Demonstrating the Business Value of Industrial Hygiene
The American Industrial Hygiene Association’s (AIHA) mission is “to promote healthy and safe environments by advancing the science, principles, practice, and value of industrial hygiene and occupational and environmental health.” (See the AIHA Website at: http://www.aiha.org/Content/AboutAIHA/strategicplan.htm.)
To achieve its mission and to effectively communicate the value that the industrial hygiene/occupational health profession brings to business, AIHA awarded a contract to EG&G Technical Services, Inc., a Division of URS, who engaged ORC Worldwide to conduct original research that would identify and quantify links between industrial hygiene investment and business value. ORC Worldwide developed and tested a strategy, the Strategy for Demonstrating the Value of Industrial Hygiene (IH Value Strategy) that enables industrial hygiene (IH) managers and professionals to conduct practical and credible business case analyses that demonstrate the value IH programs and activities bring to business at the facility, business unit, and enterprise levels. In addition, EG&G conducted a survey to identify components of management systems that have demonstrated the value that Industrial Hygiene and Occupational Health (IH/OH) program practices can bring to an organization’s business results. This report presents the IH Value Strategy and documents the project’s multi-phase approach to its development.
The Value of the Industrial Hygiene Profession Study was a multi-phase effort that resulted in a number of findings about IH and its relationship to the business process. Among the most significant was that many business leaders do not fully understand the value that IH brings to the business, and, conversely, that many industrial hygienists do not understand the company’s business and how their work adds value. With the IH Value Strategy, industrial hygienists can correct these deficiencies and increase the perception that their skills are an integral part of business success.
The value of anything is determined by how well it performs its function in relation to its cost. In a free market economy, creating and demonstrating value is increasingly a key factor in success; with rare exception, organizations must produce and demonstrate value to survive. CEOs of publicly held businesses are required by their stockholders and Boards of Directors to demonstrate value; corporate officers must demonstrate value to company leadership; managers to company executives; and so on. In business, the value proposition describes the tangible results that investing in a given product or service will yield.
In the current highly competitive and globalized economy, success depends on getting the attention of value-oriented, yet overburdened, decision makers. Investments may not be made in programs that do not clearly and immediately add value. Under these conditions, a strong value proposition can make the difference between survival and obsolescence. A financially-oriented value proposition that speaks to critical business issues and that includes specific numbers or percentages is now almost a requirement for obtaining funding for many projects and programs. Those who lack such a business case will quickly lose ground to those who have one. Making the value proposition for IH strengthens the moral argument for protecting workers. Demonstrating value is important for IH because it empowers industrial hygienists to be effective in fulfilling their mission.
Three deficiencies have contributed to the professions’ inability to effectively demonstrate value.
First, there is a lack of understanding. As previously mentioned, business leaders do not fully understand the value that industrial hygiene adds to the business, and many industrial hygienists do not understand the business and how IH adds value.
Second, there is a lack of know-how and tools needed to make the business case. Industrial hygienists tend to lack understanding of the strategic and operational objectives, and do not fully understand how value is demonstrated by other parts of the business. This “gap” is compounded by the fact that user-friendly tools focused on the IH contribution have not been available to help them.
Third, there is a general lack of data. Critical data streams for making the value case do not exist in many companies. Where they do exist, the industrial hygienists often have difficulty accessing them.
The cumulative effect of these deficiencies is significant; the combined lack of understanding, tools, and data has resulted in many industrial hygienists lacking the motivation even to attempt the value case. Even when data are available, making the value case can be daunting. Direct safety and health (S&H) costs can be quantified in many instances, but identifying and tracking costs is complex and time consuming. There is no real handle on indirect S&H costs, and soft numbers have discouraged their use over the years. Health benefits are hard to measure due to latency issues for some health conditions and the difficulty of assessing long-term ill-health effects. Measuring impacts on existing revenue streams, new revenue, and/or improvements to business processes requires that one isolate the IH influence, establish the cause and effect, and identify and extract other factors that could have produced the same result. Under most circumstances this is a complex and difficult process.
