Calculating the Cost of Nothing

Hundred dollar bill fade

By Phil La Duke

I’ve been writing this blog for almost 10 years (I started in July 2016) and during a decade of writing it, I haven’t said much about what I do; that is to say, I don’t share much about my day job. In part that’s to protect my client’s confidentiality, and partly because I don’t want to lose credibility by turning this into a weekly commercial. If I’m quiet about my work, mostly it’s because I want to explore and debunk the cherished truisms of safety. But today I have to explain a little of what I do to provide a context for the topic d’jour.

So what is it that I do? Years ago, working with a team of system management and OD experts I developed a revolutionary approach to worker safety for a major manufacturer (even though what I am about to divulge has been made public by the company I’m not going to mention the company for the sake of professional decorum and for all intents and purposes it doesn’t matter.) By the companies own calculations the new system had lowered its Incident Rate from 17.5 to 3.5 after five years, its severity rate had fallen over 90%, and by its reckoning, it had avoided over 14,000 injuries and reduced its Worker’s Compensation costs by over $55 million. We were all pretty pleased with ourselves, when the old school defenders questioned if we really saved any money or did they just get lucky. I devised a way to determine if it was because of the organizational changes using statistical analysis. It was crude by mathematical academic standards (there was a lot of “noise” in the data) but it was enough to determine, statistically speaking, where the company would have ended up had it done nothing (standard progression) and where it did end up after the engagement (logarithmic progression). In simplest terms we took ten years worth of injury data and identified the trend, then we took that same data and compared what actually happened. In the case of this company it was trending downward but slowly and relatively flat compared to the rapid improvements we saw. By comparing the difference between the trend and the actual costs we were able to prove (within a minute margin of error) the savings. Fortunately for us we calculated the savings at $54 million (which was well within our margin of error).

One would think that would be enough to convince the most ardent skeptics that the process works, and yet when (after designing and building—with the company’s permission our own propriety version) the company for which I worked at the time got even better results from a new client (this time saving $5 million in Workers’ Compensation claims in only 8 months, and saving $15 million when doing the statistical analysis) the client was incredulous; they claimed it just wasn’t possible, that we somehow must have manipulated the data (eventually they realized that the numbers were true). Eventually we saved the company $12 million in quantifiable cost reductions, and then it was on to the next company only to face the same incredulity. It’s exhausting.

The difficulty is always the same: people don’t want to believe that they actually saved money because saving money means that you used to be wasting money and when the figure is in the millions of dollars it implies that the company has been wasting millions of dollars, often without even knowing it.

Cost Avoidance Versus Cost Savings

There’s a difference between cost avoidance and cost savings and there’s a difference in the emotional charge each term carries. Cost savings: you reduce one fixed cost, for example you pay $.20 less per safety glove and you used 10,000 safety gloves so you saved $2,000 (10,000 x .20). Cost Avoidance: you pay less for a variable cost then you did historically, you “avoided” incurring a cost that you had every right to expect to pay, for example getting regular oil changes and avoiding paying for costly repairs. Most of us don’t see a meaningful distinction—and frankly without statistical analysis cost avoidance doesn’t mean that much—between cost saving and cost avoidance for a good share of us money is money and if at the end of the day we have more of it, so much the better. But for a lot of business people, particularly at the site level, cost avoidance is trivial and not something you can use to calculate return on investment. The idea being that maybe the company would have spent that money and maybe it wouldn’t, maybe we got lucky; coming back to our regular oil changes example one could argue that maybe if we didn’t change the oil in our car we might have a break down and we might not, and the cost of the oil change can be calculated but the return on investment cannot because we don’t know what the cost of repairing the engine would be, if anything. We can’t even calculate the reduction in the life of the engine (car companies can by conducting studies of numerous engines and by varying the frequency of oil changes).

Card Tricks For Dogs

Reducing costs, whether through saving or avoidance means a lot to us in safety, because we are so often seen as burdensome costs that return very little value. Like most of you I resent this and can point to a real, quantifiable statistical value to cost avoidance. For me, it shouldn’t matter if I return hard saving or true cost avoidance, if, through my efforts I am able to keep more money in the corporate coffers it positively impacts the bottom line, but when I make this argument to people who dismiss millions as “cost avoidance” it’s like doing card tricks for a dog. For me, as I’ve said above, money is money. I live in Detroit where my natural gas and electric bills are combined. In the winter my gas costs are naturally higher because I have a gas furnace and in the summer months my cost for electricity goes up if I use the air conditioner. If I invest in energy efficient appliances, insulate or replace my windows, and change my behavior to reduce usage I will save money, but if we have a mild winter my costs will go down naturally as I will require less energy to heat the house. Since there is no way to say how much of the money I didn’t pay out is because of the changes I made and how much is because of the weather I can’t calculate exactly how much of the savings is because of what I did. When you apply this to safety and the cost of injuries, and have this argument with some business leaders it’s a bit like doing card tricks for a dog, no matter how many times you make the argument and how carefully you explain statistical analysis they just won’t get it.

I had a Vice President of Human Resources of a Fortune 500 company tell me that “unless I can eliminate bodies” (directly reduce labor cost) he would never be interested in what I have to sell. “It’s just cost avoidance” he said dismissively. It was in that instant that I knew that despite my ability to save companies tens of millions of dollars in sustained annual costs for more than just a few trying to help them save money by literally saving lives I would never be able to persuade them.

 

 

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