Friday, August 13, 2010

Connecting the Dots: Safety and Profitability

The most efficient weight-loss book would have only two chapters, each with one sentence: Chapter One – “Eat less.” Chapter Two – “Exercise more.” There’d be a similar book for improving your company’s health: Chapter One – “Reduce costs.” Chapter Two – “Increase revenues.” This article hopes to make a case for the financial benefits of implementing a rigorous safety culture – a commitment that can both reduce costs and increase revenues.

The first and most obvious area where cost savings can be achieved is with Workers Compensation insurance. Many business owners don’t realize how much control they have over their experience modification rate (EMR or Mod Rate), which is used to adjust the “book rate” for Workers Comp premiums. A company’s EMR is based on how its claims experience compares to industry averages in its classifications, with a 1.0 rating representing the average. “Insurance costs are controllable costs – they’re not a fixed expense,” says Mark Oldham, CSP, an executive consultant in risk management for Fireman’s Fund. Insurance is a significant percentage of the overall cost of business (just add up your Workers Comp, liability, automobile, property, inland marine, umbrella, professional liability, and employee benefits). “It’ll have a disproportionate impact when costs can be lowered,” states Oldham. “Insurance trades fixed costs for unknown costs, and premiums are directly influenced by prior experience and control over operations.”

In fact, Workers Comp operates like a line of credit, where the insurer spreads the cost of a company’s predicted future losses over time, meaning that premiums are in essence just a way of financing a company’s cost of accidents and injuries. So, obviously if a company can reduce its claims over time, it will reduce its cost of business. This can translate to a measurable effect on the bottom line. The example below illustrates the difference in premiums between a .80 EMR and a 1.20 EMR for just one of a contractor’s job classifications:

Modifiers are also applied to a company’s general liability and auto insurance, but the EMR is a key indicator of a company’s performance. Oldham says, “It’s used as a litmus test of how you run your business. If you can’t work safely, you can’t produce a quality product.” Many insurance carriers will meet with a prospective client before offering a quote, and perform a loss control survey to gather information on its operations. This will assist the underwriters in understanding what the company does and how well it does it, and can have a direct bearing on cost. Underwriters make empirical decisions based on these tangible factors to determine debits and credits against the book rate. The carriers will also advise the client on how to control losses, identify risks, and develop appropriate action plans and follow up properly.

Fireman’s Fund also provides its clients with post-loss consulting services if warranted. They will help prepare a mutual action plan with specific objectives and timelines for the risk consultant and the client – then execute the plan in concert. At the conclusion, the desired reduction in hazards and risk factors should be clear enough for the client to give an “as a result” statement. If it can’t, the plan was merely a series of activities rather than a strategic effort.

For those contractors that don’t have a full-time safety department (or even those that do), Oldham suggests taking advantage of the many services that insurance carriers offer, such as subscriber-only content on their web sites with training programs, educational resources, topics for safety meetings, and so on.

Oldham emphasizes that successful companies are engaged. There’s an awareness of the true costs of risk, an understanding of what drives risk, and mechanisms to control the cost of risk (such as diligent hiring practices, strong training programs, aggressive injury investigation and correction efforts, and claims management like bringing injured employees back to work ASAP). When Fireman’s Fund performs a loss control survey, Oldham says that they look for employers who “get it.” These are companies that don’t just focus on the cost of insurance premiums. They understand that accidents and injuries affect their other business costs (such as the state unemployment compensation billing, which increases with the turnover rate); and they understand why.

Creating and keeping a safety culture

Some contractors look to incentive programs as a way to reduce injuries and accidents. But, according to Dianna Wiggins, an independent loss control consultant, “There’s a place for safety incentives after you’ve changed the safety culture – by developing a really good safety program.” First, stop the injuries and accidents by implementing a good program with excellent training and management. And a prerequisite to culture change is a genuine, highly visible, unwavering commitment from the very top of the organization. Because good safety practices can be perceived as slowing productivity, there is a natural tendency for line employees to view them as arbitrary and annoying rules that are imposed by “the office.” This isolates the safety personnel, who are peers, putting them in the role of “safety police” (with all the associated avoidance behaviors that accompany that mindset). A key part of the visibility shown by management is active and vocal support for the safety staff.

“After the accidents stop, employees can get complacent,” states Wiggins. “Two to three years after instituting culture change, safety incentives can help sustain the performance.” In a previous position as Safety Manager for a medium-sized manufacturing company, Wiggins implemented a highly-successful safety program that helped reduce the company’s EMR to .76. This reduced the Workers Comp premiums by almost 60%, which translated to hundreds of thousands of dollars saved per year. Once that was achieved, she maintained that level of performance with clever incentive programs (costing only around $10,000 per year), and the company won over 30 national safety awards.

