Your recent quality and performance data confirm an unacceptable trend. Last month you had damage to aircraft … and ground equipment … and people were injured. You identified the contributing factors to these three categories of challenges.
Now you must decide how to allocate resources to address the issues. And they are all important issues. How can you ensure a financial and safety return on the investments you make to fix the problems? The answer is a straightforward math problem that calculates return on investment (ROI).
This article describes new ROI software developed under an FAA human factors project. Management consultant Booz Allen Hamilton Inc. developed the software under contract to the FAA Civil Aerospace Medical Institute.
The goal is to deliver an effective, yet easy-to-use ROI tool into the hands of mid-level management. It has the potential to justify a variety of safety and efficiency interventions, including interventions related to human factors. This tool is provided at no cost to the industry.
FINANCIAL RETURN
ROI is merely comparing the money invested to the value returned. Figure 1, taken from the new FAA software, shows the data necessary to calculate ROI.
Figure 1: ROI made easy.
Let’s use aircraft ground damage as an example. Assume that you had 2.5 incidents of aircraft ground damage each month over the past 12 months. Counting repairs, delays, rescheduled flights, etc., the average cost per incident was $200,000. (By the way, that’s below International Air Transport Association estimates.) Once you conducted the investigations, including peer-to-peer assessments (See the September issue of Ground Support Worldwide for “Collecting ‘Predictive’ SMS Data”), you identified a number of contributing factors including:
- poor ramp painting for clear zones,
- inadequate maintenance of ground equipment,
- improper adherence to company procedures, and
- lack of availability of sufficiently trained personnel.
Correcting each of these contributing factors has an associated investment cost. Of the 30 incidents in the past year, you decide you could reasonably address 25, since five of the incidents are outside your control. From a financial perspective, the return would be $5 million ($200,000 x 25) of reduced aircraft damage. From a safety perspective, you would be targeting 25 safety threats.
To calculate the investment you must estimate the following costs:
- Repainting safety zones on ramps ($500,000).
- Refurbishing selected ground equipment ($800,000).
- Developing improved procedures and training personnel to use the new procedures ($200,000).
- Creating an incentive program to reward personnel for reduced ground damage ($500,000).
The total investment would be about $2 million that would be spent over six quarters.
You cannot guarantee that your interventions will be 100 percent successful. Therefore, you must estimate the probability of success. The FAA software offers guidelines to help make that judgment call. Questions, based on project management, help establish the probability of success. (See Figure 2.)
For this example, we will estimate the probability of success at 80 percent. In other words, the interventions will likely prevent 20 incidents in a six-month period, and the probability of success multiplied by the return provides a net return of $4 million.
Figure 2: Questions to estimate probability of success.
With good estimations of return, probability of success and investment, you are able to calculate the ROI. The FAA software helps you to schedule the quarterly investment as well as to forecast the timing of the expected incident reduction. Figure 3 is a partial summary of project costs, benefits and return based on assigned probability of success.
Figure 3: Partial ROI summary.
Figure 4 shows a graph representing an overview of the project. In this example, the payback is predicted within three quarters and the return on investment continues to grow. The graphs and depictions are dedicated to the financial ROI.
The graph shows that the project achieves payback by the third quarter. Over the six-quarter period, the payback ranges from a low of $4 million to a high of $5 million. This is a very respectable return on investment.
Figure 4: A picture tells the story.
ROI CAVEATS
Crunching the financials is straightforward. Safety ROI is another challenge for many reasons. It is difficult to show that the actions above improved safety. Safety is often intangible and, as a result, it is hard to quantify. Safety is based on an integration of many activities, not on just individual actions and programs. While difficult to show the safety return, the FAA research team continues to work on the issue. Safety ROI will be based on reducing events while financial ROI must be based on the money. The intricacies of the safety calculation are described in the embedded user documentation and will be discussed in the final technical report.
Our example of 30 ground damage events is clearly an indication of existing safety hazards. Reducing ground events would help improve and ensure safety. In this case, having 30 aircraft ground damage incidents over the past 12 months and expecting the interventions will likely prevent 20 incidents over the same period will result in an estimated 10 events a year in the future. This is a likely safety improvement.
This reasonably straightforward solution may require a bit of training. By discussing these issues in a team setting, however, all employees can learn to understand the positive impact on safety derived from each intervention.
The FAA software provides more detail than this short explanation. It helps assign specific categories and values to returns and investments. As with any analytic program, the quality of diligence and data accuracy provided will affect the accuracy of the ROI analysis.
The tool is designed for operational managers in ramp or maintenance organizations. The developers suggest that you use the model on small interventions before you tackle large complex ROI. If you work in a large company, your own finance team may want to add additional factors into the equation. The demonstration shown here was done in advance of the project’s completion. The same model can be used after the fact, meaning that there is no need to estimate the probability of success.
To get started go to www.mxfatigue.com. That will take you to the ROI software and associated additional guidance material. Once the software works for you, then you can write the next ROI article for Ground Support Worldwide.
About the Author: Dr. Bill Johnson is the chief scientific and technical advisor for Maintenance Human Factors at the FAA. He spent more than 25 years in the private sector as a scientist and engineering executive prior to joining the FAA.