It is time to make a better business case both for IH and S&H practice in general. In the past it may have been sufficient simply to provide a description of an IH project or program’s ability to meet regulatory requirements or to prevent occupational illnesses and injuries, with a good measure of “it’s the right thing to do” thrown in. This approach, though perhaps still effective in some organizations, is generally a weak value proposition because it offers no description of the return on the investments required to implement the project or program. Nor does it describe how the IH initiative is connected to other realizable business benefits.
Making a value proposition based primarily on how IH programs or activities have reduced incident-related and workers’ compensation costs ignores other potential benefits that individually or together may outweigh the value of such reductions. This approach can also fail to show an adequate return to justify the investment in prevention programs. IH practitioners who rely solely on cost reduction to make their value propositions are taking the risk of losing support and being seen as irrelevant to the business.
Without compelling business value information, management is likely to look at IH
projects and programs as efforts that, while in some cases necessary, can afford to wait
for additional resources while projects with a clearer connection to the bottom line are
given higher priority. Projects that are not regulatory-driven may suffer a worse fate and be vetoed completely. Thus, in today’s business environment it is becoming increasingly critical to the survival of IH and IH practitioners that a strong value proposition for their programs be made, so that they can compete successfully for limited resources with other business functions.
However, industrial hygienists and other safety and health professionals struggle with the task. As a group, the comfort zone has traditionally been around the technical aspects of the job—identifying, controlling and/or eliminating risk, and training others on those skills—rather than with understanding the operational or strategic aspects of the business. Safety and health (including IH) work is important, and S&H professionals work hard to do the right things and do them well. Since measuring performance and demonstrating value have not always been a priority for the profession, S&H programs are sometimes undervalued by corporate leadership and even viewed as overhead instead of as an integral part of the business. When that happens, existing programs are more likely to come under intense budget scrutiny, and support for new initiatives is harder and harder to obtain.
There is growing recognition that we all have to become more business savvy to survive in an increasingly complex and competitive business world. Most IH practitioners can make much stronger value propositions than they typically do. Strong value propositions demonstrate the delivery of increased revenues, decreased costs, faster time to market improved operational efficiency, increased capacity, increased employee morale, decreased employee absenteeism and turnover, higher quality, increased market share, and improved customer retention, among other tangible results. In addition, they connect the value of the project or program with organizational strategy and objectives, showing how the investment will help the company achieve them.
Strong value propositions for IH programs, projects, or interventions can be made nearly everywhere industrial hygienists practice. IH issues are an inherent part of business operations and therefore IH-related investments often have an impact on many aspects of a process or service. They can therefore return tremendous benefits that extend downstream, well beyond the scope of the immediate application. IH practitioners must not limit their value propositions to the local area of IH interventions, but must look at the entire process surrounding them in all directions to find their full impact.
Documented success stories are key components of the value proposition—no business case is complete without them. Using success stories to “sell” IH interventions lends believability by demonstrating that the proposition is real. In the case of IH, such stories may be contrary to the assumptions of management and thus generate excitement when the returns on the costs of an intervention are fully understood.
During the course of the Value of the Industrial Hygiene Profession study, a wide range of IH interventions were found that made substantial business contributions far beyond the immediate area of application. Nearly all of the interventions examined had a strong value proposition. Eliminating lead from a raw material stream saved tens of thousands of dollars and kept a facility from closing. Substituting a less toxic material for a chromate primer saved an aircraft company nearly half a million dollars in processing costs and significantly improved productive capacity. Installing engineering controls to control exposure to nano particles at a small company resulted in a ten-fold increase in production capacity.
The value proposition for IH practitioners themselves is strong. Their education and experience bring a unique type of intellectual capital to the business that contributes value in a number of critical ways.
