reuse (for
example, they are SCORM compliant) then you can easily adapt them to this purpose.

Channel sales is another common environment where this benefit is acutely strong. Consider
your product in a catalog right alongside several of your competitors. How are you going to get
the channel salesmen to move your product instead of the competitor? One (expensive) way to
favor your product is to offer higher payouts and other financial perks if the channel sellers push
your product. Another better and potentially much less costly method is to provide the channel
salespeople with superior training on your products. I have worked in the channel for several
years and I can personally attest that people sell what they know best. If they know your product
better they will sell more of it.

Calculation
Think of this benefit in terms of Public Relations (PR). PR seeks to pave the way for product
sales by providing information that constituents regard as more objective and unbiased than
ordinary sales materials. A well- crafted online training module about the objective benefits of
your product can provide a substantial “PR” benefit.

Clicks and Mortar Revenue Estimate Assumptions

How should we measure the Total website hits (mo) 10,000
impact of this benefit? See the “Click throughs” to training 1%
Complete training, receive code 25%
table nearby for an estimate Code referenced during purchase 40%
generated for a “clicks and Purchases from Training 10
mortar” company that receives Revenues per average sale $2,500
about 10,000 hits to its website Revenues from Training $25,000
per month. Suppose that just
1% of these visitors are curious enough about the prominently displayed “training” icon that they
click on it. Suppose that 25% of those people actually complete the 5-10 minute training and
receive a special code. The special code allows them to buy your product under some valuable
special term (for example, lower price or greater quantity). When the customer redeems the
code, your system tracks the number and amount of sales attributed to this training.

Is E-Learning Worth It? ICS Multimedia Page 13 of 27

Direct Cost Benefits

In the preceding sections I have focused our attention on the ways that an organization can use
computer-based training to enhance its top line revenues. But this is only half of the story.
Bottom line management of profit is just as critical to your business success. To achieve a more
substantial bottom line, organizations must continue to press for every cost advantage they can
receive. Every dollar saved in cutting costs while maintaining (and sometimes improving level
of service) contributes extra margin to the coffers of the firm.

According to Cokin and others (Kaplan and Norton), cost reduction occurs by altering existing
products and processes in response to customers and business strategies. E-Learning is one
strategy to drive lower costs by improving the ability to perform key activities that service
customer needs. In this section, I will suggest several ways that organizations can use computer-
based and web-based training techniques to decrease their costs. These cost avoidance ideas
include:
• Hard Productivity cost
• Reduced Support cost
• Reduced Live Event cost
• Soft Probability
• Regulation
• Employee Turnover

The big idea in this section is that e-Learning supports the cost cutting methods employed in
Activity-Based Costing/Activity Based Management (ABC/ABM). ABC is a new set of
accounting practices developed over the last 20 years designed to overcome the limitations of a
500-year old accounting system that cannot adequately express the organizational value of a
firm's knowledge. Basically, ABC acts as a translator that converts the information about land,
plant, equipment and people as it appears on a normal balance sheet into costs associated with
performing activities.

For instance, Kotler identifies four important businesses processes: new product realization
process, inventory management process, order to remittance process, and the customer service
process. ABC provides detailed information on the costs per task in each of these processes.
Using ABM, companies can use E-Learning techniques to make intelligent decisions that reduce
costs for these tasks. For example, in the order to remittance process one function might be
Claims Processing. In the figure below (from Cokin), the General Ledger items are translated
into their respective activities:

Claims Processing Department (General Ledger View)

Actual Plan +/-
Salaries $621,400 $600,000 $(21,400)
Equipment 161,200 150,000 (11,200)
Travel Expenses 58,000 60,000 2,000
Supplies 43,900 40,000 (3,900)
Use and occupancy 30,000 30,000 -
$914,500 $880,000 $(34,500)

Claims Processing Department (ABC View)

