Cost-Benefit Analysis: Making Management Approval Easy CBIA 2016 Safety & Health Conference May 20, 2016 David Galt, Senior Legal Editor BLR

Cost-Benefit Analysis • Define business value • 6 steps to make your business case: 1. Identify business value drivers 2. Identify costs and benefits 3. Identify investments in safety 4. Link investments to value drivers 5. Measure performance – ROI case study 6. Communicate results and follow up

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What is ‘Business Value’? • Determines the health and well-being of an organization • Tangible values • Profit • Market share • Productivity

• Hidden values • Compliance • Reputation, brand • Morale, talent

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What is Business Value? • Corporate profitability/ market share • Government directive • Nonprofit service

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Business Value and Cost— Benefit: CFO Priorities 1. 2. 3. 4. 5.

Control costs Reduce compliance risk Support business initiatives Protect/Enhance image Everything else

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CFO Priorities: Costs (Losses) • Workers’ compensation costs, related medical expenses and attorney fees • Lost workdays and related downtime (productivity loss) • OSHA penalties, civil suits (compliance risk) • Cost to train replacement employees

OSHA Penalties to Rise August 2016

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CFO Priorities: Benefits Top Benefits of Workplace Safety 1. 2. 3. 4.

Top Injury Prevention Activity

1. Better training (26%) Productivity (43%) 2. Better equipment and Reduced costs (28%) workspace (7%) Employee retention (7%) 3. More safety management Employee Morale (6%) (7%) 4. Safer environment ( 6%) 5. Enforce policies and procedures (6%) 7

Step 1: Identify Business Value Drivers Conduct basic business value research: • Review annual reports, mission statements, goals • Learn business terminology • Observe the winners • Learn from key financial personnel • Network

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Step 1: Identify Business Value Drivers Increase profit Reduce costs Reduce risk of violations Increase productivity Enhance reputation Build employee skills Increase customer satisfaction 9

Step 2: Identify Costs and Benefits— Define Common Terms for “Cost” • Cost—the value of resources used up, sacrificed, or lost to produce something; penalty incurred • Cost/Benefit—estimate strengths and weaknesses of alternatives to determine optimal benefits at lowest cost • Cost Justify—explain need for expense, with documentation to show expected returns exceed expected costs • Cost Effective—identify lowest cost to achieve objectives • Cost Savings—reduced expense compared to historical or expected expense (reduce a fixed cost) • Cost Avoidance—spending to prevent future loss • Investment—a commitment in order to earn a financial return or gain future benefits or advantage 10

Step 2: Identify Costs and Benefits— Identify Context for “Cost” Goal: Minimize risk of cost (loss) from a car accident • Cost (loss): pay medical bills/property damage from car accident • Cost avoidance: pay car insurance premiums to cover bills • Cost effective: get the best rate on insurance premium, and best medical care program from insurance carrier. • Cost savings: pay for driver safety course to get discount on insurance premium. 11

Step 2: Identify Costs and Benefits— Compile Cost (Loss) Information 1. Conduct JHA and risk assessment (risk of future loss) 2. Develop “Financial Hazard Analysis” from JHA exposures • Compile existing financial losses from injury/illness and penalties • Estimate probability of future loss “…safety professionals need to understand an organization’s financial losses in order to help senior management understand the financial benefit the safety department provides.” Professional Safety, April 2009, p40

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Step 2: Identify Costs and Benefits— Calculate/Estimate Losses

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Step 2: Identify Costs and Benefits— Calculate Losses

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Step 2: Identify Costs and Benefits— Calculate Losses

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Step 2: Identify Costs and Benefits— Benefits • Tangible benefits • • • • •

Fewer injuries and accidents Lower regulatory compliance risk Increased productivity Lower administration costs Better cash flow

• Intangible benefits • Improved employee morale (less turnover) • Improved reputation (VPP, SHARP) 16

