Ergonomists commonly assert that their projects will benefit an enterprise citing these benefits qualitat- ively while presenting the costs of the project quantitatively. When it comes to arguing for funds to be expended, to just present the cost of a project does not reflect its value. If several projects are competing for funding then, in financial terms, the project that provides the greatest value to the enterprise should be funded first. Financial modeling can be used to calculate the value of a future project, incorporating both its costs and benefits quantitatively. This requires access to the enterprise’s costs data, selection of those items that the project will affect and estimation of the size of the effect.
In the engineering field data are selected, costed and benefits estimated on the basis of custom and practice. What can ergonomists learn from the engineers’ approach?
Ergonomists are often cautious about making predictions on the benefits of a project; epidemiology tells us that we cannot know, for instance, that there will be injuries among a particular team of workers, just the likelihood of injuries. How then is it possible to say that an intervention will prevent injury and Cost Justification for Implementing Ergonomics Intervention 4-3
thus include reduced injury or other costs in a cost-benefit analysis? When we make predictions about the future we are limited in the accuracy of our predictions. Enterprises must use historical data to make predictions about the future and hence can only estimate costs and benefits.
We suggest that ergonomists follow the lead of engineers in making use of cost-benefit analysis tools.
Engineers have developed cost-benefit models that suit the questions they want to answer such as “should we buy that new machine or should we continue to maintain the old one?” Engineers are also comfor- table with the need to make estimates and how to go about estimation on the basis of their experience.
Think of cost-benefit analysis as just a financial tool to assist in asserting one’s point of view about the need for, and worth of, one’s ergonomics interventions.
Cost-benefit analysis is actually an economic model and to use it effectively in situations where one’s proposal is competing for funds against other projects, it is necessary to understand at least some of the economics behind it.
4.2.1 How is Work Valued in Economics?
Ergonomists need a way not just to present the costs for implementing ergonomics solutions but also a way to quantify the benefits from this implementation. Many of the benefits from ergonomics interven- tions flow to workers, and so, how do we quantify this?
Accounting systems are based on financial concepts but are narrow in focus, usually constructed for the purposes of taxation, regulation and financial accounting. Simplistically within the accounting system all financial transactions are recorded to be either as assets (money-in), or expenses (money- out). Traditional accounting practice considers workers merely as an expense and hence safety measures are just another expense, while ergonomists and human resource professionals consider workers and their safety and well-being to be the paramount. In many cases this has led to disputation about the value of ergonomics interventions with enterprises arguing that they cannot afford the expense of the intervention.
The debate centers on the meaning of the term “asset”. In an accounting sense an asset is something that the organization owns and has the right to sell. The theory is that the value of an enterprise (its asset base) is equal to the money that someone would pay for the components of the enterprise, which includes buildings, machinery and products waiting to be sold. As the enterprise has no right to sell its workers they are not considered assets. Hence any intervention that increased the value of the workers does not result in an increase in the asset base of the enterprise.
This accounting concept of an asset was developed early last century in manufacturing industries. The nature of work is changing with an increasing proportion of people working in service-based industries, where the product is intangible, or working from home or out of a car where there is little investment in buildings or machinery. The value of these enterprises is based on their people, which economics terms as
“human capital,” and accounting is grappling with ways of placing a value on these types of industries.
4.2.2 What Models Suit Ergonomists?
Ergonomics is person focused (Oborne et al., 1993) and hence cost-benefit analysis models that also focus on people are needed. As it is not possible to capture the value of an ergonomics intervention to workers directly within enterprise financial systems, ergonomists need to measure the benefits indirectly, that is, through changes to the enterprise costs or the value of physical assets.
For example, implementation of multi-skilling could render work more interesting, make workers feel valued and reduce work stress be it physical or mental. If a cost-benefit analysis was undertaken in support of funding for this project these benefits may be reflected in lower injury costs, higher pro- ductivity, reduced warranty costs, reduced waste, improved staff retention, etc. Section 4.4 provides other examples of ways enterprises have applied a cost-benefit model to ergonomics projects.
4-4 Fundamentals and Assessment Tools for Occupational Ergonomics
4.2.3 What Do We Need to Measure?
We need to measure any changes to the enterprise’s production costs or the value of physical assets that will reflect the impact of the ergonomics intervention. Any factors that do not change as a result of the intervention will measure the same before and after, and so do not affect the cost-benefit calculation;
hence they are not included in the calculation.
It is assumed within economic modeling that the enterprise will be in compliance with all pertinent regulations, including OHS regulations. If this is not the case then thecostsandbenefitsof becoming compliant with regulations should also be included.
4.2.3.1 Production Costs
Production costs are the costs for an enterprise to produce a product or service ready to sell and they are typically grouped into three categories: labor, raw material costs and capital (equipment, machinery, computer systems, etc.). For each area of production costs consider if that factor will change in value as a result of the project and estimate the size of that change.
The costs that most directly reflect the benefits of projects that have an impact on people are labor costs. The costs of labor that may need to be included are:
. Wages costs and on-costs
. Overtime
. Turnover costs, which include recruitment, training and any extra supervision of workers as they are learning
. Training
. Injury costs (workers’ compensation)
. Absenteeism costs
. Supervision
Raw material costs may be influenced through projects that impact on the quality of the finished product. If there is less waste during the production process, then raw materials may be reduced and this saving should be included in the cost-benefit analysis.
