Safety’s Impact on the Bottom Line
By Mark Steinhofer, CSP
Safety Advisor, Safety Management Group
Suppose your company could make an investment in its business that provided a 400 to 600 percent rate of return. Sound like a fantasy? It isn’t.
Successful owners and managers understand the importance of measuring return on investment (ROI) whenever they put money into new equipment, processes, and even employees. In fact, many won’t invest a dime unless they see solid proof that the ROI will assure a complete payback within a set period of time.
The concept of ROI can also be applied to efforts that lower a company’s costs. For example, if by investing $10,000 in a new piece of equipment you can lower your annual production costs by $25,000, you’d probable see that as a very sensible move that would benefit your bottom line year after year.
Looking at investments in safety in the same way can provide similar benefits. That’s not wishful thinking or some kind of trick math – the economic benefits of improved safety have been documented time and again. In fact, studies have consistently shown that every dollar invested in safety programs provides a payback of $4 to $6 in reduced costs.
The key is looking at the money you put into safety as an investment in your business, rather than thinking of it as an expense. It may sound strange to think of safety as an investment, but once you understand the economics involved, along with the negative bottom-line impacts of each safety incident, that viewpoint becomes clear. In simplest terms, the money you pay for a safety program and the people to implement is likely to be significantly less than what you’d pay for a preventable incident.
A dramatic economic impact
Workplace injuries, illnesses and fatalities cost more than $170 billion per year in the U.S. Beyond the immediate financial impact, more than one million injuries and 2.3 million cases of ill-health are experienced by workers in an average year, contributing to a loss of about 40 million working days. In addition, more than 25,000 individuals are forced to give up work because of injury or ill health issues. Overall, nearly 50 workers are injured every minute of every work week, and 17 will die on the job every day.
Of course, the potential hazards vary by workplaces, as does the potential cost of accidents and work-related health problems. Factors that have to be considered include the number of people who work for your organization, how many incidents actually occur at your workplace, and the nature of the work your company does. You also have to consider the value of the materials, products, or services that you provide, because that has an impact on how significantly an incident will affect your bottom line.
The costs you can see
Suppose that one of your best employees is injured three hours after starting work this morning. While you’re concerned about his well-being, you’re probably not too worried about the economic impact of his injury. After all, you reason, your workers’ compensation coverage will take care of his medical costs and compensate him while he recovers.
But injury costs are like icebergs. Just as ninety percent of the typical iceberg lurks unseen beneath the surface of the water, surprisingly high unanticipated costs lurk beneath every injury.
To understand why, let’s analyze the costs of that incident. The “visible” portion is the direct costs. Beyond the cost of medical services (from the ambulance fee to follow-up care), there’s also replacement labor. Your supervisory staff likely had to step away from other tasks to address the situation. You may also face some costs to investigate the incident and protect yourself from a legal standpoint.
The costs that may surprise you
So what are those costs lurking below the surface? The so-called “indirect” costs may include everything from the production downtime and its effect on your business, possibly some overtime to make up for that downtime, damage to your products or raw materials, and repairs to your plant and equipment. You may have had to fork over sick pay. Your supervisors will lose more time as the incident is investigated and steps are taken to prevent future incidents. You could even face OSHA fines and legal costs.
Productivity suffered when other employees stopped working to help, watch, or simply talk about the incident. Equipment they may need could have been damaged – or the injured employee may have been the only one with knowledge about a particular procedure or process.
In the worst-case situations, the injury may cause you to lose a contract with a customer that has very strict safety standards. Your reputation can suffer a significant loss, especially if the injury puts your company on the 10:00 news or the front page of the newspaper.
How much of an impact?
Many studies have examined the ratio between direct and indirect costs of safety incidents, and while there is quite a bit of disagreement over what that ratio should be, all of the studies concur on one important point: indirect costs tend to be several times higher than the direct costs. Whether it’s the 4:1 ratio identified by H. W. Heinrich in 1979, or the 50:1 difference that Bird and Loftus tracked in their study, it’s clear that the injury-related costs you don’t prepare for are the ones that will really hurt your profitability.
Consider the costs of making up the lost work. The standard way to compute that amount is to divide the cost of the incident and its related claims by your normal profit percentage. Multiply that number by 100, and you’ll see how much more you need to sell just to make up what you lost in the incident. If an incident cost you $230,000, and your company earns a normal operating profit of 13.47 percent, you’d have to sell an addition $1.7 million in products to compensate for the incident.
Even a smaller incident can have repercussions far beyond what you’d expect. Take an accident that ended up costing you just $500. Using the same formula, if you’re in the concrete business, you’d have to deliver 20 extra truckloads. Soda bottler? You’d need to produce another 61,000 cans. And if you were in the donut business, that little incident just cost you the equivalent of 235,000 donut sales.
Insurance impacts, too
The constraints on your bottom line don’t stop when your employee comes back to the job. Having incident claims on your record will affect what you pay in workers’ comp premiums, because your EMR (experience modification ratio) will increase. Have enough claims, and your carrier may even refuse to cover you.
Take two 30-employee firms, both with annual payrolls of about $600,000. One firm has achieved an EMR of 0.7, so it pays about $105,000 a year in workers’ comp. But the other had a few incidents that drove its EMR to 1.3, and pushed the annual premiums of $195,000. The firm with the better safety record pays $90,000 less.
Beyond the cost savings, improved safety has many beneficial effects. In one recent survey, 95 percent of business executives reported that workplace safety has a positive impact on a company’s financial performance. Typically, companies that implement a comprehensive safety and health program report that employee morale improves, leading to increases in productivity, competitiveness, and profits.
Changing the mindset
Gaining the full benefit of a safety program demands more than simply making it a priority. It needs to become one of the organization’s core values. In addition to providing the financial returns I’ve described, it’s a very good business practice, but it’s the right thing to do from a human standpoint.
The companies that take industry-leading positions with regard to safety view losses from accidents in the same way they look at any other type of loss – it’s a risk that must be prevented. Taking steps to prevent the causes of accidental losses is seen not as an element of overhead, but an investment in the company’s own health. They also recognize that reducing losses improves the quality of products and services they deliver, leading to greater customer satisfaction and increased revenue. That’s why they integrate health and safety into the overall management agenda.
By looking beyond the direct costs of injuries and other incidents that impact employee health, and focusing on the economic impact safety problems have upon the business, management will be in a better position to make confident, informed decisions. Examining these issues in an economic context will benefit the bottom line – and even more important, it will ensure that all of your workers return home safe and healthy every day, reducing the likelihood that their families and friends will suffer the ill effects of an injury.