Step 3: Identify Investments in Safety Activity

Tasks

$$ Investment

Program Development

Hazard analysis, write plans/procedures, reports, investigations

Staff time, consultant fees, monitoring equipment purchase

Training

Scheduling, program development, conduct training sessions

Staff time, consultant fees, training materials purchase

Update OSHA 300 forms, inspection reports, investigations

Staff time

Recordkeeping Protective Equipment

Choosing equipment, fit test, replacement

Staff time, equipment

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Step 4: Link Safety Investments to Value Drivers

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Step 5: Measure Performance Safety Program Activity

Business Value Objective

Measure of Performance

Training

• Reduce

• Incident rate • % incident rate • Employees change/time completed • % completed

compliance risk • Cost containment Hazard control • Reduce procedures compliance risk • Cost containment Personal Protective Equipment

• Reduce compliance risk • Cost containment

Business Value Result

Injuries per # % change in of work hours incidence rates?

Employees wearing PPE during incident

Cost of injury with and without PPE

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Step 5: Measure Performance— ROI Case Study • ROI--expected returns (benefits) from an investment compared to costs of the investment over a payback period • ROI = (Expected return – investment / investment) x 100 • Expressed as ratio or percentage of the investment • 300% Year 1—means investment of $1 will yield $3 within year after the investment is made • Quick and easy ROI = low probability of achieving ROI • You get what you put into it

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ROI Case Study– Airline Maintenance Service • Company experienced 189 recordable injuries ($6.3k each) and 89 damage events ($105k) in base year • Employee fatigue countermeasure training for airline maintenance workers expected to reduce injuries and damage 10% (18 injuries, 9 damage events) • What is ROI of the training program on injury incidence and aircraft damage rates? 21

ROI Example

• Investment of 205k in fatigue training estimated cumulative total return of $1.1M loss reduction in 6 quarters. • Cost savings: the training materials were free from FAA • Final ROI is 312% by Q6, factoring in probability of success. • Probability includes assessment of how well the project will be managed. 22

ROI Example – Airline Maintenance Service Factors to determine the investments of the training intervention: 1. How many personnel were trained? 2. How long was the training in hours? 3. What is the average hourly rate for mechanics? Is one average good enough? 4. Who else was trained, for how long, and at what price? 5. Is it appropriate to use the salary, without benefits? 6. If we have to use a multiplier for benefits how much? 7. Were there missed opportunity costs during training time? 8. Are management and clerical support a sunk cost or do you count their hours? 9. If not sunk cost, how many hours and at what rate? 10. Did you have to buy special hardware? 11. How do you want to amortize the hardware costs? 12. Special costs for training facilities? 13. Over how many quarters did the training occur?

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ROI Example – Training Investment

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ROI Example – Airline Maintenance Service Factors to determine benefits of the training intervention: 1. What safety incidents will be influenced by this intervention? 2. How many safety incidents are there currently? 3. How many safety incidents do you expect the intervention will resolve? 4. What key performance indicators will be influenced by this intervention? 5. For the selected performance indicators, what is the current performance level? 6. For the selected performance indicators, what will be the targeted change? 7. How much will personnel efficiency be improved? (Optional) 8. What are the metrics you will use to measure these changes (e.g., aircraft damage, rework, delivery delay, employee injuries, lost time job injuries) 9. What are the costs associated with each metric you selected?

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ROI Example – Benefits

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ROI Example – Measure of Performance

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Step 6: Communicate Results… • Speak the language of management • Be strategic—recommend action toward business objectives • Document your assertions and assumptions • Make pitch in 10 minutes • State the problem, solution, plan of action

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Step 6: …And Follow Up • Update regularly • Provide information, not data overload • Stay consistent with the measures of performance • Communicate progress on intangibles as well as tangibles

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Key Points to Remember 6 steps to make your business case: 1. Identify business value drivers 2. Identify costs and benefits 3. Identify investments in safety 4. Link investments to value drivers 5. Measure performance 6. Communicate results and follow up

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