The capital costs of production (equipment, machinery, computer systems, etc.) are usually replaced only periodically. It is assumed in economics that enterprises will monitor the efficiency of their pro- duction processes and use the cheapest and most efficient means of production available to produce their products and services. However, often enterprises continue using old and less efficient machinery or systems, for a variety of reasons, and they may choose not to replace old equipment or systems. This may lead to increased production costs that are not accounted for. Ergonomists and human resource managers are then called upon to assist in making these older production systems safer and more pro- ductive, for example, through improved work practices or training.
A full cost-benefit analysis may show that updated equipment or technology is cheaper in the long run and safer for the workers. The cost-benefit analysis should compare the costs of the short-term solution, for example, training program, plus the costs of the inefficiencies in the system against the cost of the replacement machinery or system. The following inefficiency factors may need to be included in one’s cost-benefit analysis:
. Efficiency of equipment reflected in breakdown costs
. Maintenance of equipment
. Warranty or product defect costs
. Delays in supply
4.2.3.2 Changes in Product or Service Sales
The argument that investing in workers adds to production costs and pushes up the price of products and services is often given as the reason that training and ergonomics interventions are not funded.
Cost Justification for Implementing Ergonomics Intervention 4-5
This follows from an economic philosophy that says increased production costs will push up the price and so less people will buy the product, which is not always true. For instance, motor vehicle manufac- turers in Sweden during the last several decades found that improving the skills of their workforce and giving workers the responsibility for quality has resulted in improved quality of vehicles manufactured.
This has not just saved warranty costs but there is more demand for these higher quality motor vehicles.
Estimating the impact of an ergonomics intervention on future product sales is very complex and necessarily imprecise. The best estimates of the impact of such projects come from past experience.
Look for case studies of a similar intervention to the one proposed and, if necessary, adjust the estimated impact up or down, in one’s cost-benefit analysis, to better match one’s enterprise.
4.2.3.3 Legislation Compliance Costs
Cost-benefit analysis models assume that the enterprise will already be compliant with the law. If this is not the case both the cost of becoming compliant and the penalties for noncompliance should be included in the cost-benefit analysis. Consider the enterprise’s compliance with the following standards:
. Safety
. Environment
. Employment practices
4.2.4 What Are the Limitations of Cost-Benefit Analysis?
The critical limitation of cost-benefit analysis is that social costs are not included. Micro-economic models consider only costs borne by the enterprise and are limited to consideration of the effects of man- ufacture or sale of a product or service.
The Productivity Assessment Tool, described in the following section, is a micro-economic model and does not take into account the effect of social and other outside costs. Although this is a limitation as the assumptions made within the model are relatively few it means that the model can be more easily and simply used.
Where social costs are significant to the enterprise (e.g., environmental pollution) and need to be included in one’s analysis, one will need to use another tool, macro-economic models, for the analysis.
The following three areas are examples of social costs that may need to be considered.
4.2.4.1 Injury Costs to the Person
Where a worker is injured at work the direct cost to the enterprise is usually limited to the workers’ com- pensation premium cost. This is the case even where a worker is permanently disabled as a result of a work injury.
The cost to the worker will include the social costs of that worker’s pain and suffering and restrictions on activities outside of work, expenses not covered by compensation, reduced earnings, etc. These factors are not included in financial analysis.
For example, if a worker is permanently disabled, a decision may need to be made whether to re-train the worker for another role or terminate the worker’s employment. Research has shown that workers with work-related disabilities have greatly reduced chances of finding employment on the open job market, a personal cost not considered by financial analysis. If, on the basis of the enterprise’s costs (workers com- pensation premium), the best option is to terminate the worker’s employment the case for retraining the worker might need to include an argument about social justice.
4.2.4.2 Responsibility to Provide Workers with a Living Wage
Under economic theory it is an enterprise’s responsibility to minimize production costs but there is no mention of any reciprocal responsibility to provide workers with a living wage. For example, increasing service industries such as call centers and hotels use casual workers who can be rostered to work on rela- tively short notice and for short periods of time. This is not necessarily the best situation for the workers who are involved. The enterprise can capture the cost to itself by placing a value on the costs of training, 4-6 Fundamentals and Assessment Tools for Occupational Ergonomics
recruitment and worker quality and morale but these will not include the social or personal disruptive effects on the concerned workers. An argument on the basis of social justice may be needed.
4.2.4.3 Occupational Diseases
Due to the long lag time between exposure and the development of occupational diseases such as asbes- tosis, silicosis and hearing loss, it can be difficult to prove that a particular employer was responsible and the cost of this illness is borne by the individual and the society. From the enterprise’s perspective, if workers are at risk of occupational disease in 15 or 20 years time, the enterprise may not include an allowance for the costs of future treatment in the current costs of production. Compared with the potential short-term gains, the long-term risks may seem too far off to worry about. This has two effects:
. It is more difficult to argue in support of expenditure to prevent exposure to the hazardous substance within the workplace
. The costs of diseases that occur will be borne by the worker, their family and social services, that is, the whole community
These long-term projects need a different model and are the most difficult to cost as they need to consider the impact of factors outside the enterprise including changes in interest rates. For information about long-run projects see Oxenburgh et al. (2004).
4.2.5 What Are the Benefits of Enterprise-Based Cost-Benefit Analysis?
Used judiciously cost-benefit analysis can be a powerful tool to present one’s argument for funding any ergonomics project. Cost-benefit analysis enables benefits of an ergonomics intervention for that enter- prise to be quantified, presenting the value of the intervention to the decision makers of the enterprise.
Cost-benefit analysis also provides a logical framework to assess the impact of an ergonomics interven- tion across all aspects of the enterprise.