Hammering out the return on investment in safety

A lot has been written about the real cost of safety. However, it is much more difficult to determine the real return on investment (ROI) in safety.

Most of the research depends on the perception of the investor in determining ROI. As an example, the often-quoted chief financial officer survey from Liberty Mutual Insurance Company in 2005 found that more than 60 percent of respondents reported that each $1 invested in injury prevention returned $2 or more in benefits. The same study found that more than 40 percent cited productivity as the top benefit of an effective workplace safety program.

Wow! So how does a fabricator sign up? For every dollar spent, a company gets $2 back? That proposition seems like a no-brainer. But do those numbers really represent a vigorous, justifiable ROI calculation or just the perception of the respondents?

The ROI formula is fairly simple:

Defining the cost is the easy part. We know exactly what we are spending on a safety initiative. Calculating the dollar value of the benefit is more challenging.

Getting at the Real Costs

To start, perhaps we need to evaluate the real costs of an industrial accident. The first and obvious costs are the direct costs. These include workers’ compensation insurance, medical expenses, any civil liability awards, related litigation expenses, any property damage, and loss of work product.

With that in mind, what do these costs add up to? One tool for determining the costs of an accident is the Occupational Safety and Health Administration’s Safety Pays tool: www.osha.gov/dcsp/small business/safetypays/estimator.html.

As an example, let’s look at a single amputation. According to OSHA, the direct costs for such an accident are $66,777. A hefty sum, certainly, but is that the number we need to use to calculate expected benefits?

In fact, it is only part of the real cost of an injury accident. We need to add indirect costs.

Indirect costs include workplace disruptions, loss of productivity, worker replacement, training, increased insurance premiums, any OSHA fines, and attorney fees. Depending on whom you ask, indirect costs can run from a ratio of about 1-to-1, direct costs to indirect costs (per OSHA) or 2.12-to-1 (per National Safety Council statistics). A study by J.P. Leigh in 2011 titled “Economic Burden of Occupational Injury and Illness in the United States” found that the ratio is as high as 2.72-to-1. “Improving Construction Safety Performance Report A-3,” reprinted in 1990 by the Construction Users Roundtable, found that indirect costs in the construction industry could run as high as 17-to-1 depending on the type of incident.

As we look back to our benefit figure, we find that the direct and indirect costs for our sample accident add up to between $133,554 (based on the OSHA ratio) and $208,344 (based on the NSC ratio). Can we expect to reap that entire benefit?

Depending on the cause of the accident, what is the probability of reducing the chance of a similar accident occurring? Research presented in 2012 by William Johnson of the Federal Aviation Administration tackled that question and found that even with only a 10 percent success factor on the benefit, the ROI of safety measures was 312 percent more than the initial investment and was recouped over six quarters. The original investment was returned in the first quarter.

These findings may not directly be relatable to manufacturing, but the results are still somewhat significant. For our purposes, let’s say that we have reduced the probability of the accident occurring by 50 percent.

Now we need to calculate our costs for this safety implementation. Our own internally developed data tells us that over the last eight years, the cost to guard a machine where an amputation is a possible injury averages $13,800. That’s the actual cost to guard; additional costs such as a risk assessment to determine the hazards and appropriate risk reduction methods are also involved. Those costs would be about $400 to $1,000. Let’s err on the high side and put our cost at $14,800 for safety equipment and process implementation.

Using the most conservative figures, our equation now looks like this:

Most CFOs would have a hard time finding equally valuable opportunities for investing the company’s money. But even more savings beyond the simple ROI calculation exist.

More Opportunities for Savings

A reduction in lost-workday accidents reduces the Experience Modification Rate (EMR), which can lower a company’s workers’ compensation premiums. Implementation of an improved safety program reduced Servicemaster’s workers’ compensation costs by $2.4 million over a two-year period, according to a 2002 article by Adele L. Abrams in the American Society of Safety Engineers newsletter.

There are nontangible benefits as well. A survey by the National Federation of Independent Business, called “Motivating Safety in the Workplace” (June 1995), found that issues like employee morale and improved productivity are potential additional benefits.

OSHA’s Office of Regulatory Analysis stated that the evidence suggests companies that implement effective safety and health programs can reasonably expect reductions of 20 percent or greater in injury and illness rates. The agency also suggests a return of $4 to $6 is possible for every $1 invested in safety and wellness efforts.

Good safety is just good business. According to a Goldman Sachs study in 2007, companies that did not adequately manage workplace safety and health performed worse financially than those that did from November 2004 to October 2007. Investors could have increased their returns during this period had they accounted for workplace safety and health performance in their investment strategy.

Finally, the most overlooked, if not most significant, ROI isn’t reflected in a spreadsheet. That is the peace of mind of the management and of a workforce that comes to work each morning knowing they will return home to their families at day’s end. It’s hard to put a number on that.

For additional information on building a return on investment case for safety investments in a shop, consult the NSC’s The Business Case for Investment in Safety—A Guide for Executives (http://www.nsc.org/JSEWorkplaceDocuments/Journey-to-Safety-Excellence-Safety-Business-Case-Executives.pdf).