Learning Outsourcing Marches Ahead: New Economics

We have always regarded the term “learning outsourcing” as a misnomer.  The very nature of a training function requires that many of the topics, programs, and solutions are outsourced – after all, training managers are expected to be able to train and support every function in the company.  How can they possibly do this without the help of outside experts?

That said, the market for outsourced learning solutions is growing more every year.  Today nearly 30 percent of all custom content development, 44 percent of delivery and 30 percent of learning management system (LMS) operations now are outsourced to learning service providers.   (Source:  The Corporate Learning Factbook®)

Why the continued growth?  Because, as we have described in our research on High Impact Learning Organizations, the “corporate university” model is being replaced by a model of “learning shared services.”  Today’s high-impact learning organizations are very service and performance-oriented, and they readily outsource program development and delivery to experts to meet budgetary and business needs.

The Economics of Training Outsourcing are Highly Efficient

In 2006 and 2007 we embarked on two major studies of outsourcing economics.  This research (available to research members through our benchmarking program) studied the economics of training outsourcing uncovered some interesting facts.  First, the training outsourcing market continues to be very fragmented and comprises thousands of content developers, content providers, consultants and technology firms.  Most large organizations do not select service providers based on size or lowest cost.  Rather, they seek solution providers that “understand our business problems” and “fit with our corporate culture.”

Although a few dozen companies are conducting very large process-based engagements, the majority of outsourcing is specific to particular programs or initiatives.   We believe, for example, that there are fewer than 20-30 “fully training outsourcing” projects in the world.  Rather, a company will outsource its sales or dealer training or elements of its leadership development program. As a result, most learning providers specialize in program areas, not only horizontal technologies and processes.

Prices Vary Widely – but are Efficient

Our research found content development prices ranged from $3,000 an hour to more than $75,000 an hour. Even within a single type of content (such as informational Web-based training or application simulation), prices can vary by 100 percent to 200 percent.

Prices are highly efficient, however. That is, organizations that pay more also gain far greater value. Those that paid above-average prices showed the highest satisfaction with business impact, and organizations that paid below-average prices were dissatisfied with business impact, cultural fit and flexibility.  For example, organizations which rate their solution provider “highly aligned with their culture and business processes” readily pay 25-30% higher prices for content development for similar types or learning programs.  Likewise, organizations that pay 20-30% below average for content development tend to rate their solution providers as “poor” or “very poor” in their match to company culture and business processes.

The bottom line: In this market, you get what you pay for.

At least seven highly dimensions are highly correlated to price — the price you will pay for a given program or content development project is based on far more than the content itself.  Also factored in is the business strategy on which it is based, speed of development and how you work with the service provider. This means you should be very careful about shopping for content and development providers through a request for proposal (RFP) process.

If you choose to do so, you should make sure the RFP is extremely detailed and discusses all aspects of your expected content, all methods of delivery and your expected relationship with the supplier.  In particular, to gain the best possible price/performance, you should explicitly describe your expectations for:

• Specific engagement model.  We found five different models.  Each model creates a very different relationship between you and your solution provider:
  1. The vendor does all performance consulting, development and delivery
  2. You do performance consulting and the vendor does instructional design, development, and delivery
  3. You do performance consulting and instructional design, and the vendor does development and delivery
  4. You do performance consulting, design, and development and the vendor works with you on development
  5. You do all design and development, and the vendor does “repurposing” of existing content
• Service levels.  How quickly will the vendor respond to changes?  What level of relationship-manager do you expect?  Will the vendor share their project plans with you or not?  What languages do you demand?
• Standards.  What internal or external standards do you demand?  Do you have standards for colors, fonts, technology, AICC/SCORM, LMS release, documentation etc? 
• Content Maintenance.   Who owns the final content?  Will you be able to maintain it yourself?  Do you need to use a vendor’s tool to maintain and upate the program?
• Cultural Fit.  How well does this vendor “fit” into your organization?  This seemingly subjective area is perhaps the most important of all.  Some vendors are “solution-oriented,” some are “content-oriented,” and some are “price-oriented.”  Just as with anything you buy, think hard about what kind of vendor you need.

The LMS Outsourcing Market is Exploding

In addition to the $14+ billion market for outsourced content, it is now fairly easy to outsource your LMS.  Software as a service (SaaS) technologies make this easy.  And today virtually every LMS vendor offers a hosted or on-demand solution. Traditional licensed software vendors all have announced similarly configured on-demand offerings targeted at midmarket organizations. Some of the more experienced on-demand vendors are now finding their solutions broadly established and easy to sell. In fact, these vendors tend to be growing the fastest as a result.

Outsourced LMS systems present their own challenges – described in our research on the “new generation of learning platforms” (available to research members).  In the mid-market segment, as many as 40-50% of all LMS systems are now outsourced or OnDemand.  Many global enterprises are now turning to this solution.

Outsourcing Helps you Focus on Business Value

Finally, the increased focus on outsourcing and evolution of learning services has fundamentally changed training organizations. The new high-impact learning organization focuses on business alignment, performance consulting, strategy, measurement and integration with talent management initiatives.

Although today’s training organizations still build high-value content, a much larger part of their role is the selection, management and blending of outsourced content and services into the mix of programs their organizations need.

You should expect to spend time and resources in the selection and management of learning service providers. You should evaluate vendors based on many criteria — not just the quality of their content but also their flexibility, their ability to understand your business and skills gaps, their ability to fit into your culture and, most of all, their proven delivery capability from reference customers.