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Understanding The Math

A quick glance at a fleet's financial statement can illustrate why some managers consider safety programs to be an "expense." There are certainly fees associated with training programs. Equipment upgr...




A quick glance at a fleet’s financial statement can illustrate why some managers consider safety programs to be an “expense.” There are certainly fees associated with training programs. Equipment upgrades such as additional mirrors have price tags of their own.

But safety initiatives should be recognized as investments that offer a measurable financial return.

It is an important mindset. By looking at safety programs in the context of an investment, safety departments will be able to identify the initiatives that make the most business sense. Managers may even be surprised to learn they are overlooking the types of crashes that cause the most financial pain.

A lot can be learned by comparing the impact of high-cost crashes (such as rollovers, jackknife situations and intersection collisions) to the lower-cost crashes that take place at slow speeds and involve stationary objects or backing situations. Even though the “high-cost” crashes account for a higher initial price, they may account for a small fraction of the fleet’s overall collision costs. The first step in an analysis like this is to ensure that every direct cost is measured. For example, some collision- related repairs such as a damaged trailer panel may be absorbed by an overall maintenance budget.

It will need to be identified by maintenance departments as a collision- related expense.

Direct costs such as the price to repair damaged equipment can then be applied to a simple calculation that determines indirect costs like loss of productivity, the need to train replacement workers, and damage to a fleet’s reputation.

We know that some of the indirect costs do not change regardless of the size of the collision. A replacement worker that is paid $25 per hour, for example, will need to be paid the same amount whether they were filling in for someone who is off work because of a major collision or a minor incident. This means that we need to incorporate a series of “multipliers” to reflect that reality.

Industry experience shows us that when direct costs are under $3,000, the indirect costs can be estimated by multiplying the figure by 4.5. When direct costs are between $3,000 and $5,000, the figures should be multiplied by 1.6. From $5,000 to $10,000, the multiplier is 1.2. And when direct costs are above $10,000, the indirect costs can be calculated by multiplying the figures by 1.1.

Then it is a matter of comparing the different types of crashes, generating the figures that can be used as the foundation of a cost-benefit analysis. Consider a fleet that discovers it is facing a high frequency of sideswipe collisions which cost an average of $5,500 each. Problems such as this can usually be addressed with a minor equipment upgrade such as the addition of fender mirrors. If a fleet of 40 trucks is losing $32,000 a year because of this type of incident, it is reasonable to expect that half of the cost could be eliminated by introducing a new form of corrective action. The $1,200 invested into the mirrors could produce savings of $16,000. Once the initial cost of the equipment is factored into the equation, safety managers will be able to point to a 1,233% return on the investment.

The same approach could be used to justify the investments to address high-cost collisions. If crashes such as rollovers cost the same fleet $24,000 a year, it is reasonable to believe that half of these costs could be eliminated by introducing a defensive driving course. If the selected course is delivered at a fee of $250 per driver, the overall investment of $10,000 would still pay for itself within the first year. As long as there is a measurable return on the investment, the safety department is actually making the fleet money.

The approach does not have to be limited to the costs of equipment damage, either. Workers’ compensation boards offer a wealth of information concerning the cost of personal injuries. In addition to offering details about injuries within your own fleet, they can often provide information about the experience in other workplaces.

And before you dismiss $5,000 in damage or indirect expenses, remember what that really costs. A fleet that makes a profit of 3% would need to collect another $167,000 in revenue to recover that $5,000 that was lost. It shows that a well-constructed safety program makes financial sense. It is simply a matter of doing the math.

-This month’s expert is Rick Geller, director of safety and training services for Markel Insurance Company of Canada. Send your questions, feedback and comments about this column to info@markel.ca.


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