For over 20 years, I have worn many hats, working as both a Management Consultant and Client Strategy Leader dealing with companies and their EHS challenges in many industries. To understand my clients, I often browse through their annual reports and keep track of their evolution, but when I focused on their mission, vision, and values, over the past five years, I have noticed the following trend: companies are starting to emphasize the importance that they place on taking care of both their people and planet, over the importance of profit. Some of them demonstrate this prioritization through their social, environmental, and economic values.
As a result, I’d say it has now become an absolute requirement that you invest in safety and standards for both your employees and the environment. This development aligns with the goal of companies in foundational industries to move toward what AMCS refers to as Performance Sustainability – the pragmatic approach that prioritizes people, profitability, and the planet, while empowering EHSQ professionals to boost productivity, focus on employee safety, and maintain regulatory compliance.
If your firm wants to operate in this competitive and disruptive environment, and increase profits, it’s essential that you invest in improving safety and standards for your employees and the environment. To do that, you must allocate the right level of your budget toward these goals. In this article, I will highlight some of the key factors to consider when making the case for investing in an Environment, Health, Safety, and Quality (EHSQ) solution, including:
• defining your challenges
• exploring the critical elements of an effective EHSQ solution
• developing an understanding of your current situation, systems, and processes to better expose your unique challenges
You’ll also be able to use this PDF template for your potential investment case. We’ll walk through the template, step by step, so you can learn how to:
• assess the value-add that a new EHSQ solution brings
• quantify all attributes into appropriate numbers utilizing the example templates
• financially evaluate the potential investment of the EHSQ solution from the calculated net present value, payback period, and respective return on investment
The aim is to help you bring your EHSQ strategy in alignment with your business strategy, and with respective stakeholders.
defining the challenges
First and foremost, you’ll want to define the EHS-related challenges that your organization faces. Regardless of which industry you’re operating in, you will have both generic and specific challenges, which can create risks of small, medium or high magnitude for your organization. These risks can disrupt your routine operations or impact you strategically and failure to account for these risks can impact your operations with anything from a mild disturbance to a huge legal dispute.
Repercussions could affect not just your organization as a whole, but also the larger public. Not only that, but if you fail to follow the obligatory legal compliance statutes in place where your organization operates, you could face financial penalties. Strategically, your organization’s reputation will suffer short- or long-term damage, which will cast a shadow over relationships with all key stakeholders. But, most importantly, the challenges that you’re unaware of, or those that could have been overcome by consistent monitoring, could lead to fatalities.
discovering the right solution
Obviously, it’s essential that you deploy the right resources to monitor and resolve EHSQ-related challenges, such as a state-of-the-art EHSQ software. Some of the key areas that can be addressed through EHSQ software are:
- Health & Safety: Prevent incidents, assess and mitigate risks, and provide guidance through online instructions
- Risk & Audit Management: Clearly set objectives for your programs, consider all aspects of risks, audit all levels internally, and align with external stakeholders
- Legal Compliance: Maintain legal register, handle inspections, manage changes, initiate regular content updates
- Register of Hazardous Substances: Workflow-oriented approval process, fully compliant chemical management, tracking of application and storage areas, dangerous goods management
- Air, Water & Waste management: Environmental reporting, sustainability reporting
- Control of Work: Managing work permits, safeguards, etc.
Moreover, as with many new technologies, an EHS solution can provide additional benefits:
- Rich and proven user experience
- Fully integrated modules with an all-in-one platform
- Smart reporting on-the-go
- High-performing Customer Success and Consulting Services teams
- Flexibility to adapt to requirements
- Cloud-based, easy updates and very low maintenance requirements
- ISO certified management systems, etc.
assessing value
Along with defining your organization’s potential EHSQ challenges and considering OSHA’s hazard categories, such as Biological, Chemical, Ergonomic, Physical, and Safety, it’s essential to also assess the value that a EHS solution will bring to your organization by resolving hazards, monitoring proactively, and preventing problems at early stages.
ideal “to-be” scenario
Although assessing the value a EHSQ solution can bring to your organization is complicated, I’ll attempt to describe generic value drivers that could help fuel your thought process:
- Based on the specific challenge and respective hazard identified, it’s obvious that your organization has certain expectations for what an EHSQ solution should deliver. Tracing the high-level requirements of the solution can be your first driver.
- The breadth of functions and the solution’s capability to address and mitigate the risks.
- The ability to keep your organization’s reputation intact, without damages incurred due to the hazards that we discussed earlier, both in the short and long term.
- Not only the product itself, but also the level of services and warranties that the EHSQ solution vendor can provide.
- The levels of trust and confidence in mutual success the EHSQ solution vendor inspires.
Now that we’ve looked at the value drivers, we’ll draft the business and technical requirements. The EHSQ solution vendor can work with you to determine the cost of the respective solution, including implementation. This first step (let’s call it “New Solution Cost”) will create the estimated total cost of your new EHSQ solution, including the value that it will add.
factual “as-is” scenario
Beyond understanding the new solution cost, it’s important to understand the financial consequence to the whole investment. Note that, like the value drivers, financial consequences can be different for different organizations.
