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This material is for training purposes only to inform the reader of occupational safety and health best practices and general compliance requirements and is not a substitute for provisions of the OSH Act of 1970 or any governmental regulatory agency.
 MODULE SEVEN: SELLING SAFETY TO MANAGEMENT
Introduction
In organizations where managers "do" safety primarily to fulfill the fiscal imperative, you may have to prove the recommendations you make in your investigation report make good financial sense. In this module we'll discuss some of the tools and techniques to "sell" safety to management. So, get your calculator out and read on!
Why we do what we do
We do what we do because of consequences. Most managers make workplace decisions to enhance profitability through greater productivity, efficiency, and quality. They may be slow to commit resources to corrective actions unless they understand the benefits. Effective recommendations will include information about the natural and system consequences if corrective action and system improvements are accomplished. We must clearly describe the:
- Natural consequences. Decreased injuries and illnesses.
- System consequences. Increased profitability, morale, production. Decreased OSHA penalties, workers compensation/liability costs, and other accident costs.
Top management understands the bottom line. Information that quantifies natural and system consequences will be most persuasive. We've got to be able to talk the language of management. Larry Hansen, CSP, said it well...
| “The CEO’s and comptroller’s eyes glass over when talk turns to incident rates and experience modification rates for the same reason that a safety manager’s eyes glass over when talk turns to return on investment and equivalent uniform annual cost. The terms are not part of the same language. Therefore, to be understood the safety manager must speak a language that upper management understands - dollars and cents.” |
In this module we will examine how to express, in simple financial terms, the bottom-line benefits of correcting hazardous conditions/unsafe practices and implementing system improvements. But first we need to take a look at the two general categories of accident costs.
Direct and Indirect Costs of the accident
The direct costs represent the workers compensation and other budgeted miscellaneous medical claim costs. Workers compensation claim costs include:
- Medical costs
- Time loss costs
- Permanent partial disability costs
- Insurer additional administrative costs (usually about 20%)
Indirect costs are all unbudgeted costs associated with the accident that are required to get the company back to pre-accident status. These costs represent a larger drain on the company's resources than do direct costs. They may include:
- Damage to equipment, machinery, materials, facility etc.
- Production downtime.
- Losses or costs from other sources. Includes fire, explosion, chemical, emergency response, disposal, weather, etc.
- Loss of product/services. Includes spoilage, defects, damage etc.
- Demurrage. Delays in shipment, filling orders.
- Additional overtime.
- Supervisor lost time resulting from accident. Includes inspections, accident investigation, meetings, administration, reports, etc.
- Other managers’ lost time resulting from accident. Includes inspections, meetings, administration, reports, etc.
- Employees assisting with accident. Includes administering first aid, accident investigation, clean-up, repairs.
- Hiring and training replacement workers
- Wages of replacement workers.
- Other non-productive time incurred by victim(s). Includes medical follow-up appointments etc.
- Potential OSHA penalties.
- Attorney fees.
Let's estimate direct and indirect costs...
To help estimate direct and indirect costs, I want to encourage you to download OSHA's Safety Pays Advisor software. This is an excellent software tool that determines direct and indirect accident costs. It also calculates the business volume required to cover those costs. The data is based on 53,000 lost-time claims submitted to a major workers compensation insurance carrier.
Here's what a Safety Pays report looks like for lacerations. Take a look at this as you'll refer to this information in Assignment 2.
Estimated Costs of Occupational Injuries and Illnesses and
Estimated Impact on a Company's Profitability
Report for Year: 2007
Employer: XYZ
Prepared by: I. B. Safe - May 09, 2007
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The injury or illness selected: Laceration.
Average Direct Cost: $1,622
Average Indirect Cost: $7,299
Estimated Total Cost: $8,921
The net profit margin for this company is 5.00 %.
The ADDITIONAL sales necessary
- to cover Indirect Costs are: $145,980
- to cover Total Costs are: $178,420
The extent to which the employer ultimately pays the direct
costs depends on the nature of the employer's workers'
compensation insurance policy. The employer always pays
the indirect costs.
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| What is the ratio of indirect to direct costs? |
The indirect costs for accidents will usually be higher than the direct costs. Generally this ratio may be 1.5 to 1 or higher. Generally, the average ratio is thought to be 4 to 1, but as you'll see in the next exercise, according to the Safety Pays software, the ratio tends to be less. In labor-intensive industries (retail, insurance, etc.) the ratio can be as high as 10 to 1. Capital-intensive industries (heavy manufacturing, oil drilling, etc.) can experience ratios of 50 to 1 or higher. To determine the ratio between the indirect and direct costs, use the following equation:
Referring to XYZ's report we see that the indirect cost is estimated to be $7,299 and the estimated direct cost is $1,622. Therefore, using the equation above we see that the ration is 4.5:1. The indirect cost is 4.5X greater than the direct cost.
| What is the ratio between total accident costs to direct costs? |
This ratio is a little more dramatic than contrasting the indirect costs with direct costs. It helps emphasize the fact that direct costs are actually just the tip of the iceberg. To determine this ratio, use the following equation:
In XYZ's case we see that the total cost is estimated to be $8,921 and the estimated direct cost is $1,622. Therefore, using the equation above we see that the ration is 5.5:1. The total cost is 5.5X greater than the direct cost.
| What is XYZ Manufacturing’s return on their investment (ROI) going to be? |
To determine ROI, it's necessary to estimate the amount of the initial investment required to complete corrective actions and safety system improvements. Once the initial investment is determined, use the equation below to determine ROI.
In XYZ's report we see that the total cost is estimated to be $8,921 and let's say the investment to correct the hazard is $3,000. The estimated ROI will be just about 300%! Not bad.
| How much product or service will XYZ have to sell to replace accident costs? |
If you know your company's profit margin, you can get a rough idea how much replacement business volume must be generated to recover losses for direct and indirect accident costs.
XYZ's profit margin is %5. If the estimated total accident cost is $8,921 and we divide that amount by the 5% profit margin, you see that the business volume required to replace the total cost will be 20X that amount, or $178,420!!! Now that's going to get the decision-maker's attention.
| How many product units will XYZ have to manufacture to pay for the accident costs? |
Another way to express costs and benefits is to determine the number of units that must be manufactured to replace the losses realized by direct and indirect accident costs.
Let's say XYZ makes widgets and the unit cost is $100 to produce. If the total business volume to replace the total accident cost is $178,420, XYZ will have to manufacture over 17,000 units to replace the total accident cost.
| How long will it take to get our money back from the investment? |
Some managers may want to know how long you estimate it will take to start seeing the payback on the investment. Usually, this period will be quite short...days, weeks, and may a number of months. Upon completion of the payback period, you can assume the company is "making money" or realizing a return on the investment.
Now, if the total investment is $3,000 and the total accident cost is $8,921, the payback period will be a little over .3 years, or 4 months. So, we can argue that after 4 months, we're making money on the corrective action.
There you have it! Some simple methods to express the benefits of adopting corrective actions and system improvements to eliminate future accidents. I hope these methods will help you talk the bottom-line with management to more effectively impress upon them the importance of taking action.
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