While most companies claim to care deeply about safety, even amongst enlightened companies the prevailing attitude is that safety may offer an opportunity to save money but it does not make money. This creates a challenge for safety managers who, to be successful, must resist the urge to concede the truth of this argument and convince the CEO that spending money on safety is essential to the company’s financial performance.
Traditionally, safety managers have resorted to two kinds of appeals to gain approval and funding for safety initiatives: fear and altruism. In these cases, the fear is specifically fear of liability or of the consequences associated with non-compliance. The altruism can be true altruism—the desire to do the right thing—or it can be image-based with the company wanting to be seen to be doing something for the greater good of the public.
Although some mileage can still be gotten out of the old motives for safety, the modern business climate compels safety managers to develop a solid business case for safety initiatives. Simply stated, successful safety managers can demonstrate, using a solid business case, that safety makes money through increased productivity and through the ability to stop profit leaks.
Most companies will recognize that effective safety programs have the ability to cut costs and provide bottom-line benefit. However, there is also a direct link between effective safety programs and increased worker productivity.
In a recent study involving 200 companies (75 mid-sized and 125 large-sized), a whopping 95% of the executives said that effective safety programs have a positive effect on financial performance. Of those, 61% reported that they get a return on investment (ROI) of at least $3 for every single dollar invested in safety!
When developing their business cases, safety managers must consider two major elements.
The first element is quantifying the direct and indirect costs associated with the losses, as well as their impact on the company’s bottom-line profitability. Direct costs include physical damage, cargo damage, recovery costs, injuries, payment to injured workers, equipment downtime, and the costs of finding and training replacement workers. Indirect costs include loss of business reputation, loss of future business and contracts, damage to morale, and the decline in productivity that inevitably follows on the heels of serious crashes.
Direct costs can be calculated relatively easily. Indirect costs are directly related to the direct costs. Estimates of indirect costs range as high as $10 for every $1 of direct costs. A more realistic figure would be in the $3 range.
To demonstrate the impact on bottom-line profitability, simply add the direct and indirect costs together to arrive at the total cost. Divide this by the profit margin of the company to determine the sales volume required to recover from the losses.
Helping the CEO to recognize that safety has a positive ROI is only half of the battle. The second element that must be addressed by the safety manager is the fact that most business executives don’t understand how best to invest their safety dollars.
Often, there is a gap between the business executive’s perception and the business reality as far as the cause of loss is concerned. The executive may believe that one type of loss is most prevalent when, in fact, it is a totally different type of loss that is really hurting the company. This can result in business executives feeling that dollars spent on safety did not provide any financial benefit to them.
Effective safety managers must remember that business executives cannot be relied upon to make the most prudent safety investments. They need your help identifying the company’s needs and directing resources where they will do the most good.
“Safety saves money” is a truism much like “buy low and sell high”. While you likely won’t get much argument, it is not likely to earn much influence either. To support a safety program, safety managers must provide management with tangible proof of the economic gain for the company by investing in safety.
Use this simple formula to demonstrate the
ROI for safety investments: ($ Benefits – $ Program Costs) / $ Program Costs = Return on Investment (ROI) ($600,000 – $400,000) / $400,000 = 0.5
This example shows that for every $1.00 invested in this program, there is a 50% ROI in net benefit.
While preventing losses is powerful stuff, making money is even more potent! Linking safety to productivity is almost guaranteed to capture management’s attention. And remember, halving loss frequency can increase productivity by up to 20%.
Rick Geller, CRM, has been providing innovative and cost-effective risk management solutions to the trucking industry for more than 30 years. He serves on the board of directors for both the Truck Training Schools Association of Ontario (TTSAO) and the Professional Truck Driving Institute (PTDI). He is also the incoming chair of the Toronto Chapter of the Fleet Safety Council, as well as an executive committee member for both the Ontario and Toronto Regional Truck Driving Championships.