The IH Value Strategy fills a critical need by providing value analysis approaches and tools to enable industrial hygienists, other S&H professionals, and other interested individuals to link IH investments to business value. The information contained in this report lays the foundation for the overarching value strategy and for the quantitative and qualitative strategy sub components. It is important to note at the outset that many of the findings here are the result of study, observation, experience, and anecdotal information, and do not reflect statistically reliable survey results.
Significant knowledge was gained from the iterative and interrelated study process. Lessons emerged in testing the Quantitative Approach that also applied to the Qualitative Approach and vice versa.
ORC Worldwide (ORC) is an international management consulting firm offering professional assistance in human resources management for industrial, nonprofit, and public organizations. Its Occupational Safety and Health Group, composed of senior corporate managers of occupational safety and health, promotes effective programs and practices in business, and facilitates industry understanding of and input into occupational safety and health policy and program decision making globally.
ORC has unmatched access to and prior experience with over 130 large and wellrespected member companies, many of which are among the Fortune 100. This provided researchers with a large base of participants with well-developed IH programs. Many of these companies were able to share the appropriate data in the quantities necessary to conduct the study.
Three surveys were conducted to select study participants and collect data electronically. Companies selected for participation provided case study data through a detailed questionnaire as well as facility visits and face-to-face interviews.
Adaptation of the ROHSEI Tool:
As previously suggested, for years business support for S&H programs was largely driven by the need for regulatory compliance. In those days, interest in capturing the value of the S&H contribution to the business was tepid at best. Within ORC, the discussion of metrics for measuring the business value of S&H activities intensified in the mid-to-late 1990’s. During that period, a group of ORC member companies formed a partnership to fund the development of a tool to capture the financial implications of S&H initiatives.
The tool, then labeled Return on Health and Safety Investments (ROHSI), enabled users to calculate individual business financial measures that were recognized by other parts of the business—such as Return on Investment (ROI) and Net Present Value (NPV)—for select S&H interventions. Interest in the tool grew, and several years later the ROHSEI approach (which now includes “environmental” parameters—hence the “E” in “ROHSEI”) became a recognized benchmark for business case development for health, safety, and environmental (HSE) programs. In the course of the present study, a number of methods and tools for performing value-oriented calculations and estimations were examined. The ROHSEI tool emerged as an appropriate basis for the development of the IH Value Strategy.
Data Analysis and Strategy Development.
A change from the original plan of the study should be mentioned at the outset: we changed our approach from the “macro” versus “micro” dichotomy mentioned in the Proposal and the Statement of Work to take more flexible “quantitative” and “qualitative” approaches that use varying techniques to demonstrate value based on the availability of data, time, resources, the target audience, etc. The original plan was based on a concept that the level of organization at which the study was focused determined the degree of detail to be examined. At this point it only needs to be noted that our approach has changed from one with rigid boundaries driven by the level of the organization to one that is flexible and driven by functional considerations.
The IH Value Strategy is composed of two sub-approaches. The Quantitative Approach allows the user to calculate generally-accepted financial business metrics by capturing detailed business data that demonstrate the IH impact on cost avoidance, cost savings, revenue generation, and other strategic aspects of a business. The Qualitative Approach allows the user to estimate the value of the IH contribution by evaluating its impact on health, risk, and the business process through an evidentiary cause and effect chain that relates intermediate outcomes to the value streams listed above and concurrently isolates confounding factors that could have produced the same effects. (The original ROHSEI tool described above was modified to create this approach.) The Qualitative Approach will generate the business values for individual IH risk abatement projects and single issue programs.
Project Phases: This study was accomplished in five phases:
Phase I: Gather and Analyze Data
The Value of Industrial Hygiene Programs Survey I (Appendix A) was developed as a means to gather and analyze general data from ORC Worldwide member companies as well as more specific information about their IH programs and practices. The survey was designed to identify ORC member companies that could provide the types of data needed to design, develop, and test the IH Value Strategy and its components, as well as be representative of the wide range of sizes and industry categories in which the Strategy ultimately would be used.
