Safety Programs and the Impact to the Bottom Line

If you could save your company money, improve productivity and increase employee morale, would you? According to OSHA, workplaces that establish safety and health management systems can reduce their injury and illness costs by 20 to 40 percent. Safe environments are also shown to improve employee morale, which positively impacts productivity and service.

When it comes to the costs associated with safety, consider the following statistics:

• The cost of occupational injuries and illnesses was $156.2 billion in 2003—expenditures that come straight out of company profits (National Safety Council).
• Injuries and illnesses increase workers’ compensation and retraining costs. Lost productivity from injuries and illnesses costs companies $60 billion each year (OSHA)

In today’s business environment, these safety-related costs can be the difference between reporting a profit or a loss.

Measuring the Cost of Safety

Demonstrating the value of safety to management is often a challenge because the return on investment (ROI) can be cumbersome to measure. Your goal in measuring is to be balance your investment vs. the return expected. Where do you begin?

According to the International Risk Management Institute’s (IRMI) “The Cost of Safety” article, there are many different approaches to measuring the cost of safety, depending on your goal. Defining your goal helps you to determine what costs to track and how complex your tracking will be.

For example, you may want to capture certain data simply to determine what costs to build into the price of a product or service. Or, perhaps you want to track your company’s total cost of safety to show increased profitability, which would include more specific data collection like safety wages and benefits, operational costs (such as safety training expenses), insurance costs, etc.

Since measuring can be time consuming, general cost formulas are available. A Stanford study conducted by Levitt and Samuelson places safety costs at 2.5 percent of direct labor costs, and a study published by The Economist Intelligence Unit (EIU) estimates general safety costs at about 8 percent of payroll.

If it’s important for your organization to measure safety as it relates to profitability, more accurate tracking should be done. For measuring data, safety costs can be divided into two categories:

• Direct or ‘hard’ costs, which include:
  • safety wages
  • operational costs
  • insurance premiums and/or attorney’s fees
  • accidents and incidents
  • fines and/or penalties
• Indirect or ‘soft’ costs, which go beyond those recorded on paper, such as:
  • accident investigation
  • repairing damaged property
  • administrative expenses
  • worker stress in the aftermath of an accident resulting in lost productivity, low employee morale and increased absenteeism
  • training and compensating replacement workers
  • developing a poor reputation, which translates to difficulty in attracting skilled workers, losing business share, etc.

When calculating ‘soft’ costs, minor accidents are considered to be about 4 times greater than direct costs, and serious accidents about 10 – 15 times greater, especially if the accident generates OSHA fines and/or litigation costs.

According to IRMI’s Cost of Safety article, just the act of measuring costs will drive improvement. In theory, those providing the data become more aware of the costs and begin managing them. This supports the common business belief that what gets measured gets managed. And, as costs go down, what gets rewarded gets repeated.

How can you show ROI?

OSHA studies indicate that for every $1 invested in effective safety programs, $4 - $6 may be saved as illnesses, injuries and fatalities decline. With a good safety program in place, your costs will naturally decrease. It is important to determine what costs to measure to establish benchmarks, which can then be used to demonstrate the value of safety over time.

Also, keep in mind, your total cost of safety is just one part of managing your total cost of risk. When safety is managed and monitored, it can also help drive down your total cost of risk.

Safety as a core business strategy

Industry studies report that companies who focus on safety as a core business strategy come out ahead. Consider the following, reported in a white paper, Return on Investment (ROI) for Safety, Health and Environmental (SH&E) Management Programs, by the American Society of Safety Engineers:

• A coal mining company in West Virginia reduced its workers’ compensation rate of $1.28 per $100 payroll vs. its competitor’s rate of $13.78.
• Implementation of an OSHA consultation program reduced losses at a forklift manufacturing operation from $70,000 to $7,000 per year.
• A fall protection program implementation reduced one employer’s accident costs by 96 percent -- from $4.25 to $0.18 per person-hour.
• Implementation of an improved safety and health program reduced Servicemaster’s workers’ compensation costs by $2.4 million over a two-year period.

Considering the statistics, safety experts believe that there is direct correlation between safety and a company’s profit. Meyers-Reynolds & Associates, Inc. is committed to helping you establish a strong safety, health and environmental program that protects both your workers and your bottom line. Contact us today to learn more about our value-added services.

This Risk Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.

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