Task Cost
Key/scan claims $31,500
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 Analyze claims 121,000
Suspend claims 32,500
Received provider inquiries 101,500
Resolve membership problems 83,400
Process batches 45,000
Determine eligibility 119,000
Make copies 145,500
Write correspondence 77,100
Attend training 158,000
Total $914,000

Now, computer based training can impact these activities in several positive ways. First, the
training listed as the last task item can be reduced by providing the training in a less costly online
manner. Second, tasks such as analyzing claims, suspending claims and determining eligibility
can improve through case-based scenario training. Last, any of the skill tasks can benefit from
Employee Performance Support Systems to improve both hard and soft productivity levels.

In this enlightened view of the world, training is transformed from an overhead item into an
instrument for profit growth.

Benefit 7: Hard productivity savings

Will an E-Learning project provide clear time-saving advantages to your workforce?
Can you easily document and calculate these time savings without making any undue
assumptions?
Can you identify a new set of skills that your people cannot currently perform that can be taught
through e-Learning?
Have you invested in new systems whose ROI story may be compromised unless you can train
your employees about the system?

If this is the case, then you have a direct cost benefit in the form of hard productivity savings.

Hard Productivity cost savings are the direct costs that are avoided when you implement an e-
Learning training project. These savings typically revolve around new activities that you can
perform that displace other inefficient activities you performed previously. Opportunities for
such improvements abound. Here are two ways to surface them. First, translate your general
ledger activities into their activity based costing (ABC) counterparts and look for ways that
training can impact these processes. Begin with the most costly processes and map the actual
work performed. Identify the time or procedural bottlenecks and devise the training solutions
that bring the most benefit. For example, in the Claims Processing example above, Analyze
Claims and Determine Eligibility represent two of the most costly activities. Web-based training
that delivers effective case-based instruction may increase the number of claims processed per
unit time and thus impact the overall cost structure of these two activities.

Second, identify those jobs that represent a major risk to your revenues if the current employees
where for some reason unavailable to work for you. Who would back fill these positions?
Outside contractors are expensive and take time to learn your operating procedures and corporate
culture. Your best bet is to implement a training program that cross trains a group of employees
to back up these key positions. Not only to you mitigate the risk of key employee turnover or
downtime but you also receive two other important benefits. You can use the cross training to
support career paths that you may set up for certain employees. Also, you can often improve
employee performance in their primary activity by cross training them in other activities. For

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example, in the Claims Processing example, cross training between claims analysis and
eligibility determination may bring powerful synergies to bear on both tasks.

In the analysis below, I will not provide a complete taxonomy of hard productivity cost benefits.
Instead, I will outline some hard productivity customer examples, differentiate soft productivity
cost benefits, and describe how to estimate the value of the time savings your firm might
achieve.

Here are five representative samples of hard productivity statements from my customer
research…

“Employees can easily forget detailed information without a fast and easy 'knowledge look up'
system” – How much time are employees wasting because they can not effectively use a
software tool, a form, or a piece of machinery? If these workers could quickly access a job aid
then they could finish the task without delay. Some companies treat training like inoculation:
they shoot their employees full of knowledge once and then think they are now immune to poor
work habits. The reality is that training is more like an ongoing treatment for the disease of
forgetting. Job aids on the esoteric functions within your company will directly increase
productivity.

“New employees need an efficient introduction to their job tasks” – What is the time gap
between new employee hire and the beginning of instructor-led training? In some companies, it
can be many weeks. Any gap is a financial loss because your company is paying salary and
benefits but it is not getting full productive work back in return. If your company begins the
training immediately via self-paced CD or Web training then the gap can be reduced
substantially. Closing the training gap can represent several days or weeks of extra productivity.