Companies were asked to provide responses for two levels of their programs: for the corporation as a whole and for the facility that represented their “best” IH program. Identifying the best facility was an approach intended to increase the probability of locating programs and projects that would be comprehensive and that would have the highest quality IH information.
The survey polled members regarding company demographics, organization, industry sector, IH management systems and program elements, IH-related costs and outcome data, and interest in participating in Phase II of the study. In all, 46 ORC member companies responded. The survey results and the process of selecting companies to participate in subsequent phases of the study are described in the Phase I section of this report.
The responding companies represented a cross-section of industry, including the following:
- Aerospace and defense equipment manufacturing
- Automobile manufacturing
- Chemical manufacturing
- Electric power generation
- Electronic products manufacturing
- Food processing
- Glass packaging manufacturing
- Industrial gases production
- Industrial parts distribution
- Industrial products manufacturing
- Medical device manufacturing
- Paper manufacturing
- Pharmaceutical preparation manufacturing
- Petroleum processing, research laboratories
- Semiconductor manufacturing
Phase II: Identify and Evaluate Strategy Components
The purpose of Phase II of the project was to identify and evaluate possible elements of the IH Value Strategy. This was critical if the Strategy was to have credibility and be effective in capturing and demonstrating the value that IH adds to a companys business. In completing Phase II, key concepts and terms were defined, a comprehensive literature search was conducted, and existing models were explored that are relevant to making the value case for industrial hygiene. Once strategy elements were identified, the interrelationships were examined between strategy components using the ROHSEI Causal Loop Diagram that has been in use for more than a decade. The potential strategy elements were evaluated by examining cases in the ROHSEI Users Library.
After reviewing the literature, analyzing existing models, and re-examining our own experience in demonstrating value, we came to the conclusion that the best way to capture the value that IH brings to the business is to start with the IH risk reduction process and track its impact on employee health, the IH risk management process, and the business process in general. Impacts can be quantifiable in terms of reduced cost or even added revenue, or they may be more general contributions to key business objectives.
Strategy sub-elements and parameters can be imported from the existing ROHSEI tool and from other models and sources. These elements are listed in Phases II, IV, and V. They were tested during this phase of the work with respect to reasonableness, clarity of definition, and accuracy and consistency of results.
Phase III: Develop and Assess Qualitative Approach
A qualitative method of determining and illustrating the IH contribution to business value was developed and assessed as an approach of the IH Value Strategy. The concepts behind the Qualitative Approach are not new. They have been used by ROHSEI users, legal professionals, and others for years. What may be new is the organization of the thought process. The approach enables the industrial hygienist to look at value in a broad context, and provides techniques for capturing value when data are not available to support a quantitative analysis. It is also a comprehensive integrated approach to value analysis where a wide range of benefits are captured by using multiple approaches qualitative and quantitativecustom tailored to each individual situation.
The real value of the Qualitative Approach is that it can be used to estimate value where detailed costs and benefits are hard to obtain or where there isnt the time or resources to do a quantitative analysis.
Phase IV: Develop and Assess Quantitative Approach
A quantitative method of determining and illustrating the IH contribution to business value was developed and assessed as an approach of the IH Value Strategy. The team projected that the ROHSEI instrument could serve as the starting point for the Quantitative Approach. From it, the elements of an IH program or activity could be identified, and IH project intervention data collected and analyzed. Customizing the ROHSEI model specifically to evaluate IH applications required modification of the existing global parameter definitions to apply uniquely to IH value proposition analysis. One hundred fifty-three (153) user-defined parameters specific to IH were created to reflect the range of data that could be collected for value propositions that assess the value of moving the level of employee protection up the IH hierarchy of controls. The parameters were aligned with the steps in the IH Value Equation, and a method and tools were developed to collect data for IH interventions at the process, facility, and program levels.
Phase V: Develop and Assess Overarching Strategy
The data, information, products, and knowledge gained through previous phases of the study were used to build the Overarching IH Value Strategy. The Overarching IH Value Strategy, which links the two approaches (qualitative and quantitative), was assessed by using data and case examples from participating companies.
