- OIL & GAS
Most of you know of â€” or might work at â€” companies where both significant injury/illness reduction opportunities and basic compliance challenges still exist. But many companies, particularly larger enterprises, have minimized the threat of OSHA non-compliance. And both the frequency and severity of occupational injuries and illnesses have been reduced in many workplaces. So now management typically associates diminishing returns with safety and health investments.
To justify expenditures (and perhaps oneâ€™s professional existence) in todayâ€™s business world, itâ€™s crucial to link three concepts: 1) Return on Investment, 2) Making the Business Case, and 3) Leading and Trailing Metrics.
Safetyâ€™s slippery ROIThe hard fact is this: demonstrating a quantifiable financial return can be very difficult for safety and health-related investments. When justifying any type of business project on a purely financial basis, the costs and the benefits of the project must be clearly identified. Using financial analysis tools such as â€œnet present value,â€ a multiyear project must demonstrate that associated project costs and savings over the life of the project yield a financial return that exceeds the organizationâ€™s minimum expected rate of return.
But the benefits accruing from safety and health investments are usually difficult to define solely in financial terms. Itâ€™s difficult, if not impossible, to calculate the true cost of injuries and illnesses, organizational inefficiencies from losses, low employee morale, and compliance exposures. When outcomes of safety and health interventions cannot be measured solely by financial benefits, justifying a project in order to compete evenly with other corporate financial investments is not possible.
Now it should be noted there are cases where safety and health investments can be justified on purely a financial basis. Investments that reduce workplace injuries and illnesses will reduce medical and disability costs that â€” directly or indirectly via workersâ€™ compensation costs â€” affect an organizationâ€™s bottom line.
Victim of successBut the more you succeed in reducing injuries and illnesses, the closer you come to confronting a phenomenon I call the â€œsafety paradox.â€ Simply stated: The better your safety and health performance, the more difficulty youâ€™ll have justifying safety and health investments in financial terms. As you drive down injury/illness rates, youâ€™ll require increased funding to make incremental safety and health improvement. From a financial perspective, when more funds are required for smaller and smaller benefits (lower and lower rates of injuries and illnesses) the ROI is not be sufficient to compete with other corporate projects.
Many organizations faced with this safety paradox simply accept the status quo and their safety and health efforts simply plateau. This is not an indictment. Many responsible organizations have reached this performance level, which may be above average in their business or industry sector. But if investment in safety and health systems is not continued, the safety culture will eventually start to erode, resulting in deteriorating safety and health performance.
World-class expectationsOrganizations with progressive safety and health cultures continue to make those investments, even though they might not be fully justified in financial terms. Clearly world-class safety and health cultures recognize the need for ongoing investment. These organizations do expect returns for their safety and health investments â€” but the key is that the return often is measured in quantitative but non-financial terms.
For instance, not one of the four executives participating in an â€œExecutive Summitâ€ at the 2004 American Society of Safety Engineers annual conference expected safety and health investments to demonstrate a financial return on investment. They did expect costs to relate to benefits â€” specifically, reduced injury/illness and minimized risk and business interruption.
From the executive discussion it can be seen that world-class companies establish broad metrics around safety and health performance, and then invest to continuously improve the metrics. Also, these leading organizations set metrics to measure both leading and trailing indicators of safety and health performance. Traditional injury and illness rates are used, along with leading metrics to measure proactive actions taken to drive future safety and health performance.
One caveat: Some experienced safety and health professionals might respond to these sort of executive comments by saying, â€œSure, the executives donâ€™t look for a financial ROI, but my direct manager does.â€ This is a valid comment in many cases. Middle management can filter the broad edicts of senior management in all areas â€” especially safety.
But true world-class companies minimize obstacles at the middle management level. How? Senior management creates performance management systems that hold all levels of management accountable for safety performance â€” just as it does for financial, quality, customer service performance, etc. In organizations where this kind of high-level management commitment does not exist, there is even a greater need to establish meaningful metrics that local management can buy into and use to gauge returns on safety and health investments.
Resting your caseThe list â€œBuilding the Business Caseâ€ (below) illustrates the different benefits that can be realized from safety and health investments. They are listed in the order of probable receptivity by management, although the order can be debated. Using a tiered approach to determine benefits from your proposed investments allows you to develop a flexible business case that demonstrates the appropriate return and value of a given investment.
In general, a safety and health investment that demonstrates a sufficient financial return based on improved productivity or direct cost savings enjoys a high likelihood of acceptance.
Be careful if you want to justify an investment using direct and indirect costs to demonstrate an adequate return. You can be successful, but many times the use of indirect costs is challenged. Itâ€™s difficult to determine what budget line benefits from the intangible component of the improvement.
Similarly, you can document quantitative or semi-quantitative improvements in risk reduction to demonstrate the value of a given investment. Using these parameters to build the business case makes for a harder sell, but with good data they can offer a very legitimate and measurable business justification.
Investment arguments based on improved compliance or so-called alignment with corporate values generally make for a weak business case. Itâ€™s wise to list these issues as adjunct benefits. Managers focused on the bottom line generally reject these â€œsoft sellâ€ arguments because they cannot be measured.
SIDEBAR: Building the Business Case1) ROI on productivity improvement
2) ROI on direct cost savings
3) ROI on direct/indirect cost savings
4) Improving organizational metrics
5) Reducing inherent risk
6) Improving compliance position
7) Aligning with corporate values