Safety’s Impact on the Bottom Line

By Mark Steinhofer, CSP

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. By Mark Steinhofer, CSP

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 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 may 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. Click here to use our online injury cost calculator.

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.

Mark Steinhofer (MarkSteinhofer@SafetyManagementGroup.com) is an Account Manager for Safety Management Group, an Indianapolis-based professional service organization that provides nationwide workplace safety consulting, training, staffing, program planning, and implementation. Information is available at www.safetymanagementgroup.com/pub or by calling 800.435.8850.

There is an old saying, “haste makes waste.”  But to safety professionals haste makes incidents.  Today, companies are getting leaner and meaner.  They want more productivity with less expense, meaning less people.   A job that was performed by 3 people, is now done by 2, or maybe 1 person.   As a safety person, this presents new challenges to our job.  Not only does haste make waste, it cause injuries.  To work faster and be more productive you often have to use unsafe work behaviors.

Look around you, how many people are gone?  Are you working more hours and being asked to do more?  Most people are.  Talking to other safety people, we are now starting to see more unsafe work practices and more injuries than previously experienced in the past few years.  Statistics may not show this trend for a couple of years, and one reason is the decline in the number of workers in the workforce.   But just ask a safety manager what they are experiencing, and they will tell you they are seeing more injuries than every before and more serious injuries.

I believe there are 2 main causes of incidents in the current workplace or at home, HASTE (speed) and NOT BEING AWARE OF YOUR SURROUNDINGS.  As we work faster, we tend to think less of our surroundings and more about getting the job done.

When people try to do their job in a hurry, they tend to make mistakes.  Often these mistakes can cause a near miss and at other times it can cause an injury.  Most workers today do not report a near miss, which give us less opportunity to do a root cause analysis.  We have to wait until the near miss becomes an incident. 

We hurry or speed because we are required more things today.  When I teach defensive driving, speed is still the #1 cause of motor vehicle incidents.  Speed also keeps people from focusing on the task at hand.  Remember the I Love Lucy episode where the candy was coming down the conveyor belt?  The candy was coming down at a rate that made it impossible for Lucy and Ethel to pack it properly in the boxes.  Haste not only made waste, but look closely and you will also see possible near misses.

Think of your last few Slip, Trip or Fall incidents.  Our workplace had more than we wanted in the past few months.  Many were caused when someone wanting to get somewhere a little faster.  How about you, Mr./Ms safety professional?   It is finally time to leave work and go home.  What are you concentrating on:
· How fast you get out of the building
· Picking up your kids
· Making that one stop to get dinner
· Meeting someone someplace

 Whatever the case, you are probably not thinking of the ground around you, even if there is sow, ice or an uneven surface, and all of a sudden you slip and fall.
 As I stated above, haste keeps us from not being aware of our surroundings.  At home you need a box off a high shelf, so you pull up a nearby chair and stand on it.  Do you think about how unsafe this act is?  Probably not.  You cutting your lawn wear your flip-flops.  An unsafe act?  Your probably not thinking about this act either.  The company sales rep is trying to place and order and get to the next appointment at the same time.  Do you think they are thinking about their surroundings?  Bet not, until they have an vehicle incident. 

In today’s environment, safety people are dealing with these actions more and more.  What can we do to prevent more incidents?  The message has to start at the top with senior leadership.  While every CEO wants their company to be more efficient and leaner, they cannot proceed to a point where it promotes unsafe behaviors to be more productive.  The CEO must be the leader to make sure everyone is aware that safety is high priority.   The message should state that behaving in an unsafe manner is not acceptable and actually costs the company more when an incident occurs.

Managers and supervisors have to be held accountable that their employees are working safer and smarter.  The workers should understand to report if part of their job creates an unsafe work behavior.  In other words, EVERYONE has to be responsible for having a safe workplace.  Safety people have to make sure that workers are acting in a safe manner.  Slowing down enough to make their job safe and giving the worker an opportunity to focus on being aware of their surrounding.  Through training, reminders and other forms of communication, the message must be constant and often.

Hopefully as workers slow down and become more aware of their surroundings, we can eliminate the phase HASTE MAKES WASTE and replace it with SLOW, STEADY AND SAFE MAKES YOU MORE PRODUCTIVE.

It is estimated that over 40 million workers in the United States had to receive emergency medical treatment for workplace-related injuries in the year 2003. This is a staggering number when one considers the efforts most companies have put into maintaining a safe workplace. In modern times, a number of companies have been found liable for injuries sustained in their places of business. There is a relationship that exists between workplace safety and profitability.  As we know, over the past 10 years the number of work related injuries and deaths has declined.  In fact, being “at work” is the safest place many people can be.

Every company, especially those involved in industrial manufacturing, is constantly looking at ways to continuously improve their products and processes. They realize that their profits are directly related to the ways and means by which they produce their products. Unfortunately, too many companies get caught up in drive for higher profits and tend to allow workplace safety to become an afterthought.

The costs associated with operating a large manufacturing facility in America are astounding. Workplace injuries place a massive burden of expense and weakened productivity on a company. These injuries can be reduced with proper planning and careful attention to detail. Most workplace injuries are preventable. There are a number of factors to consider, but maintaining a safe and tidy work area is one of the best ways to prevent injury. Workers, too, have a responsibility in keeping themselves safe from harm.

Workplace injuries place a significant burden on health care providers and insurance companies. As companies continue to pay higher premiums for employee health care, one of the only means available for cost recovery is to increase the prices of the goods they produce. This places the burden of expense on the consumer, and allows companies to ignore the root cause of their workplace injuries. The focus here seems to be on maintaining a healthy relationship with shareholders, and not necessarily on maintaining a healthy workforce.

It is interesting to note that there are record numbers of jobs, especially in the industrial sector, being sent overseas. There are a number of reasons to account for this. One of the most significant reasons is that American companies are able to shave their operating costs down to a fraction of their domestic costs, by capitalizing on cheaper labor in foreign markets. Foreign governments, eager for investment, are all too willing to accommodate the interests of big western business. Far too often, this comes at the expense of workplace safety.

If companies want to be profitable in the long term, they need to reexamine their approach to workplace safety and the health of their workers. Many companies are sending jobs overseas, in order to take advantage of cheap labor and relaxed labor laws. American companies can be both profitable and safety conscious. Through directed education campaigns and preemptive planning, workplace injuries can be reduced in a significant way. Remember: a safe worker is a happy worker, and a happy worker is a productive worker.

During the past few months the country has focused most of its attention on our economy.   As the economy worsens certain parts of business and manufacturing are affected first.  Training and safety are part of these affected business units because they are considered non-revenue producing areas.   Safety professionals MUST (as OSHA says) be able to show how their department affects the bottom-line revenue for their company/organization.  You need to show the features and benefits of a good safety program and do it now.  If you wait too long it might be too late. 

The first step is to list every part of your safety program’s benefits and what bottom-line it produces.  The most obvious ones are the reduction in worker comp cost, increased productivity, and reduced health care cost.  Another interesting statistic is the average cost of an injury.  It is estimated (National Safety Council) between $20,000 - $25,000.  If your company operates at 5% profit margin you need and additional $625,000 in sales to break even.  This is a lot of sales for many companies.  Reducing incidents saves money that goes to the bottom-line. 

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