A major consumer electronics manufacturer at one time employed half a dozen ergonomic experts to keep its workforce injury-free and productive. Recent layoffs, however, reduced the staff to bare bones, dialing back an investment in risk management that the company apparently had come to view as an unnecessary frill.
While in the short term this decision might appear to be sound, it can be an expensive long-term solution.
Cutbacks on risk management are not a new story, and with today's slumping economy, this scenario is likely to be repeated. When budgets tighten, in the short term many companies look at risk management as an easy area to cut.
After all, risk management is an expense, not a profit center.
Experience and historical data, however, tell us that in the long term, the painful lesson of ignoring risk management is that losses are likely to mount faster than expenses decline. As businesses shift their strategies to stay profitable, they need to remember why they invested in risk management in the past and how it will continue to pay off in the future.
While risks are specific to particular industries, locations or environmental conditions, many of the biggest drivers of business losses are common across almost all companies. Some statistics from just a few areas of liability and risk management are a compelling reminder about how quickly losses can drag down profitability.
Workers' Compensation: Strains and sprains, slips and falls–for many businesses, these can be the most frequent cause of injury. Add in exposure to industrial chemicals and toxins that are inherent in some businesses, and injuries/illnesses increase.
In 2006, more than 3.85 million workers were injured on the job, according to the Bureau of Labor Statistics. Companies spent almost $42 billion on premiums for workers' comp insurance that year, according to the Insurance Information Institute.
Organizations contemplating cutting back on risk control need to remember:
o Exposure to these types of risks continue regardless of the economic climate.
o Workers' comp claims and loss records are a significant factor in determining the level of premiums for this state-mandated insurance. Managing workers' comp risks is an important business management strategy.
Fleet exposure: Companies that are not in transportation as a business may overlook how much driving their workforce does. Sales people, employees traveling to meetings, workers going off site to pick up supplies–each opens the door to risks that are some of the most costly types of losses.
According to the National Highway Traffic Safety Administration, on-the-job motor vehicle crashes injure about 350,000 people and kill more than 2,000 annually.
The estimated cost to employers of on-the-job motor vehicle crashes is more than $40 billion annually. Motor vehicle lawsuits are becoming increasingly expensive–Marsh's "Limits of Liability" report for 2006 found that 13 out of the top 100 lawsuit awards across the country involved automobile cases.
That year, businesses spent $30.5 billion on commercial auto premiums, according to the Insurance Information Institute. Effective risk management programs can enhance driver skills, increase the use of seatbelts and reduce accidents due to inattention.
Most of all, effective risk management can reduce claims and losses that drive up insurance costs and subtract from the bottom line with expenses not covered by insurance.
Property damage: When workers' comp, auto coverage and other nonproperty coverage is subtracted, businesses spend about $130 billion a year on premiums to protect themselves from property loss.
While buying insurance is a key strategy for shifting the risk of catastrophic loss to ensure the long-term viability of their business, practicing smart risk management–such as implementing programs to help reduce the likelihood of loss, or substituting highly flammable substances with less hazardous materials–decreases the potential for business disruption and limits out-of-pocket costs for unexpected damages.
Smart risk management also includes making preparations to minimize the extent of a property loss should an event happen, ranging from inspection, testing and maintenance of fire detection and protection equipment, to putting in place an effective, customized business continuity plan.
As global competition intensifies, businesses are always looking for ways to reduce costs. When economic forecasters begin to talk about recessionary times, businesses worried about reduced revenues come under pressure to trim back spending. If on top of all this companies see softening insurance premiums, they could mistakenly presume that if insurance costs are down, the exposure to risk may not be as great.
However, during times of rapid change, risks can increase without a company even noticing. Organizations struggling to survive tough economic times may expand their business in a new direction.
For example, an office building may be converted into a warehouse center. A company without adequate risk control may overlook examining and possibly upgrading its sprinkler system to make sure the system is well suited for the new and possibly more hazardous use of the building.
Another example: To cope with increasing competition and slower sales, a business may reach out to countries overseas for new markets, lower-cost labor, or cheaper supplies of materials.
While doing business internationally may give the company's bottom line a boost, it also could involve many new areas of risk. These might include employees traveling outside of the country, quality control issues that result in the sale of defective products, exposure to another country's insurance mandates and much more.
In the midst of all of the changes a company may go through to stay on top of its game, the reasons for practicing effective risk management stay the same, regardless of economic conditions or competitive threats. More than any other reason, however, risk management is a key business strategy for companies to remain profitable.
Without proper risk management techniques and procedures in place, businesses are exposed to risk, which could lead to disaster for the company.
Managing safety is every bit as important as managing productivity and product quality, and the best companies and risk managers understand their responsibility to their employees in both good and bad economic times.
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