Building the LMS Business Case: How to Calculate the ROI of an LMS for External Training

Gordon Johnson
Aug 23, 2019, 1:17:35 PM

We’ve arrived at the last and most important post in this series, which is how to construct the ROI component of the LMS business case for your external training business.

With this final piece of the business case puzzle, you can present your argument in the best possible light and get the green light from senior management.

The first post of this series is a practical overview: How to Build an LMS Business Case for External Training. The second post provides insights that establish a baseline of the current state: How to Assess Your External Training Business. The third helps you to build on that baseline, and construct a clear vision of the future state: Developing a Compelling Vision for your External Training Business.

Now it’s time to prove the case with numbers.

 The almighty ROI 

It all comes down to the Return on Investment (ROI) calculation. The dollars and cents of how the new LMS will increase productivity and profit. Most senior executives will read this first, and if they don’t like it, won’t read another word.

Like calculating a simple interest rate, calculating ROI starts with the net profit you foresee (we will define this later on) divided by the cost of the investment, multiplied by 100, and expressed as a percentage.

The higher the percentage, the greater the return on investment, which is what management is looking for.

ROI-Formula1

Level set with senior management

Make sure you are preparing what they want to see, in the format they prefer. Two important variables you should work out in advance:

  • When calculating return, should you use all revenue or only incremental revenue. We advocate all revenue because the LMS will drive all revenue, but it’s not our choice.
  • What scenarios do they want forecast? We are suggesting two: Year 1 (the initial ROI – includes both one-time and variable LMS costs) and Year 2 (with only variable LMS costs)

Calculating net profit

The definition of net profit is revenue less the cost of the investment. Thus, net profit can come from sales or savings.

Usually ROI is calculated in retrospect, so we already know the revenue. Cost of opportunity might be a better label. Thus, to determine revenue you must make a conservative estimate of:

  • How revenue would increase, decrease or stay the same without the new LMS
  • How the new LMS will incrementally increase revenue.

One thing is sure, if you get the green light, these estimates will come back to haunt you. Management will absolutely compare actual to your estimates. Temper the forecasts submitted by the SMEs on your team.

The following shed slight on why we advocate being conservative.

According to SiriusDecisions, 79% of sales organizations miss their forecasts by more than 10%. CSO Insights reported in their most recent annual survey that about 54% of the deals forecast by reps never close.

Making money  

John Leh, Founder, CEO and Lead Analyst of TalentedLearning has kindly agreed to share his expert perspective throughout this post. He begins:

“It’s all about the numbers. Show that the return is expansive, that there is more than one needle that will be moved. If you show demonstrable success through ROI, senior management is typically onboard. 

“The return portion of ROI is found in 3 easy buckets:

  1. Making money
  2. Saving money
  3. Improving business processes”

“The categories or line items you use should be consistent with the baseline you’ve prepared and the detail of the future state.”

Making money directly and indirectly

There are both direct and incremental revenue streams. Direct revenue is from the sale of your company’s external learning programs.

Direct revenue will be enhanced by the new LMS because it will enable

  • A broader set of courses and learning programs
  • The move to self-paced learning, elearning and video, which generate more scalable revenue at a lower cost
  • The transition to the subscription model* provides a more predictable flow of direct revenue.

*Important insights are in the recent post 5 Critical Success Factors you Need to Incorporate into your Subscription Business Model.

Here are some possible direct revenue sources:

  • Subscription sales (direct)
  • Partner sales
  • Online sales
  • Individual course sales

And some of the key indicators:

  • Average purchase size
  • NPS (Net Promoter Score)
  • Learner satisfaction
  • Certification completion
  • Subscriber churn
  • Customer Lifetime Value

Indirect revenue may come from areas such as:

  • Licensing content/courses
  • Bundling
  • Packages
  • Tax tools
  • 3rd party integration options
  • Managed services

Your CRM should have most of this data. You must also work with the VP of Sales and Accounting (general ledger). They will be part of the review process and you should not surprise them. They must be familiar with the numbers and able to defend them.

