Demonstrating payback on safety programmes is a challenge for many safety professionals so, using the example of ergonomic interventions, IOSH conference speaker Winnie Ip explains how best to calculate and prove return on investment.

There are many business reasons to support an ergonomics initiative, chief among them being regulatory compliance, good health and safety performance, and production enhancement. Taking the latter two, a well-performing, productive workforce is more likely to be achieved and maintained via the implementation of measures that reduce worker ill health and injury, and most business managers now realise that the financial benefits of doing so far outweigh the initial cost.

Ergonomic interventions are commonly made to tackle work-related musculoskeletal disorders (MSDs), which remain the top source of reported work-related illness, affecting some 572,000 people in the UK last year and resulting in the loss of around 9.3 million working days.1 The HSE estimates the cost to UK employers to be between £315 million and £335 million a year for back injuries, and between £208 million and £221 million for work-related upper limb disorders (WRULDs).2

Across Europe, although precise figures do not exist, estimates from EU member states of the economic costs of all work-related ill health range from 2.6 to 3.8 per cent of Gross National Product, a high proportion of which – perhaps 40-50 per cent – will be for musculoskeletal disorders.3

Historically, ergonomic interventions have always had a positive impact on health and safety, in terms of savings in both direct and indirect costs. The former include medical costs, compensation payouts and increased insurance premiums, while the latter include the time taken to manage and treat MSDs, expenditure on recruiting and replacing workers, overtime payments, and lost productivity.

Using the ‘iceberg’ analogy, it is estimated that for every £1 of direct costs “above the water” (such as medical costs and compensation payouts), there are at least £4 of indirect costs “below the water” (e.g. wages paid for time list, cost of hiring and/or training replacements, overtime, decreased output of injured worker upon return, etc.)4

However, using such ‘lagging’ albeit visible metrics as a principal justification of return on investment is not wholly reliable. It is more straightforward to use productivity and value-added improvements to justify ergonomic improvements in terms of quality, delivery and output (measured at the workstation level).

Creating business value
In today’s economic climate, any initiative that does not deliver measurable (short- to medium-term) value is considered an option, rather than a requirement, so ergonomic improvements are more likely to be supported and accelerated if they fit into a cost-justification process. Managers are challenged every day to do more with less and are often measured on how quickly they can improve productivity and quality.

In general, cost justification:

• facilitates communication between safety, engineering, and management functions;
• takes emphasis off injuries (reactive);
• focuses on taking action before an injury occurs (proactive);
• helps prioritise counter-measures (compare payback periods); and
• makes good business sense and affects the bottom line.

Thus, ergonomic projects that result in return on investment (ROI) are both effective and efficient in reducing hazard exposures.

In the manufacturing environment, time is a valuable resource, and awkward postures, high forces, and repetitive movements all take more time to complete. The challenge in such an environment is to quantify the financial benefits of reducing force, frequency, and awkward postures, because motion time can be converted to money.

An ergonomics intervention can affect productivity in two primary ways: by eliminating non-value-added tasks and reducing motion waste. Motion time is often related to ergonomic risk and, conveniently, there are methods for identifying and quantifying time savings as a result of eliminating or reducing non-value-added motions.

Motion study (predicting the time required to perform a task and/or operation) has long been used by industrial and operations engineers to improve processes and determine appropriate workloads. The analysis method requires operations to be broken down into tasks, task elements, and basic motions. Many tasks that involve excess motion often require more time to perform and are often a source of ergonomic risk to the employee. By determining why they take more time and present a risk – for example, because the worker has to engage in extended reaching – motion-time analysis can identify a solution (e.g. move the objects closer so that the worker no longer has to reach, so strain on his/her musculoskeletal system is reduced) and be used to calculate time savings resulting from ergonomic improvements.

Motion-time analyses can also be useful when requesting financial buy-in from management/engineering.

Productivity impact
Cost justification is based on choosing the best ergonomic improvements for the available resources. For each improvement, the benefit should outweigh the cost. The easiest and most effective way to estimate benefits of ergonomic improvements is to focus on productivity impact.

Time savings from eliminating non-value-added tasks and reducing motion times can be used to project effects on productivity. Projected productivity impact is calculated by dividing your total time savings by the total operations time. A conservative productivity impact can be used to account for the inefficiency of directly translating time savings into productivity gains (in other words, just because you can shave off six seconds in a 60-second cycle it doesn’t necessarily mean you can produce 10 per cent more product). Industry standard suggests 65 per cent as a good starting point, though this can be increased or decreased, depending on the specific effectiveness of the improvement.5

Projected productivity impact = total time savings ÷ total operations time

Conservative productivity impact  =  projected productivity impact  x  65%

Payback time
Another way to justify ergonomic improvements is by calculating the payback period, i.e. the amount of time that savings must accumulate to “pay back” the initial investment cost. Payback period is typically expressed in years or months.

The payback period is calculated from annual savings and the cost of the investment. Annual savings can be determined by multiplying the productivity impact (see below) by the annual direct cost. Annual direct costs are equal to your fully burdened labour costs (labour burden includes the benefits and taxes that a company must and/or chooses to pay on their payroll – for example, taxes, retirement/pension costs, health care, life insurance, etc.) These are derived from the average production employee’s annual wages, multiplied by a benefits burden multiplier. This multiplier will vary depending on company, country, and industry but typically ranges from 25-33 per cent of the annual wages.

Annual savings  =  productivity impact  x  annual direct cost

Payback period (years)  =  cost of investment  ÷  annual savings

Finally, to calculate the ROI, subtract the initial investment from the annual savings and divide by the initial investment. Typically, an ROI of fewer than three years is desirable.

Return on investment  =  (annual savings - initial investment)  ÷  initial investment

Summary
For your ergonomics process or safety programme to be successful, you must be able to demonstrate its value to the business. To do so, you must:

• focus on proactive goals and measures on which people can act;
• use objective, real-time methods;
• demonstrate value to other initiatives (quality, cost, time, etc);
• calculate and communicate the cost-benefit of improvements (ROI); and
• achieve tangible results.     

References
1    HSE (2010): ‘Statistics 2009-2010’ –  www.hse.gov.uk/statistics/overall/hssh0910.pdf
2    Whysall, W, Haslam, C, and Haslam R (2005): A staged approach to reducing musculoskeletal disorders (MSDs) in the workplace, Loughborough – www.hse.gov.uk/research/rrpdf/rr379.pdf
3    European Agency for Safety and Health at Work (2000): ‘Work-related musculoskeletal disorders in Europe’ – http://osha.europa.eu/en/publications/factsheets/3
4    MacLeod, D (1995): The Ergonomics Edge: Improving Safety, Quality, and Productivity, John Wiley & Sons, New York
5    Humantech (2008): The Handbook of Ergonomic Design Guidelines, Version 2.0, Ann Arbor, MI

Winnie Ip is director of consulting and an ergonomics engineer for Humantech and will be presenting on this subject at the IOSH Conference on Tuesday, 15 March – www.ioshconference.co.uk