Note: This article is a modified version of one originally appearing in The Ergonomics Report™ under the title “Calculating Ergonomics ROI; Documenting Ergonomics-Related Improvements”.
Proving the value of ergonomics is a recurring theme at Ergoweb. We’ve written about it many times since we launched the company in 1995; we’ve taught courses on the subject; we’ve discussed it in conference presentations; we’ve published case studies; and A Strategy for Human Factors/Ergonomics as a Discipline and Profession (Reprint), in which we identified proving value as one of the most important components in our mutual quest to grow the influence and positive outcomes of ergonomics.
Here are a few more examples from our archives that touch on this topic:
At the highest organizational management levels, there are four primary motivating factors in any decision making process, in any organization, for-profit or not-for-profit:
Revenues minus costs equals financial profit, and we’ve all heard phrases like “businesses are in the business of making profits.” Good ergonomics can satisfy any or all of these criteria at one time or another (though it might not be the highest priority opportunity).
On the other hand, organizations often add a complex layer of decision making criteria over these primary high level concerns. For example, a board of directors might incentivize company management to accomplish specific goals, such as “launch new product XYZ within the first fiscal quarter,” or “reduce labor costs by 10% this year.” We can debate the efficacy of such initiatives, but regardless of what we think of them, they usually are the overriding force for decision making, especially if performance bonuses or job security are tied to them. Other layers that affect decision making are initiatives like Lean and Six Sigma. When well understood and executed, such systems should map directly back to the four criteria, above. Whether or not they do, they can become the criteria through which nearly all decisions are made, so it behooves us to understand those systems and present our solutions within their framework and terminology.
As with any value proposition, the customer must recognize, appreciate, and want or need that value in order to justify any investment. That customer could be an end-user, someone in your supply chain, a production team, your boss, etc. If they don’t already recognize and appreciate the value of an ergonomics solutions, it’s our job to demonstrate and “sell” that value. Performing a cost-benefit analysis is not just a potential tool in our “sales” approach, it is often a requirement before an investment can proceed. There are numerous approaches, and some are very complex, well beyond the scope of this article. Calculating Return on Investment (ROI), sometimes called Rate of Return (ROR), however, is a very common way to help a customer understand the value a proposed solution will bring, and the basic calculations are fairly straightforward.
A typical ROI calculation compares the financial benefits of a proposed solution to its costs. For example, you might propose a solution that will cost $1,000 to implement, but you’ll also need to calculate the resulting financial benefits of that investment. Therefore, you must include specific measures and attach specific financial values to those measures. The basic ROI calculation is a ratio:
ROI = ($benefits – $costs)/$costs
So, if we propose to spend $1,000 on a solution, and we predict that solution will produce $2,000 in financial gains (or reduced expenses),
ROI = ($2,000 – $1,000)/$1,000 = 1.0
It’s common to express ROI as a percentage, so continuing our example,
%ROI = 100 * ($benefits – $costs)/$costs = 100 * ($2,000 – $1,000)/$1,000 = 100%
It’s also common to consider the length of time over which our investment will produce future gains. For example, if the $2,000 gain we expect from our $1,000 investment will occur within 1 year,
1 year %ROI = 100 * ($2,000 – $1,000)/$1,000 = 100%
If our solution will produce $2,000 in profit/savings each year,
1 year %ROI = 100 * ((1 yr * $2,000) – $1,000)/$1,000 = 100%
2 year %ROI = 100 * ((2 yrs * $2,000) – $1,000)/$1,000 = 300%
3 year %ROI = 100 * ((3 yrs * $2,000) – $1,000)/$1,000 = 500%
and so on for 4, 5 or more years.
Since the time to recoup an investment can be an important organizational measure, ROI is often presented in terms of a payback period. In our simple example, the payback period is 6 months, meaning we will cover the entire cost of the investment, $1,000, within 6 months.