Wiggins also advocates for an early return-to-work policy, which can help reduce the cost of Workers Comp. This policy allows injured employees to return to work in a light or modified work position until they’re fully recovered and can resume normal work duties. Everything that can be done to reduce the claim cost and get the employee back will have a positive impact on the employer’s cost of business. Justin Cremers, a Safety Coordinator for SMI, a safety consulting firm, counsels his clients on the benefits of an early return-to-work policy. “The type of claims experienced and what’s done to control the cost of claims has a significant effect on Mod Rates,” says Cremers. Claims for medical treatment only are usually less severe and are reduced by 70% before they’re applied to the formula. Cremers urges his clients to take advantage of this by ensuring that injured employees return to work as soon as possible. “This is where an effective claims management and return-to-work program can have a dramatic effect,” he says.

“It’s critical that a job description should include what kind of physical demands are placed on the employee,” emphasizes Wiggins. That document should be given to the doctor so (s)he’ll know what light-duty or modified work the injured employee can perform while recuperating, which will make it more likely that (s)he’ll approve a quick return rather than keeping the employee off work. (A key point to remember is that the employee must have signed the policy.) “You can even get your employees to work at a not-for-profit location, and write it off as a charitable contribution,” she suggests.

Another factor affecting costs can be the OSHA 300 log and 301 Incident Report. Wiggins says that many companies have a high incident rate because they’re recording things that they shouldn’t – they don’t realize that first aid, visits to a doctor for x-rays or blood tests, and even drilling a fingernail or toenail to relieve pressure are not recordable. “The effect of that,” she points out, “can be losing business with companies that don’t allow contractors with an incident rate higher than the national average.”

Similarly, opportunities to perform work for the government and large companies that have rigorous safety standards exist only if a company’s EMR is below 1.0; and the chances improve the lower the Mod Rate gets. But this is only part of the equation. If your firm becomes noted for safety excellence, your customer base is much more likely to increase and repeat – which is exactly what happened during Wiggins’ tenure.

Actions, when allowed to repeat, become behaviors; and behaviors develop into cultures. “A culture of safe work practices and intelligent/informed risk-taking is the strongest operational mindset any employer can ever hope to have,” says Oldham. Companies that "get it" focus on the actions of their employees to protect and nourish a safe-work culture – not just "Can we do it at a profit?" but "Can we do it at a profit, safely?"

Monday, August 9, 2010

You Can Get There From Here

In an old joke the great classical pianist Arthur Rubinstein is asked, "Pardon me, sir, how do I get to Carnegie Hall?" He replies, "Practice, practice, practice." This advice would be well-taken by anyone wondering how they can reach their goals, whether personal or business.

For one member of Remodeling’s Big50 class of 2010, his journey in life and work confirmed the truth in Rubenstein’s apocryphal wisdom. Chris Wright, the owner of WrightWorks in Indianapolis, spent years accruing the skills for success and then building a business that is now swamped with repeat work and referrals; a business that has won three regional and one national CotY awards, and two Chrysalis awards this year… sort of the remodeler’s version of getting to Carnegie Hall.

Before he started WrightWorks in 1998, Wright benefitted from a series of powerful role models: His grandfather and father, who instilled a competitive fire and an expectation of excellence in him; his first manager at Federal Express, an ex-Marine and police officer who was a strong and principled leader; a martial arts instructor who helped him understand how to be the best person he could be, and who also hired him as the school’s program director. Here Wright learned the connection between belief in what you’re selling and the success of your sales process.

After leaving the martial arts school Wright partnered with his cousin, renovating older homes for sale to low-income families. This is where he learned to love the process of revealing the beauty of an old, neglected house. While working on the low-income projects, Wright met a designer who was starting his own business. This was the impetus for launching WrightWorks, and together they did small projects like kitchens and bathrooms. Today they collaborate on large six-figure projects.

Like many startups, Chris felt that “It was all about the craft – if it’s perfect when I’m done, I’ll be successful.” Business realities got in the way, though. “I got beat up. If there’s a mistake to be made in the business, I’ve made it.” He floundered because he didn’t have a strong financial background and had no frame of reference for pricing his work – so he’d just shoot in the dark, with unpredictable results.

Over time, he’s come to believe that business skill is equally important to the craft. “I have a deep respect for the people who have put in the time and effort to systemize every part of their businesses,” he states. As he matured, he realized that “If I build it right but don’t make money, my clients aren’t going to care.” In other words, a great reputation wouldn’t matter if he was out of business. Today his mantra is that “it’s either going to work for all of us, or it’s not going to work.”

“The relationship with the client has to have balance. There has to be mutual respect and appreciation. Problems usually happen when there’s an imbalance in the relationship.” Wright has grown very sensitive to that, and “when an imbalance starts to creep in, I know when to step in and try to bring it back to where it needs to be.”

Wright is also sensitive to the fact that the home is a very primal thing. “Your home is your cave…it’s an extension of who you are.” And when a contractor comes into your home and “tears the guts out, they’re kind of tearing away part of who you are.” Being sensitive to that fact is “very, very important to my success,” Wright believes. It’s equally important to develop a team of people that share this view, and Wright is quick to credit his team – which includes his vendors – for their contribution to the success of his company.

At the core of WrightWorks is a set of values that enshrines hard work and personal accountability. In a way these were the “directions” Wright followed that led him through each stage of his career to the present – a highly-regarded company that thrives even in a weak economy… a path worth following if you’re just starting your career.