“We can accelerate the pace of change and our flexibility through an easy to use, browser-based
content authoring interface” – Do you have a decentralized organization with content
contributors spread out over many separate facilities? How do you coordinate such a training
effort? How do you provide content uniformity? Most companies use manual processes to
standardize content across multiple contributors. Save this effort by using web-based templates
that capture this information in a form that can be immediately plugged into your training
curriculum. Also, remember that it is quite likely that very expensive knowledge workers are
wasting time on these editing tasks so include their higher costs in your analysis.

“Our primary critical concern is providing training to mobile employees. Currently, it is

difficult to get everyone together to hold training sessions” – Here we are capturing the
opportunity costs associated with attending live training – not travel expense which we will
consider separately below. If you want to train a group of engineers, sales people, or managers
you have two basic issues. First, coordinating the schedules can delay the training to the point
that a serious productivity gap appears. If you want to train this group right away but their
schedules will not allow a meeting for another four weeks, you have lost valuable time applying
these productivity enhancements to the employee's work. Second, when these workers travel to
live training they cannot perform their jobs. If you give them self-paced training then they can
take the training during slack time. This asynchronous (“any time, any where”) benefit can be
substantial. One company reported that self-paced training for their union employees would
result in substantial savings as the firm would no longer have to pay overtime for training
sessions.

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“We would like our [secure] employees to be able to make changes and additions to the system
without involving an outside contractor” – How fast does your environment change? You may
think that it changes too fast for a training plan to keep pace. However, newer technologies now
allow your organization to keep up. Once a system is installed and the appropriate templates
created, adding content to a web based E-Learning system is very simple. You can keep pace
with the most frenetic environment and reap the associated productivity rewards.

Calculation
How do you calculate these hard productivity cost benefits? First, clearly identify all the roles
that online training will impact. Second, examine each role and determine what hard
productivity benefits each will receive from online training. Third, translate the productivity
benefits into estimated time savings. Fourth, using your corporate pay guidelines for each role
(alternatively, find salaries for similar job titles on the Web), multiply the days saved for each
role by the corresponding salary. Fifth, multiply the savings for each role by the number of
employees in each role. Last, add together all of the aggregated role savings.

Employees Salary Total Productivity Total

Impacted $$/HR Hours Discount Savings
Role1 100 $40 15 0.7 $42,000
Role2 200 $30 40 0.5 $120,000
Role3 10 $100 5 0.9 $4,500
$166,500
For example, suppose an E-Learning project will impact three roles at a company. Examine the
table at the right to see one possible calculation. Note the column “Productivity Discount”. This
term captures the idea that not every hour of liberated time gets applied back to productive work.
Sometimes this liberated time becomes longer lunches and more web surfing – at least in the
short run. In the long run, either more work will be found to fill the time or fewer people will be
needed for the task.

Benefit 8: Support cost savings

Has your accumulated training inefficiencies begun to manifest as higher internal help desk
support costs?
Do new or untrained employees consume valuable coworker time by asking them support
questions?
What is your cost of Quality? How much of rework can be eliminated through better training
methods?

If you do, then you have a direct cost benefit opportunity in the form of support cost savings.

Companies can think of this benefit in three ways. First, one common metric in the training
literature claims that for every $1 companies spend on training they can recoup $5 on support
costs. Undoubtedly, your internal help desk is very efficient and expertly handles every question
it receives. In fact, you may have already invested heavily in call center automation and support
technology. By plucking the “low hanging fruit” your firm is already saving many thousands of
dollars. However, if you haven't made these expenditures, then a training investment can pay a
big dividend and you can avoid spectacular call center investments. A medical analogy is
particularly apt here. Help desks address symptoms while training gets at the root of the problem
and cures the condition. We all know that prevention is always less expensive than cure. Train
employees and customers. Then, they will not have to call the help desk for answers to their
questions. Cure the disease of ignorance.

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Another insidious cost is the productivity destruction that occurs when new or ill-trained
employees bring all their questions to more experienced colleagues. When this happens the
original unproductive employee infects his coworker, causing her to become unproductive as
well. We suppose that one could put a positive spin on such “informal training” by calling it
tacit knowledge transfer or mentoring. It is more likely, however, that the experienced worker is
frustrated by the frequent interruptions and dispatches the untrained coworker with only the most
cursory of instruction.

