The Value of Safety The Value of Safety

22

AGENDA

BackgroundBackground

What is ROI?What is ROI?

What is ROHSEI?What is ROHSEI?

BenefitsBenefits

Business CaseBusiness Case

• EGPWSEGPWS

• SMSSMS

SummarySummary

QuestionsQuestions

33

THE PARADIGM

““Safety people have their hearts in the right Safety people have their hearts in the right place but seldom understand true business place but seldom understand true business

objectives”objectives”

• Safety has the high moral ground Safety has the high moral ground No one can publicly disagree with what we representNo one can publicly disagree with what we represent

• But Safety people are seldom seen as true business partnersBut Safety people are seldom seen as true business partners Our requests are compared with competing business objectivesOur requests are compared with competing business objectives We’re never seen as balancing Safety objectives with business We’re never seen as balancing Safety objectives with business

realityreality• We seldom make a credible business case We seldom make a credible business case

44

WHAT LANGUAGE DO YOU SPEAK?WHAT LANGUAGE DO YOU SPEAK?

PROBABILITY FREQUENT PROBABLE OCCASIONAL REMOTE IMPROBABLE

SEVERITY A B C D E

I - CATASTROPHIC 1 2 4 8 12 II - CRITICAL 3 5 6 10 15 III - MARGINAL 7 9 11 14 17 IV - NEGLIGIBLE 13 16 18 19 20

-OR--OR-

55

METRICS USED BY CFO’s

MetricMetric % Time Used% Time Used Internal Rate of ReturnInternal Rate of Return 75.6%75.6% Net Present ValueNet Present Value 74.9%74.9% Payback PeriodPayback Period 56.7%56.7% Discounted Payback PeriodDiscounted Payback Period 29.5%29.5% Account Rate of ReturnAccount Rate of Return 30.3%30.3% Profitability IndexProfitability Index 11.9%11.9%Source: Graham, John R. and Harvey R. Campbell, “The Theory and Practice of Corporate Source: Graham, John R. and Harvey R. Campbell, “The Theory and Practice of Corporate

Finance: Evidence from the Field”, Journal of Financial Economics 2001Finance: Evidence from the Field”, Journal of Financial Economics 2001

66

FINANCIAL METRICS

The financial metrics are built around the The financial metrics are built around the concept of the:concept of the:

$ Time Value of Money $$ Time Value of Money $

That is, a dollar today is worth more than a That is, a dollar today is worth more than a dollar tomorrow.dollar tomorrow.

77

INFLATION AND DISCOUNTING

Present Value

An investment can be viewed in two ways—its future value or its present value.

Future Value

Inflation

Discounting

88

Review JHSAT Recommendations & Assign Number

JHSAT Overall Effectiveness

Value (OE)

Assign JHSIT Average

Feasibility

ValueValue

Prioritize Recommendations

(OE x F)

Group Recommendations

By Common Theme

Prepare Preliminary

Safety Enhancement

Plan

Prepare Detailed Safety

Implementation Plan

Execute and Monitor Progress

Of Safety Implementation

Plan

Initiate Top Level Safety Intervention Actions (e.g. promoting IHST, SMS, Infrastructure changes)

IHST Approval

IHST Approval

U.S. JHSIT PROCESS MODEL

99

Technical Feasibility: The ability of the project to take advantage of the current state of technology in pursuing further development.3 - Off-the-shelf technology, no development required2 - Some development required, not currently in public use1 - Major technology development effort required

Financial Feasibility: Should consider the total cost of the implementation, including the planning process. Financial feasibility also involves the capability of the participating organizations (FAA, Manufacturers, and Airlines and Operators) to provide the appropriate funding needed to implement the project.3 - Relatively low cost to implement2 - Relatively medium cost to implement1 - Relatively high cost to implement

Operational Feasibility: Involves the “practicality” of the project within the context of the operating environment, including NAS, ground operations, maintenance, inspection, etc. Considers which organizations within the aviation system are impacted.3 - Minimal change to entities within the operating environment2 - Modest change to operating environment1 - Major change to operating environment

Schedule Feasibility: Can the project to contribute to achieving the goal in a selected timeframe? Must consider implementation schedule by project.3 - Less than 2 years to full implementation2 - Full implementation in 2-5 years1 - Longer than 5 years to full implementation

Regulatory Feasibility: Should be evaluated against current rules and certificationprocess. Could be a deterrent due to a long approval process.3 - No policy change2 - Guidance change only (orders, handbooks, policy)1 - Rule change

1010

MANAGEMENT SYSTEM = SAFETY SYSTEM

SafetyAchievement

Finance Plan

Targets & Objectives

Budget

Accountabilities

Levels of Authority

Procedures

Safety Plan

Targets & Objectives

Budget

Line Management Authorities

Accountabilities

Procedures

Financial Management System Safety Management System

AccountantsAuditPlan

Checks and Balances

AuditsBalanceSheets

Audits

Monitoring/Line Checks

Audit PlanSafety

Committee

1111

ROI = ROI = Net Present ValueNet Present Value

Present Value of Project CostPresent Value of Project Cost

Present Value of Project Benefit – Present Value of Project CostPresent Value of Project Benefit – Present Value of Project Cost

Present Value of Project CostPresent Value of Project Cost

ROI =ROI =

ROI – WHAT IS SAFETY’s PAYBACK?

