The Learning Management System (LMS) as an Investment: Four Steps to an LMS ROI
What's an LMS worth to your organization? Whether you're thinking about investing in an LMS for the first time or considering changing to a new one, your return on investment (ROI) will play a key role in that decision. Keep reading to learn more about the factors you'll need to take into account to make an accurate calculation.
You're probably already familiar with the standard return on investment (ROI) calculation:
In other words, will your organization make enough (or save enough) from an LMS to make the investment worthwhile?
If you're wondering about the advantages of adopting an LMS, considering switching to a new one, or just want to know what your LMS is doing for you, the following steps will help you determine the ROI an LMS would generate for your organization:
Step 1: Calculate Your Cost
Calculating the cost of your LMS is the easiest part of the equation. Unfortunately, easiest isn't the same thing as easy. You'll need a thorough understanding of your LMS's pricing model before you can assess its cost. I'll briefly review the six main models here.
If you opt for a self-hosted LMS, you'll need to consider costs like infrastructure, IT support and possible charges for updates and fixes, as well as the cost of the LMS itself. Upfront charges for the LMS may be:
1. Free - Several free LMSs are available. eLearning Industry lists several open source options in their Ultimate List of Open Source Learning Management Systems. Using a free LMS is never going to mean your LMS costs are zero. As well as the infrastructure and IT costs mentioned earlier, you might have to pay for hosting, add-ons, support, implementation services and many other related services.
2. Perpetual License - A one-time fee is charged for a set number of users to use the system in perpetuity. If you're looking at this option, you'll need to account for some of the following costs as well:
- Setup and hosting
- Additional licenses
- Upgrades and bug fixes (which may not be included in the initial fee)
3. Periodic License - License fees are charged monthly or yearly. Additional costs are mostly the same as those for a perpetual license, though upgrades and fixes are usually included.
Using a cloud-based LMS means hosting costs are included in the price of the LMS. Some support is often provided as well. The main costs are usually a one-time setup fee and a periodic consumption-based fee. The consumption-based fee may be:
4. Pay-per-use - with "use" given every definition imaginable
5. Pay-per-user - the definition of "user" is similarly variable
6. License fee - this can be a one-time, perpetual use or periodic fee
Step 2: Calculate Your Profits
The LMS profit calculation can involve actual profits, if you're selling learning via eCommerce, or cost savings, which are more common in a corporate environment.
LMS profits or savings may include:
1. eCommerce profits
If you're entering the learning marketplace, your eCommerce profits will be your income less the cost of course development. If you're already there and just switching to a new LMS, the right LMS can offer opportunities to increase your sales and save on costs:
- An LMS with good eCommerce features will let you cross-sell products, recommend items to current and potential customers and offer a variety of promotions. Any increased sales due to new features should be accounted for in your ROI calculation.
- An LMS upgrade might also allow cost-saving improvements and efficiencies in administrative and other processes. Review what you're doing differently with the new system and add your savings to the profit tally.
2. eLearning savings
Learning delivery costs should drop dramatically when you adopt an LMS to facilitate eLearning. Even if you moved away from classroom delivery some time ago and are now looking at a replacement LMS, new features can help you realize additional savings.
If, however, you are still delivering in-person, instructor-led training, eLearning offers substantial savings. When appraising your eLearning savings, don't forget the following:
- Travel - With instructor-led-training, either the instructor or the trainees often have to travel to the training site. Costs for travel, accommodation and food are eliminated when training occurs online.
- Infrastructure - eLearning eliminates the need for classroom facility rental and the purchase of classroom supplies.
- Training time - Traditional training requires time away from work, while eLearning is often completed in short spells during travel or other downtime, especially if you're using mobile learning. Additionally, eLearning is self-paced, so advanced and faster learners spend less time completing the learning.
- Disruption - When training is completed during downtime without time away from regular tasks, there's no need to leave tasks undone or hire extra employees for cover. Rescheduling regular activities during training times is another cost that can be avoided.
- Reduction in missed learning opportunities - eLearning tends to be easier to implement -- no classrooms to book, or days off to schedule -- and to complete, and organizations can take advantage of this to increase learning opportunities.
3. Improving the effectiveness of learning
The right LMS can help improve the effectiveness of your learning offerings. Most LMSs have tracking and reporting capabilities you can use to help you figure out what's working for you and what needs improvement. These tools will tell you:
- Which learning items are being completed and which ones aren't
- Where people are dropping out of courses
- Whether or not learning is successfully preparing people for assessments
Identifying your problem points is the first step to fixing them. LMS analytics enable improvements in learning, whether you want a better product to sell or more effective training within your organization.
4. More efficient administration
LMSs automate many administrative processes of learning, including:
- Progress tracking
- Assessments and outcomes
LMS records can be invaluable for tracking compliance and documenting legally-required training.
5. Standardized training and development programs
Organizations can reap substantial benefits from using an LMS to formalize or standardize ad hoc training or development programs.
Onboarding is a prime example of the value of an LMS. A quality, formal onboarding program can lower turnover and improve employee performance. Using an LMS to deliver that program lets an organization:
- Individualize the onboarding process
- Maintain key records
- Store and update documents for future reference
- Avoid overloading new hires
Step 3: List Intangible Benefits
Intangible or unquantifiable benefits aren't strictly part of the ROI, but they should be listed alongside it. Improving training and simplifying administrative processes that were once a source of annoyance can do a lot to improve morale. While good morale probably has financial benefits, the effort required to quantify that benefit is far too great for most people involved in an ROI calculation to undertake. It can be useful to survey affected personnel for their opinions of a new LMS and present the aggregated results with the ROI.
Step 4: Calculate the ROI
Once you've itemized your costs and profits, you're ready to calculate the ROI of your LMS. How you go about it will depend on whether you're adopting an LMS for the first time or switching to a new one. If an LMS is new investment, simply add up your costs and profits and plug them into the standard ROI formula:
If you're switching LMSs, you'll be more interested in the differences between the two systems. Your profits will be the income and cost savings generated by the switch, while your costs will be the difference between the costs of the new system and the ongoing costs of the old one.
In this article, we've reviewed the factors that must be considered to calculate the ROI of an LMS. ROI is essential information when deciding whether to invest in a new LMS, but it's just the first step. If you're looking to build a case for a new LMS, you can learn about the next steps in Building a Successful LMS Business Case.
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Jill is an Instructional Designer at BaseCorp Learning Systems with more than 10 years of experience researching, writing and designing effective learning materials. She is fascinated by the English language and enjoys the challenge of adapting her work for different audiences. After work, Jill continues to leverage her professional experience as she works toward the development of a training program for her cats. So far, success has not been apparent.