Following the same path we did in example 1, above, let’s assume:
Cost of Investment: $15,000
Projected Savings Resulting from the Investment: $50,000/year
1 year %ROI = 100 * ((1 yr * $50,000) – $15,000)/$15,000 = 233%
2 year %ROI = 100 * ((2 yrs * $50,000) – $15,000)/$15,000 = 567%
3 year %ROI = 100 * ((3 yrs * $50,000) – $15,000)/$15,000 = 900%
Payback Period = $15,000/$50,000/yr = 0.3 years, or 3.6 months
In Ergoweb’s experience, ergonomics solutions often result in very quick payback periods, often in months instead of years, which can be a very strong carrot for financially oriented decision makers.
Now, just when you thought this really was simple and straightforward, there’s often much more to consider in formal cost-benefit and ROI type calculations. For example, many organizations use Net Present Value as a measure (NPV, sometimes referred to as Net Present Worth, or NPW). NPV calculations take into account things like inflation, and are especially important for investments that have a long-term payback period. If your ergonomics solution has a short payback period, NPV calculations become less relevant. If your customer requires NPV calculations, we suggest either working with them to perform those calculations, learning how to do NPV calculations on your own (beyond the scope of this article), or working with a financial expert.
For an example and possible tool to do such calculations, you might visit http://www.equipoisinc.com/roi/, a free tool offered by Equipois Inc. It’s somewhat oriented to their own products, but I believe you can also use it for other purposes.
Identifying the outcomes, and attaching financial values to those outcomes, is the most important part of the ROI calculation process. Ergonomics solutions typically produce two types of outcomes (e.g. see A Strategy for Human Factors/Ergonomics as a Discipline and Profession (Reprint)):
One of the reasons ergonomists are sometimes challenged in predicting future financial benefits is due to a focus only on the well-being outcomes. It’s often difficult to accurately tie financials to things like future injury rates and their costs. In some organizations, it’s even prohibited to do so. Further, even though some may recognize the benefits of outcomes like improved moral, reduced absenteeism and turnover, they find it difficult to accurately predict the financial impacts, and consider them as intangibles — things that are difficult to measure. Financial decision makers typically don’t like to, or don’t have the means to, account for intangibles.
Companies do, however, place a lot of weight on measures they are accustomed to, and for which they have firmly entrenched (often to a fault) accounting methods grounded in GAAP (Generally Accepted Accounting Principles). GAAP motivated companies utilize traditional financial measures for things like labor costs, productivity and quality, and anyone who has worked in a production facility knows that these types of measures typically override all other considerations (again, often to a fault). You may encounter organizations, particularly those that are on a true Lean Journey, who use very different accounting methods than traditional GAAP, in which case they may measure value differently, but for most, the focus is on the performance outcomes ergonomics can provide, not the well-being outcomes. To be effective and convincing, you must present the value you propose in the terms to which they are accustomed.
The Value of Ergonomics Outcomes
Ergonomics can impact many metrics, including any or all of these:
Our challenge is to translate our solutions into recognized measures that can be used in financial decision-making so that the above list moves from intangible niceties to tangible financial gains:
Ergonomics Solution $Gains =
+ Injury Prevention($)
+ Injury Management($)
+ Absenteeism Reduction($)
+ Employee Retention($)
+ Enhanced Customer Experience ($)
= Big $$$!
Take the time to measure/predict a solution’s impact on performance measures like productivity and quality in particular, because these are already being measured, and driving decision-making, in nearly all organizations. Also understand any incentives/initiatives that are motivating decision making, and be sure to include those components (e.g., if management is concerned about high employee turnover rates, be sure to include that in your ROI calculations).
Revisiting the four primary organizational decision-making factors at the start of this article, it’s clear to us that “ergonomics is ‘the right thing to do’,” and it’s clear that there are no direct “punishments” for organizations with poor ergonomics, so if we really want to make an impact, we need to present ergonomics solutions as the right financial thing to do. Focusing more on the performance outcomes that companies are accustomed to, and held to by their stakeholders, rather than just the well-being outcomes, will increase the value of ergonomics in our customers’ minds.