It’s very important to understand the cost of the systems and processes you have in place today (Excel or any other standard solution). You should also consider the costs of having no solution.
Quantify the issues you’re facing with current systems and processes. Don’t just consider Total Cost of Ownership of such systems. Also note the impact of:
- Incidents you’re unable to manage
- Situations which made your organization vulnerable due to non-compliance
- Low engagement and higher employee attrition due to the risks that employees could face
- Ad-hoc scenarios leading to hazards
- Inability to bring your products to market on schedule due to these issues
- Unhappy customers who are wary of buying from a risk-prone organization
- Competition having an advantage due to a lack of ability to compete effectively in the market
- All the negative numbers you accounted so far due to these issues
Through this step (let’s call it “Expected Savings”), we’ll have total costs of your current systems and processes, including the issues quantified monetarily. Thus, we can derive the savings that you’ll realize during the operational Ideal “To-Be” Scenario.
But the calculations don’t end here!
crunching the numbers
Considering the numbers from the above “As-Is” and “To-Be” scenarios, the next step is to have an in-depth look at the long-term cash flow. Consider a time frame such as Year 0 to Year 5, where in Year 0 you consider all the capital expenditures that may be needed and from Year 1 on you consider the net pre-tax income (which is subtracting your new solution cost from expected savings). Knowing the % cost of capital and applying it to the cash flow over a five-year term, you can determine the net present value of the project for the whole term.
To determine the period where the investment’s benefits exceed the cost during the whole term of 5 years, you can calculate the payback period and indicated months. And, you can derive the percentage of ROI by considering the net pre-tax income for the 5-year term divided by the total cost of the project throughout the whole term.
I know this swirl of calculations may seem confusing. But, in practice, knowing the numbers and having a clear breakdown of steps will make the evaluation process much simpler. For increased clarity on the calculations, here’s a rough template with details for the respective steps:
instructions for using the template
To use the template effectively, follow the detailed explanations for each step.
Objective of Table A above: To calculate the expected savings when your organization gets rid of current EHSQ-related issues and existing legacy solution.
i. Quantified issues: Annual average predictable costs over next years (for e.g. costs of accidents, human loss, recovery time, replacements, trainings, bringing back-to-normal stage, non-compliance, etc.) based on past years.
ii. Current solution costs: The cost of maintaining current outdated legacy solution and additional resources.
iii. By adding the above costs (i + ii), you’ll derive the expected savings as benefits.
Objective of Table B above: To calculate the net pre-tax income for future years, considering the expected savings and total cost of the new EHS solution.
iii. The expected savings from eliminating the current issues and legacy solution as calculated in Table A.
iv. The total cost of ownership of new EHS solution for future years (years 1 to 5). You’ll need to capture the initial cost on hardware and one-time software license fees, if any, as Capex in Year 0.
v. Determine the annual net income before taxes by subtracting the new solution cost from expected savings.
Objective of Table C above: To calculate the net present value of the project as a whole.
vi. First, determine the present value for respective years by:
A. Filling the cash flow for years 0 to 5 in the above table. The cash flow = annual net pre-tax income as calculated in step v.
B. For respective years’ cash flow, calculate the present value by either
Using Excel PV function (with Excel help) or
Using formula PV = FV / (1+r) ^n where PV is Present Value, FV is Future Value from the cash flow, r is Cost of Capital, n is Number of the time period
vii. The net present value of the project is the sum of the present values for the whole term of 5 years.
Objective of Table D above: To calculate the payback period of the project.
vii. Follow these steps:
A. Fill the present value of cash flow for respective years as calculated in step vi
B. Calculate the cumulative values for respective years from year 0 to 5.
C. Payback period = (i – c)/o where
i = Initial investments in year 0
c = Cumulative present value in the year just before break-even
o = Original cash flow in the break-even year
vii. Payback period can be represented in months or years.
Using the right numbers from the templates above reveals the following financial results:
Net Present Value of your EHSQ investment today, considering all your future savings and costs in the long term.
Payback period in months/years during the project term, when you’ll start realizing the benefits of your EHSQ investment.
Return on your EHSQ Investment % across the whole term.
ready to develop your investment case?
Of course, every organization has its own specific challenges. And, the values that you’ll gain from a new EHS solution depend on a wide range of factors, such as your industry, region(s), the market you serve, the products you produce, etc.
This article is intended to provide you with high-level insights, and inspire you to prioritize building a factual investment case that covers your specific EHS end-to-end process needs, all in alignment with your organizational strategy. Some elements of the investment evaluation, such as quantifying the issues and both considering the cost of a new solution and quantifying the value it can provide, need specific in-depth analysis.
Extensive research, and my own experience, tell us that the money you invest in a EHS solution will provide abundant returns. While our primary goal here is to evaluate the financial benefits of the project, it’s equally important to remember that the ability to increase your company’s productivity, maintain regulatory compliance, and ensure your employees are protected, provides crucial value to your organization.
If you would like help to conduct further analysis or to develop your final investment case, AMCS is ready to help. Contact one of our EHS experts to schedule a short discovery call and determine your next productive steps.