GEORGI POPOV, QEP, CSP, ARM, SMS, CMC, FAIHA, is a professor at the University of Central Missouri. TSVETAN POPOV, CSP, CIH, is an assistant professor at the University of Central Missouri. RAYNA BROWN, MS, CIH, CSP, is the manager of HSE&EM process excellence for Honeywell FM&T. Send feedback to The Synergist.
The Business Case for EHS
Commercial businesses, government, and industrial organizations are experiencing greater pressure to be efficient. As a result, industrial hygienists and environmental, health, and safety professionals are increasingly expected to justify the costs of controlling EHS risks. To satisfy this expectation and gain support for EHS protection programs and activities, a persuasive business case may be developed to demonstrate that protecting worker health creates a competitive advantage for an organization. This way, IH and EHS professionals can be partners with business executives in the financial quantification and, ideally, the management of risk.
Demonstrating the business value of EHS interventions can be challenging. We must learn the language of business to persuade executive management that EHS improvements are not only necessary but good investments. For example, within the electric utility sector, executive leadership routinely requires the completion of a cost-benefit analysis for EHS projects that exceed higher dollar amounts (approximately $250,000). It is useful for EHS staff to have access to tools that help us competently perform this analysis and quantify the reduction in risk. Unfortunately, to date, very few of these concepts are included in educational offerings and publications.
Without compelling business value information, management is likely to look at IH projects and safety programs as efforts that, although necessary in some cases, should wait for additional resources while projects with a clearer connection to the operations and finances are given higher priority. EHS improvement projects that are not regulatory-driven may suffer a worse fate and be vetoed completely. Thus, it’s critical to make a strong business value proposition for these programs so that they can compete successfully with other business functions for limited resources.
A SIMPLE FRAMEWORK In 2009, AIHA published the Value Strategy Manual, which presents a fairly complex business case model. Many AIHA members subsequently requested a simplified version of the model. To answer their request, we’ve updated the AIHA business case model around a simple framework based on internationally accepted risk management methods and terminology. We brainstormed how to assess EHS risks and align them with key business objectives. We reviewed risk reduction strategies and the benefits—financial and non-financial—of EHS interventions. And we developed an interactive tool that steps users through the process of creating a business case, culminating with a five-minute “elevator speech” that effectively communicates the benefits of EHS interventions.
The risks and benefits of an EHS project should be assessed from an enterprise risk management (ERM) perspective. For employers, these risks and benefits can be quantified in terms of the cost, savings, and potential new revenue associated with changes in EHS risks and health status (that is, occupational risks), operational risks, financial risks, and strategic risks.
Traditional risk management is often associated with entrenched silos that separate EHS professionals from financial and strategic risk decisions. Under traditional risk management, the human resources department typically manages turnover rate, hiring, benefits, and absenteeism. The Lean Six Sigma function manages productivity and quality. Accounting manages financial records, business transactions, cash flows, and accounts payable. These functions or departments have their own management structure and rarely work in synergy.
By contrast, ERM is based on an integrated and holistic risk management approach. It integrates so-called hazard risks with operational, financial, and strategic risks, and encourages an understanding of their relationships and their additive or synergistic effects, which can result in greater risks than the sum of the individual risks would suggest. For example, regulatory fines related to EHS risks may be considered acceptable from a financial perspective, but the reputational issues from reported citations may not be acceptable from an ERM perspective due to the additional strategic risk. Therefore, “reputation” risk could be highlighted to emphasize the importance of strategic risks to the organization. Understanding and managing risk interactions requires careful evaluation of the managerial silos common within organizations. In some organizations, the hazard risk is often called “occupational risk,” which includes employees, property, environmental, and liability risks. See Figure 1 for a depiction of these elements as aspects of the four “quadrants of risk.”
Figure 1. Quadrants of risk, highlighting reputational risk. From Assessing and Managing Risk: An ERM Perspective, published by ASSP. Reprinted with permission.
Figure 2. The simplified EHS business case model.
Click or tap on the figures to open larger versions in your browser.
These risks and benefits should be communicated effectively to decision-makers. EHS professionals can use the new model to justify a project or intervention. It includes current risk levels, risk reduction utilizing the hierarchy of risk treatment (HoRT), and percent risk reduction. It captures the effects of implementing programs or activities on employee health and safety, risk management, and the business process. The effects include customary financial business metrics, such as benefit-cost analysis (BCA), return on investment (ROI), net present value (NPV), internal rate of return (IRR), and payback period (PBP), that are meaningful to business management. The model also includes non-financial benefits (NFB)—those that cannot be directly or easily monetized.
As leaders within companies are often trained in finance, accounting, or engineering, use of these concepts may help bridge the gap between the profession of EHS and other technical specialties, increasing credibility for EHS professionals and improving the likelihood that EHS projects will be supported by upper-level management.
LINKING EHS TO BUSINESS VALUE The new AIHA business case model should be considered an evolution of the 2009 Value Strategy Manual. This new model enables industrial hygienists, EHS professionals, and other interested individuals to link EHS investments to business value. Many of the findings utilized in the model are the result of study, observation, experience, and anecdotal information, and do not always reflect statistically reliable survey results. However, the model is well grounded in generally accepted ERM business practices routinely used by corporations.
To gain more specific understanding of the framework, we encourage readers to download the beta version of the model from the AIHA Apps and Tools Resource Center. Supporting videos produced by the Instructional Video Unit of the University of Central Missouri’s Center for Teaching and Learning are available from YouTube (here and here).
MORE THAN AN EXPENSE Changes in the economic environment and intensified business pressures, including increased global competition and energy costs, have convinced some organizations to take greater risks under the assumption that profits will increase. More companies have adopted a “leaner is better” approach with the belief that spending less on EHS is a wise choice for saving resources. Use of the business case methodology can assist EHS professionals in demonstrating that occupational safety and health activities are more than an expense and can have a positive return on investment. Perhaps even more importantly, the business case provides support that EHS professionals are integral partners in the organization and essential contributors to the bottom line.