Finally, and more insidious yet, poorly trained employees produce excessive rework and scrap
costs. A quote attributed to Derek Bok says that if you think education is expensive - try
ignorance. One pharmaceutical company reports that seven chemical batches produced by a
comple x piece of machinery have to be scrapped each year because of human error. Each bad
batch costs the company $125,000. When the company instituted computer-based training
featuring machine 3D simulations it reduced the human errors to four in the first ye ar thus saving
the company about $375,000. This was several times more than the cost of the computer based
training.

Calculation
Given these considerations – internal call center support, informal "help desks" and cost of
quality rework – it is no stretch to say that any comprehensive E-Learning project can easily
eliminate 20% of your current support costs. It makes sense to use this savings in the E-Learning
cost justification. Be sure, however, to isolate the support costs specific to the area that E-
Learning will address. You cannot simply take 20% of the entire current support costs if the E-
Learning project addresses only one part of the support coverage area.

Also note that if you can isolate specific examples of rework and scrap costs that can be directly
avoided due to focused and targeted training, then these can be added to your E-Learning cost
justification case. You may find that one bad decision prevented because you have enlightened
employees can provide a complete offset for your training program.

Benefit 9: Live Event Costs

Do you fly people to various sites to perform training?
Do you fly employees from their normal job sites to central training locations for instruction?
Have you valued the cost of your training rooms, personal computers, network infrastructure
and maintenance costs? What if you didn't have to make that expenditure?

If you do, then you have a direct cost benefit in the form of live event costs.

Flying is expensive and for some employees very stressful. Why no t avoid it altogether? If you
place training on a CBT or online then employees do not have to travel at all. In calculating this
cost avoidance, we recommend the following strategy. First, look at your historical records and
see how much money you have spent in the past on travel directly attributed to training. Next,
determine what your training would be over the next 12-24 months assuming you did not
implement E-Learning. Would it go up? Do you have a couple of looming regulatory
compliance events or software system upgrades that will require a substantial one-time training
effort? Figure these into your analysis. Then, determine the size of your work force over the
next 12-24 months. Are you growing? Do you need to prepare for a pending merger or
acquisition? Consider this growth as you prepare the numbers.

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Let me make two other ad hoc points about the impact of E-Learning on live event costs. First,
replacing instructor- led training and a classroom environment with computer based training at
the users desk is an example of operating leverage. Essentially, a fixed cost method (create a
CBT knowledge asset) replaces a variable cost method (live event costs). In manufacturing
settings, companies have employed operating leverage to receive substantial benefits. For
example, when a plant modernizes by adding industrial robots it consumes a higher fixed cost in
purchasing the robots but incurs reduced variable costs in fewer hourly wages. Over time, the
reduced variable costs more than pay for the increase fixed cost and the plant enjoys higher
profitability. E-Learning manifests the same principle. Over a surprising short period of time,
the fixed cost of creating computer based training is offset by the reduced variable costs of
travel, salaries, and facilities costs associated with asynchronous training events.

Second, instructor- led training delivers the content in a random and non-standard way. If a
company must train hundreds of employees it will have several trainers shoulder this workload.
They will each exhibit substantial variation from training performance to training performance.
In fact, they will not only differ between instructors but a single instructor will vary in how she
delivers the training over the course of time. These random differences lead to operational
inefficiencies. Some employees are performing tasks differently than others due to the
difference in training they received. Until E-Learning, business had no choice but to tolerate
these differences. Now, however, the training content can be delivered in a standard and uniform
way without any differences between training populations. This will result in operational
efficiencies. Instead of spending valuable resources trying to standardize the quality of live
instruction, business would do better to invest in computer-based training and deploy the trainers
elsewhere.