It’s important to shine a light on some of the features of the new LMS that amplify the size of sales. Some examples are:

  • In-widget apps. These are mini-application views embedded in other applications. This allows for learners to easily access information about courses, notifications, learner paths, certifications, events, gamification, etc. within Salesforce or other systems that they spend a lot of time in.
  • Gamification. This is the use of gaming elements such as leaderboards, badging and milestones, to incentivize learners and making learning fun.
  • Certification. Essentially a professional award or independent assurance that the recipient has demonstrated an expressed level of knowledge and skills.

You may wish to include an assessment of how market share will change (e.g., increase) with the new LMS. While it’s not revenue, it is certainly causal.

The effects of better reporting

Lastly, the increased scope and accuracy of LMS tracking and reporting should be mentioned because it enables business agility and constant improvement. The new LMS will generate better management information on things such as the performance of customers, groups, or programs, and by area. This information, now reliable, provides important direction on how to best use resources to generate profit.

Saving money 

As John said, there are many needles that can be moved, examples include:

  • Transitioning to elearning and video. The scalability and long term cost of development, production and distribution is far below that of instructor-led courses.
  • Minimization of personnel (instructor and admin) costs associated with training programs. The less manual work there is, the more person hours you free up for more strategic work.
  • Minimization of admin costs associated with tracking and reporting because these functions are now automated by the LMS.
  • Minimization of travel expenses, for both your company, and your learners (which makes it easier for them to say yes to training)
  • Reducing errors. Manual systems are more prone to errors. Here’s a worst-case scenario: your company has been promoting an instructor-led course in City A but has only 2 registrants, which is not enough. The course is thus canceled, but the 2 registrants are not notified. They show up, but there is no facility, no instructor and no course. That’s a lost customer.
  • Additional benefits of using the LMS for internal training. Bring all the power of the new LMS to your employees and partners.

Improving business processes

Examples include:

  • Course authoring that is built into the LMS. Create online courses and content easily, quickly, and without 3rd party applications
  • Improved onboarding and ongoing education. These are the greatest levers to long-term customer success.
  • Reduced time to market. This is the lever to pull that decreases costs, increases agility and builds a high wall to competitive inroads.
  • Automation of tracking and reporting eliminates errors and vastly increases the range of reporting to reveal course and geographic opportunities, at a minimum.

You’ll need help in assigning monetary value from HR, Accounting and Marketing.

Calculating the Cost of the External LMS

There are two kinds of cost:

Fixed. These are your one-time costs associated with implementing the LMS. They include:

  • Implementation
  • Training
  • Integrations
  • Modify your existing workflows

Variable. This is the LMS SaaS license, which tends to be yearly with a three-year contract.

Forecasting ROI

There are at least 2 scenarios that require an ROI calculation:

Year 1

This is the initial ROI and includes the implementation, integration, LMS license and set-up costs. Let’s assume that implementation begins at or near the beginning of the fiscal year. John adds, “Start measuring from day one. These costs should be recouped almost immediately.”

Here’s a simple ROI calculation for Year 1:

LMS Cost / Investment: $60,000

Fixed: $50,000

Variable: $10,000

Estimated return (revenue): $300,000

ROI-Formula2

Translation: the investment of $60,000 in the LMS is forecast to generate a 400% return in year 1.

It is possible that senior management will also want to know the payback period, or the timeframe required to amortize the fixed costs.

Year 2

Ongoing costs are based on consumption. John adds: “There’s no surprise here. The most you use the more you pay, the more business you have. You are growing by success.”

Here’s a simple ROI calculation for Year 2:

Cost / Investment: $20,000 (variable)

Estimated return (revenue): $400,000

ROI-Formula3

Translation: the yearly investment of $20,000 in the LMS is forecast to generate a 513% return in year 2.

The last word, from John Leh

“Nobody does this for fun. Companies acquire or upgrade their LMS to sell more, more quickly, at a higher dollar volume, to get to market more quickly, expand into new territories, and rollout new products faster. Make more money and increase competitiveness. Prove it.”

We make it almost as easy as pie

Click below to download a pre-programmed excel spreadsheet that will calculate the ROI for both scenarios. Just plug in the numbers. Play “what if” games. It’s our investment in your success.

Here's your ROI recipe.

ROI

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