The State of the E-learning Market
By Sarah Boehle

As a fragmented e-learning market continues to mature, vendors must merge or partner with each other to compete. And customers are reaping the benefits.

Each year, we check the pulse of the e-learning market, from what's new to what's not to what's next. And each year, some things stay the same. Analyst after analyst talks about the same issues that have been bandied about for some time, such as the need for better interoperability and the demand for "end-to-end" solutions.

The same holds true for spending. Last year's state of the e-learning market report sounded a note of cautious optimism—training budgets were up, spending on e-learning was increasing, and the sector seemed poised for respectable, if not skyrocketing, growth. This year, spending on e-learning continues to hold its own, though it has come nowhere near to reaching the epic proportions analysts predicted it would both before and after the dot-com bubble burst.

"We had been living with the notion that, once the economy improved and companies began spending again, we would see pent-up demand surge—particularly in the learning management system (LMS) category—and that we would see companies rally," says Trace Urdan, a senior analyst of educational services with Robert W. Baird & Co., an asset management and investment firm headquartered in Milwaukee. "Instead, as the economy has improved, we have seen steady growth, but not the surge in spending that many vendors had hoped for."

If the market hasn't lived up to the industry's once-lofty expectations, at least there is no indication that customers have abandoned or taken a step back from their e-learning initiatives. Far from it, in fact. "Our research is showing that the learning market in general, and e-learning in particular, is still growing," says Joe Pulichino, director of research at the eLearning Guild, a Santa Rosa, Calif., community of practice for training professionals. "Also, on average, more money is being spent on e-learning as a total percentage of overall budgets."

Not much has changed on the consolidation front this year either. Earlier in the decade, talk about the impending "shakeout" of the market was rampant. That shakeout, such as it was, seems to have already happened. That's not to say that there haven't been major mergers and acquisitions in the last year, notes Urdan. "It's just that it's not like the days before. I think we saw the last of the weak vendors find resolution with Saba's acquisition of THINQ earlier this year." The vendors that remain, he says, are generating enough cash to stay in the game—at least for now.

But there was one surprise in store for Urdan and the rest of the industry: On August 4, SumTotal announced that it would buy Pathlore.

Growing Pressure
What has changed during the last year is the increasing pressure—and competition—the e-learning vendors face.

One of the most alarming trends—from the vendor's point of view, not the consumer's—is that e-learning products are starting to look more and more alike, particularly in the off-the-shelf (OTS) content and platform areas of the business. "In terms of tools and functionality, LMSs have become so commoditized that it's now difficult to tell one vendor from another in terms of what they offer," says Pulichino. "They are all more or less the same." That means that the only way for vendors to compete is price, and prices for LMSs and for OTS content in particular are dropping precipitously. "The 2005 Buying e-Learning Research Report," published by the eLearning Guild in June, revealed that people are still spending money on LMSs. But Pulichino notes that price points have come way down.

The same holds true for the OTS content market, according to Urdan, who says that prices in this market have dropped dramatically of late because buyers no longer perceive meaningful quality distinctions among the four largest providers. "A year or so ago, the larger players such as Thomson NETg and SkillSoft were beginning to be undercut by smaller, scrappier players such as MindLeaders and Element K, which were trying to gain [market] share by pricing aggressively," he says. "That has forced everyone in the market to start pricing aggressively."

In this end-of-days market, it goes without saying that vendors who hope to succeed must reinvent their value proposition or face extinction.

"Companies today are looking for vendors who can provide expertise in the form of ancillary services to guide them through [implementing and using products]," says Waldir Arevolo De Azevedo Filho, a research director with Stamford, Conn.-based research firm Gartner. That's a shift from a few years ago, he notes, when both vendors and customers were focused primarily on technology and tools.

Peter McStravick, a senior research analyst with the learning services group of Framingham, Mass.-based research firm IDC, is witnessing the same trend. "There's a transformational discussion going on right now between customers and vendors. Vendors are having to step up the services they offer around products because it's no longer a matter of giving people products and helping them implement them. Today, customers also want to know how you can help them improve their return on investment on products, or help align learning objectives with their company's business objectives."

Customers also are increasingly interested in vendors that provide a complete approach to e-learning. The majority of buyers are still contending with a disparate environment in which they must cobble solutions together from various sources—say, purchasing an LMS from one vendor, a learning content management system (LCMS) from another, and content, authoring or collaboration tools from multiple sources. "[Customers] are increasingly looking for ways to put everything together in a more cohesive way," says Rebecca Wettemann, an analyst for Wellesley, Mass.-based Nucleus Research.