Calculation
Consider a company that trained 100 people at centralized locations last year and anticipates
training at least that many in each of the next two years. Part of this training is due to turnover
and part is due to growth. The company expects to have about 600 employees by the end of next
year. At that time, the company will upgrade an online system that will require every employee
to receive new training on the new user interface and additional functionality. The table at the
right shows how we could compute the avoided cost benefit of online training from travel in this
scenario. (Notice that we use a conservative Cost-per-Traveler figure since some trainees may
have only driving and hotel expenses. Your figures may be much higher if trainees must fly.)

Employees Travel Cost per Total

to be % Traveler Cost
Trained
Year 1 100 50% $ 500 $ 25,000
New System 600 50% $ 550 $165,000
Year 2 100 50% $ 600 $ 30,000
$220,000

Trainer personnel and facilities expenses– Let's examine both of these costs in turn. Perhaps
the most easily identified avoided cost from an E-Learning project is trainer cost. In principle, it
seems clear that a well executed online training strategy would eliminate the need for trainer
salaries, benefits and management costs. In practice, however, these employees are so valuable
and the needs of your various corporate knowledge management issues so great, that trainers are
typically shifted to other high- value projects within the company. For our purposes, we will

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consider training personnel as redeployed and count the cost savings toward the E-Learning
project. Calculations are straightforward with the cost of each headcount aggregated for a total
savings. For example, redeploying (4) trainers who each earn a $75,000/year salary saves the
organization $300,000/year.

Facilities costs are another fertile expense to cut. If you perform all of your training online then
you do not need classrooms. Calculate the room, hardware and software costs avoided and
aggregate them across the company. Perhaps the (4) trainers listed above each taught in a
different classroom location with 10 multimedia computers per room. The rooms cost about
$75,000 (500 sf. x $38 per sf x 4) in a premium market and the 40 loaded PCs probably cost
around $100,000 ($2500 x 40). Therefore, in this example, you can add $175,000 of cost
avoidance to the salary avoidance noted above.

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Indirect Cost Benefits
Benefit 10: Soft Productivity
Will an E-Learning project provide general time-saving advantages to your workforce?
Do you have a sense, perhaps unquantifiable, that you can save time and money for the
organization?
Do you believe that continuous small improvements to your corporate performance will lead to a
large impact on the bottom line over time?
Do you work in a highly competitive global market where you cannot compete on labor rates but
must compete on labor productivity?

If this is the case, then you have an indirect cost benefit in the form of soft productivity savings.

Soft Productivity gains are an indirect cost avoidance resulting from performing existing
activities better. The main difference between hard and soft productivity savings lies in the ease
of measurement. Hard productivity costs are easily identified whereas soft productivity costs are
more nebulous and harder to clearly articulate. Also, hard productivity cost savings have a
higher probability of actually occurring; soft productivity cost savings carry the risk that they
may not be fully realized. Typically, soft productivity arguments cannot make the entire
business case for e-Learning but they can serve as important corroborating evidence.

As with hard productivity, I will not provide a complete taxonomy of soft productivity cost
benefits. Instead, I will outline some soft productivity customer examples and describe how to
estimate the value of the time savings your firm might achieve.

Here are four representative samples of soft productivity statements from my research…
“Once we create training programs then we can use this same material for our marketing
campaigns” – Why not leverage a knowledge asset as much as possible by reusing the content in
all relevant contexts? You train your internal employees on products; why not train your
customers on the benefits of purchasing your products? Many of our customers repackage
training materials into demo disks that they give to their prospective customers.

“Proficiency testing has not been effectively incorporated into the internal training program” –
Do you stop short of testing because it consumes too many manual resources with your current
infrastructure? Don't leave it out of your E-Learning project. Testing and tracking within a
learning management system holds the employee accountable for attending and performing well
during the training. Every implementation should strongly consider a testing component because
this small add-on greatly enhances the value of the entire investment.