The Overarching IH Value Strategy has three categories of activity: preliminary investigation and study prioritization; value assessment; and value presentation. The categories include eight specific model components, and each component includes specific steps and approaches in a sequential construct. The overarching strategy represents a flexible approach that allows users multiple entry points and allows them to substitute their own existing information whenever possible.
The Overarching IH Value Strategy consists of eight steps:
- Understand Business Objectives and IH Hazards
- Identify and Prioritize Value Opportunities
- Assess Risk Reduction
- Determine Value Approach: Qualitative or Quantitative
- Determine Changes
- Determine Impacts
- Determine Value
- Present Value Proposition.
The findings that are listed below are not based on statistically reliable data. This study was not designed or funded to support that kind of analysis. Rather the findings reflect lessons learned from more than a decade of experience with the ROHSEI effort, observations from site visits that were conducted as part of this study, and discussions and dealings over the years with colleagues from some of the worlds leading corporations.
Although the findings reflect the experience of larger companies, the insights (and resulting strategy elements) are, in many cases, applicable to smaller companies.
Finding #1 IH professionals who were eager to contribute to the project generally knew very little about cost and business data or how to access them. A major effort needs to be undertaken to educate industrial hygienists on how they can better understand their companies business strategies and business processes.
Finding # 2 Making a credible value proposition cannot be done by the industrial hygienist in isolation; it requires a team approach with contributors from operations and other business functions.
Value demonstration requires comparison: either of a target in before and after conditions; or, of a program to like programs of competitors or to some control group. Users need to be able to evaluate prospective, retrospective, and current applications. To do this they must understand the business and business drivers, and they must understand the intersection between IH risk and the business. They must also understand the business process and the relationship between IH activity and downstream benefits.
Finding #3 The most significant IH impacts on the business were not those that have traditionally been tracked by safety and health professionals. Usually those trying to measure the value of S&H to the business track impact on workers compensation premiums and reduced fines and penalties. Why? Because they are the obvious connections and they seem to be the easiest to quantify. However several site visits indicated that these savings may be the tip of the iceberg in many situations.
At one site, substitution of a carcinogenic process chemical with a less toxic one improved the quality of the product, required less re-work to produce quality products, and thereby freed up resources that resulted in increased production capacity. The increased capacity resulted in additional sales since the plant was already working at full capacity and their output was already sold out for the next several years. The changes made in order to reduce health risk at that facility will produce a continuing revenue stream of several million dollars each year for years to come.
Industrial hygienists contributed substantial value by enabling a process that was key to maintaining critical production capacity to keep running. The ability of the site industrial hygienists to develop a heat stress protection program for workers conducting repairs on a critical piece of equipment ensured that there was no shutdown of the process, which would have caused a multi-million dollar loss. Had the unit shutdown, other units would have been shutdown as well. A total shutdown for 10 days would have cost approximately $15 million.
In still another example, IH involvement was critical to a key process for an entire industry that allows oil refineries to process lower grade crude oil, and subsequently results in millions of dollars of profit each year. By providing an essential function to a highly profitable process, industrial hygienists contributed tremendous value. Without their expertise in managing the radiation detector program, the delayed coking process could not have happened, and the company would have lost $81,250,000 of annual profit. Again, the business impact of industrial hygiene was significant.
Finding #4 The traditional strategy for capturing IH value has to be broadened. Traditional S&H strategies and approaches focus on cost. That is not without reason; other disciplines, such as quality, also look to cost when measuring value.
Phil Crosby, a well-respected thought leader in the quality movement, defined the cost of quality as the “cost of conformance” (i.e., the cost of a company’s quality assurance program) plus the “cost of nonconformance” (the cost of quality defects). The IH corollary is that the cost of IH is the cost of IH-related loss plus the cost of IH programs and activities. Gross cost savings from IH programs or activities would be the cost of IHrelated loss before the program or activity minus the cost of IH-related loss after the IH program or activity. That was depicted in ROHSEI as:
Net cost savings would be gross IH–related cost savings, minus the cost of the IH program or activity.