Vendors, in turn, are answering this demand by expanding their product and service portfolios. The emergence of e-learning "product suites" is evidence of this trend. For example, SkillSoft, which entered the market as an OTS content provider, has added a "searchable learning" function called SkillChoice to its arsenal, as well as a virtual-classroom product. Legacy LMS players, likewise, have been hard at work for some time—whether through partnerships, internal R&D or acquisition of smaller players—expanding their offerings to include everything from authoring tools and content development to collaboration and live Web-conferencing capabilities.

But many analysts say the same thing: The promise of end-to-end solutions has been a dangling carrot for years, and the emergence of true one-stop providers is unlikely. They point out that e-learning is composed of market segments that are so unique that vendors must focus on their own turf to be effective, rather than spread themselves too thin by trying to be all things to all people.

Partnering Up
That's one reason the strength of a vendor's partnerships will play a key role in determining whether it continues to "play in and be profitable in this market or whether it has real challenges," says Wettemann.

This fact is not lost on vendors. IDC's McStravick recently has seen an uptick in the number of partnerships that are in place—or forming—across various segments of the industry. "In fact, I haven't spoken to anyone who doesn't have a partnership of some kind. In a fragmented industry, it's the only way to survive," he says.

Despite this trend, McStravick and many others admit, vendor partnerships have only scratched the surface. In fact, often the customer is the one who has to make those partnerships happen. Mitch Bardwell is a perfect example. Bardwell is director and assistant general manager of the sales training division at Canon U.S.A., an electronics company headquartered in Lake Success, N.Y. When he purchased an LMS for his division, he needed to add functions that his LMS vendor couldn't provide, so he turned to two smaller vendors to meet his ancillary needs. But getting all the vendors to partner effectively was a monumental challenge.

All told, he says, it took the three parties six months to hammer out the legal terms under which they would work together and share technology and information. "While we're pleased with the outcome, I find it frustrating that it was up to me to do all of the negotiations and legal wrangling," Bardwell says. "My sense, from talking to other companies recently, is that vendors may be saying that they offer partnerships, but they're not really knee-deep in them, and it is still incumbent on the customer to lead the process and get everyone to come to the table."

Barbara Bridgford, a learning technology specialist with Southwest Airlines in Dallas, has had similar experiences. "Oftentimes in the customer- vendor-LMS provider relationship, the customers have to force the other vendors and the LMS provider to come together and play nice."

The Standards Problem
Even if a customer is lucky enough to find vendors who understand what it takes to form effective partnerships, there's still no guarantee that integration will be successful. Why? Despite the concerted efforts of standards bodies over the years, interoperability and integration still remain the Achilles' heel of the industry.

The goal, of course, is to reach a point at which all e-learning content and technology work together in an open environment that doesn't require a Sisyphean integration effort—not to mention gobs of money—to perform effectively. But, according to McStravick, the industry still has a long way to go in reaching that ideal. He notes that compliance with SCORM—one of the many standards intended to eventually make all e-learning technology interoperable—only gets you to the 10-yard line. "Content can be SCORM-complaint and still not run properly in an LMS or another platform because of other things," he says.

Bridgford concurs, calling integration her biggest, most frustrating challenge. "We have yet to find content that plugs into our LMS and plays seamlessly, and we have tested a lot of stuff," she says. In defense of standards, Bridgford notes that they do serve as a baseline. "But there are so many other things that there are SCORM protocols for but that are not required, such as score-keeping, tracking, course start and end times, and bookmark features. You have to make sure that all of these little things that are not required by SCORM will work within your unique configuration."

For now, getting e-learning where it needs to be is not only costing companies inordinate amounts of time and money, it also is having a huge impact on the ability of training departments to meet the needs of stakeholders, who often need training soon after a request is made. Unfortunately, says Bridgford, her division often needs months to develop a single e-learning course. A large portion of that time, she says, is spent on the implementation phase—"getting it to work, getting it out the door, and making sure that it's stable."

Better Analytics
Customers have also been asking for better measurement, reporting and analytics capabilities. "Our members are to trying to do more with the LMSs they have," says the eLearning Guild's Pulichino. "They want to do more in terms of assessment, content management, analytics and business reporting. As a result, we're beginning to see a lot of vendors marketing themselves in that way. Their materials now talk about the ways in which they are addressing performance improvement and knowledge management, not just the learning component."

It's not difficult to understand why. For the last several years, there has been increased buzz throughout the industry about the need to align training with overall business strategy and for better metrics that tighten the link between training and bottom-line business results like increased sales or enhanced customer service.

Initially, LMSs were designed to report fairly rudimentary statistics, such as seats occupied and training hours completed. Progress has been made on the analytics front in recent years, but aside from a few exceptions, today's LMSs have yet to glean meaningful data that shows training's impact on the enterprise. "While some have begun to add this functionality, in general it still tends to be pretty clunky in terms of interacting with other enterprise systems," says Nucleus Research's Wettemann. "As a result, we see lots of folks who are using stop-gap measures and entering data manually from one system to another, but lots of people are looking for more holistic data-management systems. There is still a lot of opportunity for innovation in that area."

