This document discusses return on investment (ROI) and return on health, safety, and environmental investment (ROHSEI) as tools for evaluating safety investments from a business perspective. It introduces ROHSEI as a standardized approach to evaluate safety investments using the same financial metrics as other business investments. Two case studies are presented using ROHSEI to analyze the business case for investing in enhanced ground proximity warning systems and safety management systems. The document argues that using ROHSEI allows safety professionals to demonstrate the value of safety to business objectives and priorities.
3. THE PARADIGM
“Safety people have their hearts in the right
place but seldom understand true business
objectives”
• Safety has the high moral ground
No one can publicly disagree with what we represent
• But Safety people are seldom seen as true business partners
Our requests are compared with competing business objectives
We’re never seen as balancing Safety objectives with business
reality
• We seldom make a credible business case
3
5. METRICS USED BY CFO’s
Metric
Internal Rate of Return
Net Present Value
Payback Period
Discounted Payback Period
Account Rate of Return
Profitability Index
% Time Used
75.6%
74.9%
56.7%
29.5%
30.3%
11.9%
Source: Graham, John R. and Harvey R. Campbell, “The Theory and Practice of
Corporate Finance: Evidence from the Field”, Journal of Financial Economics 2001
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6. FINANCIAL METRICS
The financial metrics are built around the
concept of the:
$ Time Value of Money $
That is, a dollar today is worth more than a
dollar tomorrow.
6
7. INFLATION AND DISCOUNTING
An investment can be viewed in two ways
—its future value or its present value.
Inflation
Present
Value
Discounting
Future
Value
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8. U.S. JHSIT PROCESS MODEL
Initiate Top Level Safety Intervention Actions
(e.g. promoting IHST, SMS, Infrastructure changes)
Review JHSAT
Recommendations
& Assign Number
Group
Recommendations
By Common
Theme
IHST Approval
JHSAT Overall
Effectiveness
Value (OE)
Prepare
Preliminary
Safety
Enhancement
Plan
Assign JHSIT
Average
Feasibility
Value
IHST Approval
Prioritize
Recommendations
(OE x F)
Prepare Detailed
Safety
Implementation
Plan
Execute and
Monitor Progress
Of Safety
Implementation
Plan
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9. Technical Feasibility: The ability of the project to take advantage of the current state of technology in
pursuing further development.
3 - Off-the-shelf technology, no development required
2 - Some development required, not currently in public use
1 - Major technology development effort required
Financial Feasibility:
Should consider the total cost of the implementation, including the
planning process. Financial feasibility also involves the capability of the participating organizations (FAA,
Manufacturers, and Airlines and Operators) to provide the appropriate funding needed to implement the
project.
3 - Relatively low cost to implement
2 - Relatively medium cost to implement
1 - Relatively high cost to implement
Operational Feasibility: Involves the “practicality” of the project within the context of the operating
environment, including NAS, ground operations, maintenance, inspection, etc. Considers which
organizations within the aviation system are impacted.
3 - Minimal change to entities within the operating environment
2 - Modest change to operating environment
1 - Major change to operating environment
Schedule Feasibility: Can the project to contribute to achieving the goal in a selected timeframe? Must
consider implementation schedule by project.
3 - Less than 2 years to full implementation
2 - Full implementation in 2-5 years
1 - Longer than 5 years to full implementation
Regulatory Feasibility: Should be evaluated against current rules and certification
process. Could be a deterrent due to a long approval process.
3 - No policy change
2 - Guidance change only (orders, handbooks, policy)
1 - Rule change
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10. MANAGEMENT SYSTEM = SAFETY SYSTEM
Financial Management System
Safety Management System
Finance Plan
Safety Plan
Targets & Objectives
Targets & Objectives
Budget
Budget
Accountabilities
Accountabilities
Levels of Authority
Line Management
Authorities
Procedures
Procedures
Checks and Balances
Monitoring/Line Checks
Audit
Plan
Accountants
Audit Plan
Safety
Committee
Audits
Balance
Sheets
Audits
Safety
Achievement
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11. ROI – WHAT IS SAFETY’s PAYBACK?
Net Present Value
ROI =
ROI =
Present Value of Project Cost
Present Value of Project Benefit – Present Value of Project Cost
Present Value of Project Cost
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12. ROHSEI
One Way To Change The Paradigm.
Return on Health,
Safety and
Environmental
Investment
(ROHSEI)
12
13. GENESIS OF ROHSEI
In 1995 a taskforce of fifteen Fortune 500 companies
sponsored the development of a process and supporting
tool set to answer important questions such as:
What safety investments should we make?
How do we know we are doing the “right things” in the
“right way”
To which projects should we allocate our resources?
Which EHS investments create the greatest value to the
organization?
How do we demonstrate the value of our investment
decisions?
How do we demonstrate our value and justify our
existence?
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14. BRIDGING FINANCE & SAFETY
BUSINESS TALK
SAFETY TALK
Finance/Operations
Safety/Industrial Hygiene
Earnings/EPS
Accident rates
ROI
Property loss
Payback
Insurance premiums
PVRR
Fines and citations
Internal Rate of Return
No. of people trained
Production rates
Exposure Assessments
Earnings/employee
Net Present Value
Cost Benefit
ROHSEI
Bridges
the Gap
Near misses
Behavioral Observations
Audit findings
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15. WHAT ROHESI DOES
ROHSEI offers a standardized approach to
evaluating health, safety and environmental
investments.
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16. WHAT DOES A SAFETY GUY KNOW
ABOUT FINANCE? – ROHSEI!
Return on Investment (ROI): This is calculated by dividing the net present value by the present
value of the project costs. The net present value is calculated by subtracting the present value of
project costs from the present value of project benefits. The model calculates ROI based on
costs, benefits, and the discount rate that are entered by the user.
( B − C ) ( 1 + n) i
i
i
i
(1 + r )
i =1
ROI =
=
i
t
C ( 1 + n)
i
i
i =1 (1 + r )
t
∑
∑
B ( 1 + n) i t C ( 1 + n) i
i
− i
i
i
i =1 (1 + r ) i =1 (1 + r )
i
t
Ci ( 1 + n)
i
i =1 (1 + r )
t
∑
∑
∑
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17. THE CHALLENGING QUESTIONS
What investments should we make?
Should we make the investment this year or next?
How do we compare an operational investment decision to a
health and safety investment decision?
To which projects should we allocate our human resources?
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Safety is the high moral ground, but we need to make a ‘business case’ for investing in safety.
Safety managers speak in their own language, normally centered on safety risk management terms
But the financial managers speak a different language.
To be successful, safety managers must present their proposals for safety investments in financial terms.
The worth of a dollar today is different than the worth of a dollar in the future.
An investment can be viewed in two ways – its future value or its present value.
The JHSIT process includes evaluating the “value” of the recommended intervention.
The JHSIT process includes evaluating the feasibility of implementing the intervention. One of the 5 feasibility factors evaluated is the “FINANCIAL” feasibility.
The management tools used to manage safety are the same as the elements used to manage the business.
To be successful, safety managers must be able to show the financial benefits of proposed safety investments! There has to be a financial return on the investment if you want the financial community to support it!
ROHSEI is a proven financial software tool used by safety managers to calculate the financial return on safety investments.