“Without some kind of online training, we would never be able to train everyone in time” – Do
you have a big bang training deadline approaching? Many of our clients have impending
regulatory training for which everyone must be trained by a certain date (HIPPA, for instance).
Others have “flip-the-switch” software system changes for which every user must be retrained.
Since most in-house training departments are geared for training the incidental new users for a
system, they are inadequately prepared for everyone-at-once training events. Online training
solves these problems nicely.

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”Clearly, we have several instructors teaching their own version of the material without any
standard approach” - Does everyone teach the same curriculum or do you experience substantial
deviations in the material presented to employees? Online training captures the best training
practices and uniformly teaches them to your workers. Multi- instructor classroom training
leaves the employee subject to the vagaries of the particular instructor.

Calculation
How do you calculate soft productivity cost benefits? First, use the approach I advocate under
hard productivity savings and use a lower Productivity Discount rate. Decreasing the rate
reflects the higher risk of actually achieving the targeted savings.

Second, consider applying the power law of practice. Intuitively, you would guess that
subsequent trials of any task will take less time than the initial trial. But the rate of
improvement diminishes. Otherwise, after a finite number of trials the task would take negative
time - clearly a nonsensical result. The general formula for the power law of practice is

Tn = T1 n-a, a ~ 0.4

where

T1 = the time to perform a task in the first trial.

Tn = the time to perform a task after n trials.
n = the number of trials.

The table below describes an example in which the time to perform a task on the first trial is 30
minutes. Subsequent immediate trials reduce the time to perform the task to only 12 minutes
after 10 trials. If the task to be performed is embodied in a computer simulation, then the learner
can use the simulation to work down the learning curve toward greater and greater proficiency.
This works equally well for new tasks and for "forgotten" tasks (i.e., a large gap in time caused
the learner to lose proficiency in the task).

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 T1 30
a -0.4

Number Tn Reduction Change

of Trials (Min) (Min) %
1 30.00
2 22.74 7.26 24%
3 19.33 3.40 15%
4 17.23 2.10 11%
5 15.76 1.47 9%
6 14.65 1.11 7%
7 13.77 0.88 6%
8 13.06 0.72 5%
9 12.46 0.60 5%
10 11.94 0.51 4%

Benefit 11: Regulation

Is your business subject to state or federal regulations?
Do you have to certify that your employees have completed proper training?
Has senior management ever mentioned US Sentencing Guidelines and the impact that specific
training can have on the firm?

If these topics characterize your environment then you have an indirect cost benefit in the form
of satisfying regulations.

Just as supervision is the price an employee pays for working for somebody else, regulatory
oversight is the price authority exacts for provid ing the infrastructure of a free market economy.
It is a cost of business that accosts every business.

Regulatory E-Learning offers the following benefits. First, legal and ethical training deters
inappropriate individual action. Where ignorance is no excuse, knowing the law is crucial.
Regulatory E-Learning can easily provide the necessary knowledge on the law. A well-trained
work force will commit fewer ethical breaches and their attendant fines, forfeitures and bad
publicity. Second, government must determine if you are ethical about your ethics training. You
must prove that you have trained the specified personnel in the proscribed manner. Regulatory
E-Learning offers the objective audit trail necessary to prove that you have complied with the
law. Last, government recognizes that modern businesses operate under principal-agent
concepts. The principal is held responsible for the behavior of his agents and the agents have the
duty to act in the best interests of the principal. However, no principal in a modern corporation
can reasonable control the behavior of every agent. Some may break the law or perform
unethical acts (or both). Therefore, government will reduce the penalties it metes if the principle
has made significant preventative effo rts. Regulatory E-Learning centered on legal and ethical
training serves as a perfect vehicle to evidence these proactive efforts. When a breach occurs,
the system can provide the principal with the relevant detail necessary to argue for mitigation.

