A safe investment
There doesn’t seem to be much disagreement in today’s workplace that safety is good business, but there is certainly plenty of disparity about how much it costs to implement a workable safety solution.
- Production doesn’t want to spend money unless they can see an increase in productivity.
- Maintenance wants to lower its down time.
- Human Resources wants to ensure that any investment in securing and training people pays off with lower turnover.
When all is said and done, not many of them think pouring more money into safety will result in meeting these needs or achieving their goals. The truth, however, is that investing in safety is a key element in meeting all of those needs and more.
Properly configured safety programs are not only a good investment, but rigorous ROI evaluations indicate that it is one of the best investments a company can make, yielding improvements in productivity, lowering maintenance costs (and fewer maintenance-related injuries), and improving employee retention.
Many know of the 1987 speech by Paul O’Neill, the then newly minted CEO of Alcoa. "I want to talk to you about worker safety," he began. At this time Alcoa was struggling, and investors were nervous. By addressing the issue of worker safety, Alcoa dropped from 1.86 injury lost work days (per 100 workers) to 0.2. By 2012, the rate had fallen to 0.125. More importantly, perhaps, is that one year later the company’s profits had hit a record high. When O’Neill retired 13 years later, Alcoa’s annual net income was five times higher than when he started.
There is no question that reducing the number of lost work day accidents leads to significant improvements in productivity. When that accident is machine-related, the costs to productivity are staggering.
Let’s look at one of the most conservative examples of an accident’s costs, based on the tool from OSHA: $afety Pays.
First, we must select the type of accident involved. Some of the choices include: amputation, crushing or laceration. If we select crushing, which is one type of typical injury caused by an unguarded machine, the OSHA tool estimates that the direct cost of this kind of injury will be $56,557. The data from the National Council on Compensation Insurance, Inc. (NCCI) reflects the average cost of lost time workers’ compensation insurance claims derived from unit statistical reports submitted to NCCI for policy years 2009 to 2011.
The total cost of injuries
Direct cost is only one element of the total cost of the injury. In our example, the OSHA tool estimates that there is another $62,212 attributed to indirect costs. The indirect cost estimates provided in this program are based on a study conducted by the Stanford University Department of Civil Engineering. These indirect costs covered in this estimate include:
- Any wages paid to injured workers for absences not covered by workers’ compensation;
- The wage costs related to time lost through work stoppage associated with the worker injury;
- The overtime costs necessitated by the injury;
- Administrative time spent by supervisors, safety personnel and clerical workers after an injury;
- Training costs for a replacement worker;
- Lost productivity related to work rescheduling, new employee learning curves and accommodation of injured employees; and
- Clean-up, repair and replacement costs of damaged material, machinery and property.
The total cost associated with this one injury incident is $118,769, and this estimate does not include other related costs such as:
- OSHA fines ($124,709 for a willful violation) and any associated legal action
- Third-party liability and legal costs
- Worker pain and suffering
- Loss of good will from bad publicity.
The OSHA tool goes on to estimate the amount of increased sales a company has to generate to cover these costs. At an OSHA-suggested nominal 3% profit margin, it takes $3,958,966 in additional sales to fully pay for the cost of this single accident. It stands to reason that an investment in ensuring that this accident does not occur could translate to recapturing that $118K as profit vs. cost.
So does every investment in safety yield a profitable return? Maybe not. In a 2001 study of 86 small manufacturing firms by Michelle Kaminski, investment in increased training hours were negatively related to injury rate, but a study published the same year by William Bunn, et al, found that a comprehensive corporate wellness effort had a significant impact and reduced direct health care costs and improved productivity.
The findings of a 2008 research paper by Tushyati Maudgalya, Ash Genaidy and Richard Shell titled, "Productivity-quality-costs-safety: A sustained approach to competitive advantage–a systematic review of the National Safety Council’s case studies in safety and productivity," supported the relationship between strong safety initiatives and productivity.
Their review and report on 17 case studies, which were published by the National Safety Council (NSC), found that following workplace safety initiatives resulted in an average increase of 66% (2% to 104%) in productivity, and 82% (52% to 100%) in safety records, and 71% (38% to 100%) in cost benefits. In a few reported cases, it took only eight months to obtain a payback in terms of monetary investment in the safety initiative. While not conclusive, there is demonstrable evidence to indicate that safety as a business objective can assist an organization in achieving the long-term benefit of operational sustainability.
When reviewing the literature about workplace safety initiatives and proactivity, there is almost always a reference to improved worker retention. However, it is difficult to nail down just how much of an impact this may have in the evaluation of how safety really contributes to the profitability of an organization. Statistics gathered by the Oklahoma Department of Labor for the US Bureau of Labor Statistics show that employees with less than one year of service are twice as likely to be injured at work than employees with more than five years of service with the same employer. These statistics suggest a direct causal link between workplace injuries and the amount of time an employee has worked for the same employer.
It does stand to reason that a person injured on the job and unable to work requires a replacement, and while that replacement may not necessarily result in a new hire, it has been estimated that a replacement machine operator, for example, results in up to 30% loss in productivity, while requiring additional training expense, etc. Various industry calculators show that the replacement of a worker (regardless of the reason for the replacement) ranges from an additional 30% to 40% above their actual salary.
The challenge in truly understanding the benefit of investing in safety as a solid business decision really rests in understanding the real cost of an accident. The National Safety Council and the Centers for Disease Control and Prevention (CDC) have developed models that attempt to estimate the costs, but these different models can vary greatly. For example, CDC’s estimate shows a fatal injury carries an average cost of about $991,027. This average includes only hospital costs. In contrast, the NSC model puts the average fatality’s cost to society at $1.42 million.
These figures, although high, are likely to be lower than the actual cost of a single death because both models reflect only direct costs. Direct costs include workers’ compensation, medical expenses, civil liability or litigation costs and property losses.
Indirect costs can be much more expensive: For every dollar in direct costs, indirect costs could be as much as $2.12, according to NSC, although in the OSHA model the ratio is closer to 1:1. As discussed, indirect costs include workplace disruptions, loss of productivity, worker replacement, training, increased insurance premiums and attorney fees.
Using this math, a single fatal workplace injury goes from costing an average of $1.42 million to costing $4 million on average.
Whether the ratio is 1:1 or 17:1, the cost savings from safety are real. The prevention of a single accident, no less a fatality, can have a major impact on a company’s bottom line and over time a significant impact on the overall business health of the organization as a whole.
Four questions to help ensure a positive return on your safety investment:
1. Have machines, production equipment and operations been assessed for compliance by a qualified assessor?
2. Have risk reduction measures been implemented?
3. Have the risk reduction measures been implemented correctly and verified by a qualified or certified safety engineer?
4. Is there a periodic audit program in place to inspect and ensure equipment safeguards are in place, used correctly and updated as needed?
If you answer yes to all four questions, you are in good shape!
John Peabody is major account manager for Omron STI.