By Philip C. Curran
All businesses employ various forms of capital to execute processes that produce goods or services. The various forms of capital can be categorized as financial, physical, or human. This is the basic DNA of all businesses. While most businesses attempt to maximize the return on financial or physical capital, the investment in human capital is generally not managed well.
Employers spend huge amounts of money sourcing, selecting, training, deploying, and rewarding their workforce. But this investment yields only a finite number of working days when employees can be productive. Those available working days are reduced by certain planned absences - such as holidays and vacation days. But the employer's investment is further eroded by unplanned, medically-related absences - sick days, workers' compensation, short- and long-term disability, and FMLA. A recent study of U.S. employers shows that lost time (i.e., productive work days lost to absence) is increasing at a rate of 3% per year. Lost time represents a measurable financial cost to businesses. Few employers, however, quantify the cost of lost time or take effective steps to manage it.
U.S. employers typically spend an amount equal to 14% to 16% of their payroll paying employees not to be at work. But businesses' direct payments toward absence programs only represent the tip of the iceberg. There are multiple sources of indirect cost, and (while highly variable by industry) these indirect costs are typically 150% to 300% of direct absence expense. Indirect costs include:
- Temporary labor or overtime expense
- Reduced and/or interrupted productivity
- Increased error or defect rates
- Increased consumption of direct supervisors' time
- Retraining cost
Further, most employees view absence programs as an entitlement. A recent CCH survey reported 66% of employees take sick time off to deal with personal or family issues (i.e., there is no illness involved). Of these, the vast majority admit that they call work at the last minute claiming a personal illness - thus increasing the likely indirect cost of the absence.
Simply getting employees to come to work doesn't solve the problem. Presenteeism is a recently coined term that describes workers reporting to work when ill (or otherwise distracted) and not operating to their usual level of productivity. Most research puts the cost of presenteeism at about 60 percent of the total cost of worker illness. Plus, employees who come to work sick are also likely to infect others - coworkers, customers, or clients. In 2004, the Harvard Business Review reported on a study conducted by researchers at Tufts-New England Medical Center in Boston. The study assessed the impact of twenty eight non-urgent medical conditions (including allergies, and common colds) on workers' productivity at Lockheed-Martin Corp. The findings showed that employees who came to work sick that year cost the company about $34 million.
Clearly, lost time - in all its forms - represents a serious risk to a company's financial well-being. The first step in solving a problem is often simply recognizing there is a problem. Businesses that ignore the currency of lost time may very well have an adversely-effected bottom line. The second step is taking effective action. Unfortunately, most companies that address lost time do so in a counterproductive manner. According to the 2004 CCH Unscheduled Absence Survey, disciplinary action is the single-most used absence control tool (with 91% of surveyed organizations reporting its use).
Outcomes research suggests that the most effective approach to recapturing lost productive time - and minimizing the cost of absence - is an integrated health & absence management approach. Under an integrated health & absence management program, employers:
- Consolidate management of all lost time programs. Having one point of intake for all absence reporting, and one internal group responsible for managing all lost time, will tend to minimize program "leakage" (i.e., the overpayment of absence program benefits because of a failure to coordinate with other programs).
- Partner with their vendors to implement best practice administrative processes. But never forget that these vendors are being paid to provide a service. Accordingly, expected service levels and performance levels need to be established up front. Then financial guarantees must be wrapped around the service agreements.
- Train direct supervisors how to interact with absent employees. Direct supervisor action (or inaction) may be the single greatest determinant of whether an employee will return to work rapidly or become a malingerer.
- Understand that presenteeism is real, and that it costs a great deal of money. Reducing presenteeism must be part of a comprehensive lost time management approach.
- Identify the root medical causes of lost productivity and remediate. Embracing a corporate culture of health, health risk behavior modification, and targeting high-incidence disease states/chronic conditions will go a long way toward minimizing non-occupational causes of absence. Occupational causes may be addressed through ergonomic changes, work hardening, and other initiatives.
- Warehouse data for analytics, forecasting and for measuring performance. Employers with sufficient data credibility may also use their data warehouse for predictive modeling that will help to proactively identify high risk employees. Remember...if you don't measure it, you can't manage it.
Managing lost time as an enterprise risk drives demand for credible metrics and to optimize program management. An effective integrated health & absence management program will reduce direct and indirect program costs, but should also mitigate risk by evaluating and addressing root causes of absence. The actual results organizations may yield from implementing such a program will vary, based on a variety of factors. Typical results see direct program savings totaling 2% to 4% of payroll. Total savings are significantly higher. You can improve the return on your investment in human capital.
About the Author
Phil Curran is a Managing Director of Craford Benefit Consultants. He has twenty-four years of management consulting experience focused on HR issues. Before joining Craford in 2010, he held regional and national leadership roles at major human capital management consultancies.
About Craford Benefit Consultants
Craford partners with client businesses to provide consulting solutions and administrative outsourcing services to solve complex workforce management issues. Craford designs and helps manage benefits, health management, and absence management programs. It is a leader in benefit administration outsourcing. Craford has served clients domestic and global benefit needs since 1946.
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