How much is safety worth...Or...What good are safety numbers?
December 8, 2015
One of the challenges I hear from safety people is the difficulty of explaining to execs the value of the different initiatives they want to implement. Everyone knows that safety is important and every decent fleet is serious about continuously improving their safety record, but translating that into an actual dollar benefit can be tricky. If your Out of Service rate drops by 10%, how does that impact the company's top or bottom line?
There are two challenges in answering that question:
- The disconnect between safety rating numbers and actual dollar costs
- The fact that fleets often don't have a clear picture of their safety costs
The first point comes from the fact that safety professionals focus much of their time on managing the company's safety record, which is largely reflected in the safety rating numbers that outside enforcement agencies use. Safety rating numbers - whether CSA scores, DOT reportables per million miles, OOS rates, or whatever - track incidents that are a potential risk to the public (what enforcement cares about) but they have only a loose affiliation with business performance. While a bad safety rating will certainly mean a lot of associated costs, you could have a good safety rating and still have a pile of safety related costs that aren't reflected in the official numbers. There isn't a direct relationship between the two.
Which brings me to the second point - the challenge of figuring out exactly what the fleet is spending on 'safety' right now. There are a few ways of doing that.
Total Cost of Risk
One measure that insurance people use is the Total Cost of Risk. To calculate that, they add up the total amount spent on premiums, plus the amount the company covers itself through its deductible, and that's the Total Cost of Risk. As an example, consider a 50 truck fleet paying $5000/truck in premium, with a $25,000 deductible. Through the course of the year they may have a handful of minor incidents that are paid through their deductible and add up to maybe another $50,000. Their 50 trucks x $5000 premium + $50,000 in minor incidents = $300,000. (A true TCOR calculation includes other things like risk management staff costs, but for our purposes this simplified version will work.)
That's a pretty good starting point for understanding costs, and you can really see the value of working to reduce those costs. However, since insurance premiums tend to lag business performance (you don't see the improvement in your premiums until well after the business improves) it may not be the most accurate or timely indicator of safety cost.
The Accounting Approach
Another approach, more time consuming but more complete, is to look at all the actual expenses in a given year. This exercise generally requires the accounting department to be involved, but if you add up everything you spend on direct and indirect safety related items, you'll get a good picture of where you're at. The trick is making sure you include everything. To calculate it, be sure to include:
- Total cost of headcount in safety department (salary plus taxes, benefits, etc.)
- Fines and violations
- Towing and spill cleanup
- Direct payments for damages to third parties
- Cargo claims (whether direct payments or discounts applied to customer invoices)
- Maintenance and repair work beyond normal scheduled items (including excess wear and tear costs)
- Any other costs that result from any items above (e.g. legal costs, consultants)
Put it all together and you get closer to the total cost of safety, beyond insurance. It's important to note that many of these are subtle, easily hidden costs so you may have to look carefully to find them all.
People often think of safety improvement as reducing crashes or violations, but safer fleets also have fewer cargo claims, lower maintenance costs, and lower staffing costs in their safety departments, and those can add up to big numbers. Even before those crashes or violations happen, the behaviour leading to them will driving costs up - if you replace your brakes twice as often as you expect because drivers are following too close and riding them constantly, you'll see the effect in maintenance costs even before the inevitable rear end collision happens.
Safety Costs per Mile
Once you have the total (non-insurance) cost of safety figured out, it can be helpful to convert that into a cost per mile. Since trucking revenue is calculated per mile, and the two largest costs (driver pay and fuel) are tracked by mile, it's good to know what portion of that revenue is needed to cover safety issues as well. Sometimes the total cost numbers are hard to relate to, but breaking it down into a mileage cost makes it real, and reducing your safety cost per mile is probably easier than trying to haggle a price increase from a customer.
Looking at data from the Best Fleets to Drive For program, I found that the safer fleets can have a safety cost under 2¢ per mile. Based on that, a 50 truck fleet, running 100k miles annually per truck, might spend $100,000 or so per year on all those odds and ends noted above.
If you're paying attention you'll note that this is double the $50,000 we estimated for deductible costs above. That's because this cost includes things like maintenance, fines, and staff costs that generally aren't included in the deductible discussion. As with many things, the devil is in the details and all those little extras add up.
Having compiled the total spend on safety-related issues, and broken it down to a per-mile rate, it's much easier to see the value of investments in a real-world context and determine whether a particular investment in safety is likely to be worth it.
As an example, let's say our 50 truck fleet has an opportunity to reduce their cost of safety by 20%, but it's going to require a $100,000 investment. A 20% improvement sounds like a big deal, and $100,000 is an appreciable but not insane amount of money for a fleet that size (it's about what they're spending now annually for safety-related costs). Using the mileage numbers above, that investment translates into about 2¢/mile and the 20% expected improvement means they'll see a 0.4¢/mile reduction in costs. That's certainly good, but they'll need 5 years to recoup the investment, so it's not great and they'll certainly notice a 2¢/mile hit while trying to recoup it.
On the other hand, if that same fleet can get a 10% improvement by investing $5000, the numbers look very different. The $5000 investment represents about 0.1¢/mile, and 10% (which may not seem like a big deal) is a 0.2¢ reduction. It's still not going to set the world on fire, but the savings are double the investment, so it shouldn't be a hard decision to make. As is often the case, the little changes can end up having a much more positive impact over time.
When you add up all your safety costs, what does your per-mile cost end up as? What kind of return do you see on your safety-related investments?