1212

ROHSEI

Return on Health, Return on Health,

Safety and Safety and

Environmental Environmental

InvestmentInvestment

(ROHSEI)(ROHSEI)

One Way To Change The Paradigm.

1313

GENESIS OF ROHSEI

In 1995 a taskforce of fifteen Fortune 500 companies sponsored In 1995 a taskforce of fifteen Fortune 500 companies sponsored the development of a process and supporting tool set to the development of a process and supporting tool set to answer important questions such as:answer important questions such as:

What safety investments should we make?What safety investments should we make? How do we know we are doing the “right things” in the “right How do we know we are doing the “right things” in the “right

way”way” To which projects should we allocate our resources?To which projects should we allocate our resources? Which EHS investments create the greatest value to the Which EHS investments create the greatest value to the

organization?organization? How do we demonstrate the value of our investment decisions?How do we demonstrate the value of our investment decisions? How do we demonstrate our value and justify our existence?How do we demonstrate our value and justify our existence?

1414

BRIDGING FINANCE & SAFETY

Safety/Industrial Hygiene

Accident rates

Property loss

Insurance premiums

Fines and citations

No. of people trained

Exposure Assessments

Near misses

Behavioral Observations

Audit findings

ROHSEIBridgesthe Gap

Finance/Operations

Earnings/EPS

ROI

Payback

PVRR

Internal Rate of Return

Production rates

Earnings/employee

Net Present Value

Cost Benefit

BUSINESS TALK SAFETY TALK

1515

ROHSEI offers a standardized approach to ROHSEI offers a standardized approach to evaluating health, safety and environmental evaluating health, safety and environmental investments.investments.

WHAT ROHESI DOES

1616

Return on Investment (ROI): This is calculated by dividing the net present value by the present value of the project costs. The net present value is calculated by subtracting the present value of project costs from the present value of project benefits. The model calculates ROI based on costs, benefits, and the discount rate that are entered by the user.

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WHAT DOES A SAFETY GUY KNOW ABOUT FINANCE? – ROHSEI!

1717

THE CHALLENGING QUESTIONS

What investments should we make?What investments should we make?

Should we make the investment this year or next?Should we make the investment this year or next?

How do we compare an operational investment decision to a How do we compare an operational investment decision to a

health and safety investment decision?health and safety investment decision?

To which projects should we allocate our human resources?To which projects should we allocate our human resources?

1818

ROHSEI NAVIGATION SCREEN

Process – Horizontal

Tools – Vertical

1919

THE CASE FOR ENHANCED GROUND PROXIMITY WARNING SYSTEM (EGPWS)

2020

DEVELOP AND DOCUMENT The Focus Of Opportunity

2121

DETERMINE ASSUMPTIONS

2222

DOCUMENT BENEFITS AND COSTS

2323

EXPENSE AND CAPITAL COSTS:

2424

ACCIDENT RATES With And Without Equipment

2525

ACCIDENT RATES With And Without Equipment

2626

SOFTWARE DOES THE CALCULATIONS:

2727

PRESENT RESULTS :

2828

THE CASE FOR SAFETY MANAGEMENT SYSTEMS (SMS)

2929

DEVELOP AND DOCUMENT The Focus Of Opportunity - SMS

3030

BRAINSTORM PARAMETERS

3131

DETERMINE ASSUMPTIONS

3232

DOCUMENT BENEFITS AND COSTS:

3333

RELATIVE NUMBER OF INCIDENTS:

3434

FINANCIAL COST OF AN ACCIDENT:

3535

INCIDENT MODULE CALCULATES BENEFIT

3636

ENTER COSTS OF IMPLEMENTATION:

3737

HIT CALCULATIONS BUTTON:

3838

PRESENT RESULTS:

3939

BENEFITS

ROHSEI offers ROHSEI offers

a a

standardized standardized

approach to approach to

evaluating evaluating

safety safety

investmentsinvestments

4040

40

Work the business case…but don’t Work the business case…but don’t lose focus on what safety is all lose focus on what safety is all about.about.

Remember…there is a lot more to Remember…there is a lot more to safety than economics.safety than economics.

4141

ADDITIONAl ROHESI INFORMATION

Jo Linhard

202-822-3691

linhard@orc-dc.com

Dave Eherts

203-386-8666

deherts@sikorsky.com