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Measuring ROI: The Basics[1]

Measuring and evaluating learning through technology has earned a place among the critical issues in the learning and development and performance improvement fields. For decades, this topic has been on conference agendas and discussed at professional meetings. Journals and newsletters regularly embrace the concept, dedicating increased print space to it. Even executives have an increased appetite for evaluation data.

Although interest in the topic has heightened and much progress has been made, it is still an issue that challenges even the most sophisticated and progressive learning departments. While some professionals argue that having a successful evaluation process is difficult, others are quietly and deliberately implementing effective evaluation systems. The latter group has gained tremendous support from the senior management team and has made much progress. Regardless of the position taken on the issue, the reasons for measurement and evaluation are intensifying. Almost all technologybased learning professionals share a concern that they must show the results of the investments. Otherwise, funds may be reduced or the function may not be able to maintain or enhance its present status and influence within the organization.

The dilemma surrounding the evaluation of learning through technology is a source of frustration with many senior executives—even within the field itself. Most executives realize that technology-based learning is a basic necessity when organizations experience significant growth or increased competition. They intuitively feel that providing e-learning and mobile learning opportunities is valuable, logically anticipating a payoff in important bottom-line measures, such as productivity improvements, quality enhancements, cost reductions, time savings, and improved customer service. Yet the frustration comes from the lack of evidence to show that programs really work. While results are assumed to exist and programs appear to be necessary, more evidence is needed, or executives may feel forced to adjust funding in the future. A comprehensive measurement and evaluation process represents the most promising, logical, and rational approach to show this accountability. This book shows how to measure the contributions of learning through technology with several case studies. This chapter defines the basic ROI issues and introduces the ROI Methodology.

ROI DEFINED

Return on investment (ROI) is the ultimate measure of accountability. Within the context of measuring learning through technology, it answers the question: For every dollar invested in technology-based learning, how many dollars were returned after the investment is recovered? ROI is an economic indicator that compares earnings (or net benefits) to investment, and is expressed as a percentage. The concept of ROI to measure the success of investment opportunities has been used in business for centuries to measure the return on capital expenditures such as buildings, equipment, or tools. As the need for greater accountability in learning, demonstrated effectiveness, and value increases, ROI is becoming an accepted way to measure the impact and return on investment of all types of programs, including technology-based learning.

The counterpart to ROI, benefit-cost ratio (BCR), has also been used for centuries. Benefit-cost analysis became prominent in the United States in the early 1900s, when it was used to justify projects initiated under the River and Harbor Act of 1902 and the Flood Control Act of 1936. ROI and the BCR provide similar indicators of investment success, although one (ROI) presents the earnings (net benefits) as compared to the cost, while the other (BCR) compares benefits to costs. Here are the basic equations used to calculate the BCR and the ROI:

Calculate the BCR and the ROI

What is the difference between these two equations? A BCR of 2:1 means that for every $1 invested, $2 in benefits are generated. This translated into an ROI of 100 percent, which says that for every $1 invested, $1 is returned after the costs are covered (the investment is recovered plus $1 extra).

Benefit-cost ratios were used in the past, primarily in public sector settings, while ROI was used mainly by accountants managing capital expenditures in business and industry. Either calculation can be used in both settings, but it is important to understand the difference. In many cases the benefit-cost ratio and the ROI are reported together. While ROI is the ultimate measure of accountability, basic accounting practice suggests that reporting the ROI metric alone is insufficient. To be meaningful, ROI must be reported with other performance measures. This approach is taken with the ROI Methodology, the basis for the studies in this book.

  • [1] For more detail on this methodology, see The Value of Learning: How Organizations Capture Value and ROI and Translate Them Into Support, Improvement, Funds (Phillips and Phillips, 2007, Pfeiffer).
 
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