To win in this arena, analysts say, next-generation LMSs will need to be able to "talk to" and share data seamlessly with other enterprise systems like human resource management (HRM) software or finance and procurement databases. The goal, says Eric Bassett, director of research practice at Boston-based research firm Eduventures, is to tie all the data and software of the enterprise together so that organizations get "a much better window into cause and effect—as well as the ability to spot bottlenecks and measure performance across the organization in a way that will help the company run better and better tie learning into the overall database of knowledge about corporate operations."

How soon will it happen? No one knows. "It may be five years out or further, but it is inexorable," says Bassett. "This goes beyond technology; it's really about arriving at a place at which learning becomes part of the business process." Bassett predicts that analytics will take on such importance in the future that they eventually will become a key differentiator among vendors. Eventually, he says, analytics will set the standard that will determine which vendors win and lose individual contracts.

The analyst chatter on this front bothers Jack Kramer, vice president of sales at Pathlore Software, which was just acquired by Mountain View, Calif. LMS provider Sum Total. While he views analytics as the next frontier of e-learning, he cautions against going too far down that road just yet. "It's not doing this industry a service when vendors haven't finished the job at hand and now are trying to sell poor folks something else." Analytics are a wonderful concept, he notes, but the bottom line for the vendor community is that it needs to focus on "getting the infrastructure in place"—including standards and interoperability—"before it can build a house." Kramer, for his part, believes that much of the perceived demand in the analytics arena has been "manufactured" by industry analysts.

Canon's Bardwell disagrees, saying that his biggest disappointment with LMSs is their lack of reporting and analytics. "I want five or six meaningful data points that I can use to make a case to management for e-learning," he says, "and after four years of trying, I still cannot get them."

Bardwell chalks up this shortcoming to the fact that today's LMS companies can't change their software fast enough to meet customer demand. "They have built LMSs that are confined and not very flexible. You have to adapt to them. And if you look at their databases, they are built in a proprietary manner that makes it difficult for LMS companies to move fast enough. It is not the analysts who are creating this need—it's the people who have been doing this for several years and who realize that an LMS that serves up content and creates one learner record at a time is no longer enough."

But here's the real problem, says Pathlore's Kramer: Few organizations, if any, are willing to pay what it would cost to develop more sophisticated reporting and analytics capabilities, even though they may claim to want it. "When it comes to tying analytics and performance to training, there's not a CFO in America who will sign off on it until 100 other people are doing it already," he warns. "It's just not going to happen."

The Big Picture
Now for the million-dollar question: What will happen to the e-learning market in the future?

One of the biggest points of contention among analysts, vendors and customers is whether e-learning eventually will rise to the level of other enterprise software applications like those of Oracle or SAP. Many on the customer side don't see this happening. Rather, they view e-learning as a tool embedded into other parts of the work process. "I see it as an option to meet a need—as part of the business process," says Southwest's Bridgford. "It is not the best thing for everything that we have to do. It is a tool to help people learn—just like instructor-led training or reading a book. It is not a total solution."

Still, Gartner comes to the same conclusion in its "2005 E-learning Client Issues" report as other analysts do: E-learning is "in the midst of making the transition from a department-level initiative to enterprise-wide deployment."

The disagreement, perhaps, boils down to the word "enterprise." While e-learning may never be on par with large enterprise software applications, there is evidence that it is beginning to broaden its reach. A few years ago, for example, it was not uncommon for different departments and business units within a single organization to have separate e-learning infrastructures. Today, says Gartner, companies are beginning to focus their efforts on supporting several different programs with a single, common infrastructure. Gartner's "Client Issues" report suggests that e-learning continues to broaden its reach to all populations of the enterprise—not only internal employees, but customers, suppliers and partners as well.

For the last few years, the market also has been consumed by a debate over whether the big enterprise software companies eventually will swallow up today's e-learning vendors to create massive systems that feature e-learning as a subcomponent. Some believe this will happen, but others believe that legacy enterprise vendors don't possess the expertise necessary to do it, and instead will begin partnering more extensively with e-learning vendors to add more robust learning content and learning management capabilities to their own systems.

Whatever direction the industry takes, not everything will be decided by what customers need and what vendors can come up with to offer. Baird's Urdan predicts that we will see continued consolidation among the remaining players on both the platform and content sides of the business. But that consolidation will be driven by investors, not the industry. "These companies are generating enough cash to remain [afloat], but they aren't generating the kinds of profit margins that will keep investors happy over the long haul," he says. "At some point, investors are going to lose patience with them." 

Reprinted from Training Magazine

Sarah Boehle is a freelance writer for Training magazine. edit@trainingmag.com.