This formula still works. However, in addition to tracking cost savings and cost avoidance, two new categories should be added to the framework for capturing value. First, there are situations where IH programs and activities result in new revenue for the business. So there must be a mechanism to capture revenue generation. Second, there must be a means for capturing key impacts on the business process. The cost-based approach in ROHSEI should be expanded to a new framework as follows:
Finding #5 A highly effective approach to capturing business benefits (other than by measuring cost reduction and new revenue generation) is to identify the relationship of IH programs and activities to key business objectives. All organizations have objectives. Objectives are the means that organizations use to make their vision and value statements actionable. Corporate leadership uses business objectives to set priorities, guide operations, and drive accountability. As such, business objectives provide a “universal” framework for capturing the “other” business benefits contributed by IH programs and/or activities.
Finding # 6 Ironically, the largest, most significant value contributions often were the most difficult to isolate and precisely quantify. Lack of precise quantification should not result in loss of the value contribution. Industrial hygienists need to be able to capture this value even though some of it may be difficult to quantify. This phase of the report contains an approach that will assist the industrial hygienist in providing credible estimates of the business value generated by industrial hygiene in these situations.
Finding #7 Making a qualitative case for IH value added will be easier in situations where the industrial hygienist presenting the information already has credibility in the organization. The technique for using cause and effect analysis will withstand scrutiny if the industrial hygienist can obtain leadership attention and focus.
Finding # 8 Value assessments can be made for individual IH activities and programs. Programs can be measured at the facility, business unit, and enterprise levels. However, the precision of the assessments will vary. Project assessments provide the greatest degree of accuracy; program assessments will be less precise. The more aggregate the data the less accurate it gets. Methods used to assess value at the project level are significantly different (and more granular) than strategies needed to assess IH programs at the facility, business unit, and enterprise levels
Finding # 9 The hierarchy of controls generally applies for financial and economic reasons as well as IH reasons, although it is not a one-to-one relationship. The financial aspects vary with the industry and the type and magnitude of risk.
The greatest cost savings and other benefits tended to be associated with hazard elimination and the elimination of PPE usage. Material substitution can have very large pay-offs because the change often has impacts that create efficiencies throughout the business process. Containment projects can result in improvements in employee health exposures and significant savings in labor and waste disposal costs with little incremental capital investment. Engineering controls are most often, but not always, better financially than PPE. In cases where financial benefit cannot be shown for engineering controls, there are often other benefits that make them preferable. The use of PPE versus engineering controls or containment is usually the least effective and most costly way to protect people. The economic circumstances of PPE programs support the IH hierarchy of controls. However:
- PPE can be a cost-effective measure to protect employees in high noise areas
- Relying on PPE as the primary means of protection requires extraordinary measures to ensure that expected levels of protection are validated in actual field operations
- Even in highly responsible organizations management may delay taking action if they have the perception that employees are adequately protected by PPE.
Management Practices Demonstrating the Value of the Profession
A survey instrument was developed based on the Malcolm Baldrige Award Criteria for Performance Excellence, and administered to participating companies in order to demonstrate the value that IH program practices can have on an organization’s business results. The survey was administered by ORC to its member companies, resulting in 24 responses. Preliminary analysis by EG&G indicates that the most significant factor affecting business results regarding IH programs is a pronounced focus on the workforce. The second most significant factor appears to be a focus on the customer. These two areas account for the majority of the variation in the responses in the Business Results category. Further analysis is under way to make more definitive statements with statistical confidence.
Opportunities for Further Research
Opportunities for further research were identified at the end of the project. They include testing and further strategy refinement, development of representative values, further study of the relationship between the hierarchy of controls and financial returns, and statistical validation and expansion to safety.
The following report details the purpose, methods, and findings of each of these study components.