Calculations Are By No Means Rocket Science, But It Might Pay To Involve Your Finance Or Accounting Staff.
By Joe Didonato
T he U.S. Department of Labor estimates that organizations spend about $1 billion a week to compensate employees for safety-related job injuries. Beyond this financial burden, organizations can also face litigation if they don’t train their employees on job-related safety issues.
Yet with all of these consequences looming, the learning organization is sometimes faced with the daunting task of creating an ROI for safety training in order to get the budget approved. In this column, I’m going to take on that task and give you a head-start on how you might go about putting that ROI together.
The basic strategy I would suggest for this ROI is based on a reduction of lost days of work. The other part of the ROI would be an estimate of the lost production incurred as a result of these lost days of work. So the way that we could approach this is to look at injuries by department, manufacturing location, or overall. If it’s by location or department, then it’s going to be easier to prove the ROI. You simply do a training intervention and measure the results after that training occurred.
Let’s make some assumptions to show you how we could approach an ROI formula:
Let’s assume that the total employee base in a car manufacturing company is 100,000 workers, and that the count is equally distributed in four plants. Let’s also assume that Plants 2 and 4 are showing the highest injury rates:
>> Injury rate of 15% in Plant 2; and
>> Injury rate of 18% in Plant 4.
Let’s define “injury rate” to be the number of lost days, with each employee working 250 days/year.
>> Lost days in Plant 2 = 25,000 employees x 250 days = 6.25 million Work Days x 15% = 937,500 Lost Days;
>> Lost days in Plant 4 = 25,000 employees x 250 days = 6.25 million Work Days x 18% = 1,125,000 Lost Days.
Calculating the direct cost for those lost days would be done as follows, if the cost of each employee was $200/day (or $25/hour):
>> Direct cost of lost days in Plant 2 = $200 per day x 937,500 lost days = $187.5 million
>> Direct cost of lost days in Plant 4 = $200 per day x 1,125,000 lost days = $225 million
Next we need to calculate the cost of the “lost production.” This would be equal to the “total production output capacity per plant,” expressed in a dollar amount. If we multiply 100,000 employees x $200/ day rate x 250 days/year the total labor costs are $5 billion — not including fringes. If labor cost is 25% of the total cost of goods produced, then the total cost of goods produced for all of the plants would be $5 billion divided by 25% or $20 billion. That’s $5 billion per plant.
Next we calculate how much production we’ve lost in these two plants by multiplying their injury rate times $5 billion:
>> Lost Production in Plant 2 = $750 million (15% x $5 billion); and
>> Lost Production in Plant 4 = $900 million (18% x $5 billion).
Now to complete the calculation, we need to estimate how much a training intervention could reduce the overall injury rate. Here you would probably want to find data that show which activities are creating the most injuries and determine what type of training would likely reduce that injury rate. It would help to compare those injury-causing activities by plant, to see how another plant may be avoiding those causes.
So now we’re ready to produce the ROI. If we estimate that a particular training intervention could reduce the injury rate by 2.5%, then the ROI would be obtained by multiplying 2.5% times each of the above lost production results, and adding that amount to the total savings in lost payroll costs:
>> Total cost savings in Plant 2 = $4.69 million in payroll costs for lost injury days (2.5% x $187.5 million) + $18.75 million in lost production (2.5% x 750 million) for a total of $23.44 million; and
>> Total cost savings in Plant 4 = $5.625 million in payroll costs for lost injury days (2.5% x $225 million) + $22.5 million in lost production (2.5% x 900 million) for a total of $28.125 million.
Next we would have to gather up the cost of the training intervention that produced these savings to finish the ROI calculation. For purposes of this example, let’s assume that it costs $100 per employee, which accounted for the training intervention and the lost time. That would make it $5 million for 50,000 of the 100,000 employees.
Then it’s simply a matter of dividing the savings by the cost of the training:
>> Plant 2 would show an ROI of ($23.44 million ÷ one-half of the training costs or $2.5 million) = 937.6% ROI; and
>> Plant 4 would show an ROI of ($28.125 million ÷ one-half of the training costs or $2.5 million) = 1,125%.
Obviously, the actual calculations are going to be much more involved than this, and your language will also vary from the terms that I used in this simple example. My recommendation is that you should request help from your finance or accounting staff to add credibility to your calculations, but having the strategy in hand will certainly help the conversation and gain support.