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Defense Contractors, Pharmaceuticals and Investment Banks, to name but three industries, can
benefit substantially from online regulatory and ethical compliance training.

Calculation
How should you value this benefit? As with any risk, you should determine the probability of a
violation and the most likely negative outcome of a violation. Then, you multiply the probability
by the cost of the outcome. For example, if you run a 5% risk of receiving a $1M fine then the
value of a training program that has a 90% chance of preventing this fine has an expected value
of $45,000.

Benefit = (risk probability)*(negative outcome)*(training remediation probability)

= (.05)*($1,000,000)*(.09) = $45,000

Again, we are predicting the future so expect some complication. This is still easier than
reading bird entrails.

Benefit 12: Turnover

What is the turnover rate within your company?
When you conduct exit interviews do departing workers complain about lack of growth and
personal development?
Do you lose employees to bigger firms that provide superior employee development programs?

If this situation describes your environment then you have an indirect cost benefit opportunity in
the form of a turnover benefit.

Organizations often claim that they cannot invest in training because they fear that if they train
employees they will leave too soon for a payoff and become a valuable knowledge asset for
another company – often a competitor. What are we to make of this argument? It seems like a
rather large obstacle to implementing an e-Learning program. After all, it is the senior
executives with profit/loss responsibility that make this argument. The e-Learning project
cannot succeed without their support.

While this argument is pervasive I think it is unpersuasive. First, I would recast this as a salary
issue and not a training issue. Why are these executives afraid that trained employees will leave?
It is precisely because effective training makes these employees more valuable. They attain a
higher sense of their worth. They ask for raises. If the present employer does not give them the
raise then they go work for another employer that will. This is not the fault of the training. From
a purely economical perspective, the company should pay an employee up to the amount of the
increased value they bring to the firm because of the training. It is worth it for the company to
do so. Paying beyond this amount is not worth it because the company will have expended more
than it gained.

Therefore, it is not training but unwillingness to pay a salary commensurate with higher skills
that is the culprit. Now, let's say that you are a company that refuses to pay any higher wages to
these newly trained and more valuable employees. You know and expect that these employees
will leave. Now you have turnover and the expense of hiring new people and training them to do
the job. A-ha! Now we are back to training again. If you are going to run a company that slams
through as many people as it can until they get fed up and le ave then you better have a very low-

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cost and automated training program. Otherwise, any benefit you sought to achieve through
lower employee salary costs will be wholly consumed by turnover and learning curve costs.

Second, many industry analysts do not believe that executives have anything to fear by offering
training. Rather, if they do not offer training they can find it increasingly more difficult to attract
and retain highly motivated individuals. In fact, analysts believe that employees avoid
companies that will not invest in their training. When companies do invest in their employees
they defect at increasingly lower rates. This lower defection rate caused by the training
investment can be a substantial human resources benefit. One large professional services firm
reports that it saves $25M for every 1% drop in the rate at which people leave [Stew 112].

The reasoning that I have outlined above gives me the firm conviction that whether you are an
enlightened executive or robber-baron tyrant, yo u will benefit from the best training program you
can institute.

Calculation
How much does it cost your firm to hire and make productive a new employee? How many new
people do you hire a year? What if you could reduce that turnover by 5% or even 10%? How
much money would you save? The table at the right shows one way your organization can
assess this value.

Total Employees 1000

Current Turnover 20% Per year
New Hire Costs $10,000 Per New Hire
Retention Probability Expected
Improvement (Total = 100%) Value
0% 25% $ -
1% 50% $ 25,000
3% 10% $ 75,000
5% 10% $ 125,000
7% 4% $ 175,000
10% 1% $ 250,000
100% $ 650,000

Let’s summarize the direct and indirect benefits we have discussed so far. Given the analysis
above, we conclude that

