Calculate Safeguarding ROI
In the United States, workers operating or maintaining industrial machinery in the metalworking sector suffer more than 18,000 amputations, crushed fingers, and other traumatic injuries each year. While these injuries vary greatly, the majority of cases do have one thing in common: most injuries are largely preventable if machine safeguarding equipment had been in place, or would have at least been far less severe.
Many employees, unions and worker advocates may well ask, “Why do we need to safeguard our machinery?” The simple answer is that employers have a responsibility to provide a safe and healthful workplace for their employees that is free of recognized hazards that could cause injury or death. Although U.S. organizations understand that machine safeguarding is the law and that protecting human life is socially responsible, each company must answer the return on investment (ROI) question in their own way. Where does machine safeguarding fit into a business strategy? Can machine safeguarding be quantified by using a cost-benefit financial analysis? In order to answer these types of questions, we need to look at both sides of the ledger and compare the extended cost of an accident to the cost of preventing it.
Insurance studies indicate machine safeguarding provides an opportunity for businesses to reduce bottom-line operating costs by eliminating both the direct and indirect costs of an accident while improving productivity and employee morale. But just how much can be saved? Liberty Mutual reported in its 2021 Workplace Safety Index that U.S. employers spent $58.6 billion on wage and productivity losses, medical expenses and administrative expenses in support of workers hurt on the job. This is roughly equivalent to the annual sales of Cisco, Pfizer or FedEx. A study by Colorado State University set the total direct and indirect cost of workplace injuries as high as a staggering $128 billion.
The direct costs of an accident refer to out-of-pocket expenses like a medically consulted injury and related medical bills. They also include the loss of a worker’s time because of the accident, lost productivity when the machine involved in the accident is locked out post-accident (and possibly in need of repair), citations, legal expenses, and possibly new workers who need to be hired and trained. The National Safety Council (NSC) estimates that lost time alone associated with the average injury costs nearly $30,000.
Indirect costs related to an injury can occur when there is a need to outsource work while a machine that had been involved in an accident is locked out. As well, companies need to take into account company morale and reputation. Analysis of most accidents reveals that the actual total cost can range anywhere from four to ten times the visible, direct cost stated by an insurance company. For example, a single accident can result in OSHA fines well in excess of $145,000 per violation or more if a violation if found to be willful in nature. In addition, insurance rates can increase dramatically or, in some cases, an insurer may even choose to drop a company’s coverage completely. Investments targeted for company growth may need to be diverted to cover the costs of the accident, while employee morale and productivity can experience a significant drop, and the company’s brand and reputation possibly damaged by negative publicity. Finally, there are the legal fees, plus management time spent dealing with litigation-related issues.
And while it is not calculated as an indirect cost, a poor safety record could possibly even make the difference between a company winning and losing certain contract bids, especially with respect to government contracts. A plant with a singularly bad reputation for safety may also find itself unable to attract skilled labor and may have to pay wages well above market value to do so. If a machine where a serious accident occurred is unique and is either locked out for investigation or until the safeguarding deficiency is abated, the company may need to outsource the work normally performed on that machine at a much higher cost. It’s also possible that the work is so specialized that it’s impossible to outsource and the company could lose that business.
OSHA’s Safety Pays website (www.osha.gov/dcsp/smallbusiness/safetypays) makes it easy for organizations to calculate the direct and indirect costs of an accident. As an example, let’s assume a fictional company with annual sales of $5 million and an 8% pre-tax profit margin has an accident involving an employee whereby his hand was entangled in a drill press.
By using insurance company claims data, Safety Pays can calculate that the crushing accident will cost that company, on average:
- Direct Cost: $56,557
- Indirect Cost: $62,212
- Estimated Total Cost: $118,769
By entering profit margin information, Safety Pays will also project the additional sales required to recover the costs of the injury. In this instance, additional sales revenue necessary to cover costs is $1,484,612 based on the 8% profit margin or approximately one third of annual sales. If pre-tax margins are less, the sales impact is even greater.
On the other side of the ledger is the cost to safeguard the machine involved in the accident. For the purpose of this discussion, let’s assume that the same fictional company had an onsite machine safeguarding assessment performed by a reputable firm that surveyed ten machines on the plant floor at a total cost of $5,000. That breaks down to an average of $ 500 per assessed machine. Next, assume that an assessed drill press is properly safeguarded to exceed OSHA regulations and meet ANSI standards and NFPA 79 at a total cost of $1,800. Adding in its prorated share of the risk assessment, total cost to safeguard the drill press would be $ 2,300, a figure that compares very favorably to the estimated $118,769 cost of the accident.
A poll by Liberty Mutual Group insurance showed that the majority of executives surveyed (61%) reported that for every one dollar spent on safety, three dollars is saved. And nearly all (95%) said workplace safety had a positive effect on financial performance. OSHA estimates a 6:1 ratio for saved dollars for every one dollar invested in safety, twice Liberty Mutual’s 3:1 ratio.
Of course, if a company could be guaranteed a positive return on their safety investment, more than half the machines in the United States today would not be operating unprotected. The majority of safety professionals will tell you that although cost savings are a motivator, safety’s biggest ROI comes in the form of human capital. Money savings from fewer injuries, increased productivity, and higher morale are all additional benefits.
Whether driven by the law, social responsibility or the need for a positive ROI, most organizations embark on a quest to make their workplaces safe. The business case for machine safeguarding is solid. By comparing the installation of properly safeguarding a machine versus the direct and indirect costs of even a single accident, it becomes clear that safeguarding makes sound business sense and should be a cornerstone of an organization’s safety goals and objectives.