Total Benefits =
Direct Revenues earned (training add-ons, training products, competencies) +
Indirect Revenues earned (competitive wins and losses, pulled training sales) +
Direct Costs avoided (hard productivity, support costs, travel, other expenses) +
Indirect Costs avoided (soft productivity, regulation, turnover)

Salvage Value

Salvage value is the scrap or residual value of an asset at the end of its useful life. In calculating
the NPV of an asset, the salvage value acts like a benefit and represents a postive value in the

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NPV equation. Since salvage value is the best guess of the future value of an asset it must be
discounted to determine an appropriate present value. For example, if you buy an asset expected
to have a value of $10,000 at the end of three years and assuming an 8% discount rate, it will
have a present value of $7,938. When it comes time to sell the asset at the end of year three,
assuming you negotiate an arms length transaction with a willing buyer paying on open market
price, you will get a check for $10,000. It's just that $10,000 three years from now is only worth
about $7,938 to you today.

Is it appropriate to consider salvage value when creating a cost justification for an E-Learning
project? After all, this is not your traditional property, plant, or equipment asset. The answer is
yes for the following reasons. First, modern accounting is beginning to change as more and
more American companies shift the center of value creation away from hard assets and toward
knowledge assets. Computer based training is a quintessential knowledge asset and deserves
appropriate financial treatment for what value it adds to the firm. Note that we cannot make this
claim about traditional instructor- led training (ILT). In ILT, the company typically consumes
training as an operating expense. In CBT, the company creates a tangible instrument that
represents a capital asset.

Second, a significant amount of competitive advantage resides in the policies and procedures that
make one company better than another. If those business methods are captured in a training
program then it now serves as an asset that helps enable and preserve these methods. If you sell
the firm, you will sell this training right along with the company and you should expect to
receive appropriate value from it. Finally, training makes hard assets work harder. So, without
the training, the hard assets are worth less and with the training hard assets are worth more. This
difference represents a value that can be assigned to training. Undoubtedly, if you sell the hard
assets with a training program you will command a higher price than hard assets without such a
program.

How should you calculate the salvage value of your E- Learning project? There are several
important factors to consider including obsolescence, an identifiable market place of ready
buyers, and off-the-shelf alternatives. Let's consider these. First, what effect will the passage of
time have on your training progr am? If you consistently update the content to reflect changes in
your business and the industry, then time will not have eroded the value of your training. If you
neglect to update your training materials, however, the relentless pace of change may render the
training almost worthless. Also, unless some a compelling business reason dictates otherwise,
develop your E-Learning to comport with an internationally recognized open standard such as
SCORM (Shared Content Object Reference Model; see www.adlnet.org). This will make it
easier to maintain and more likely to be useful to a future buyer. SCORM will increase the
salvage value of your E-Learning asset.

Next, can you think of competitors or business partners who might value your training? If the
way you do business or the way you extend the productivity of hard assets has value in the
marketplace and you have captured that knowledge in a training program, then your competition
and your partners may want to purchase this knowledge asset from you. When a corporate
merger takes place the value of all of the firms knowledge assets are rolled into a figure called
“Goodwill”. Your E-Learning project contributes to this Goodwill and the amount that it
contributes is its salvage value for the purposes of the initial NPV calculation.

Last, what is the chance that someone else will commercialize a close approximation of the
training you are creating? If the E-Learning project is very unique and applies to a few
Is E-Learning Worth It? ICS Multimedia Page 26 of 27
specialized businesses then you need not worry. However, if someone else does create an off-
the-shelf version then your salvage value will probably be no higher than the market price for
this commercial training. For example, suppose that you create basic web based training for a
printing press as an aid to getting apprentice press workers productive more quickly. Later, the
press manufacturer creates very similar training as an add-on product for its customers. The cost
of this training product probably represents a very good benchmark for the salvage value of your
training.

Given this analysis, the salvage value equation is

Salvage Value = (Value at the end of the useful life) - (Maintenance and updates over the life of
the training) - (Any costs incurred to improve the product for resale)

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