Controlling losses the Burger King way.
While in most major companies the costs of losses and claims management represent more than 80 percent of the total risk management budget, most risk managers focus on the financing and transference of risk. Indeed, these are obviously important considerations in assuring the protection of the company's assets from catastrophic loss, but the cost of losses associated with daily business operations continues to grow at an alarming rate.
The traditional division of responsibility between risk manager and loss control manager is no longer appropriate in today's business environment. Rapidly escalating medical costs, compensation benefits, litigation awards and the transference of medical costs to the private sector, among other changes happening in the business sector, are seriously eroding the bottom line profits of most companies. It is time for the risk manager to become actively involved in managing the entire area of risk, including the process of controlling loss.
This article provides a case study of a loss control program currently in effect at Burger King. The company has had substantial success in reducing the frequency and cost of loss and, most importantly, has provided management with a clear understanding of the significance of loss control management and its impact on corporate profits and productivity.
Most risk managers have direct responsibility for loss control or a close functional relationship with the loss control manager. In either event, it is essential that they know what constitutes a comprehensive loss control program and how to implement procedures and evaluate techniques. In addition, risk managers should know how the costs associated with a loss control program can be translated into terms to which management can relate, thereby avoiding the "what have you done for me lately?" syndrome.
Determine Cost Effectiveness
If a company looks at traditional measurements for cost-effective investing, it would most likely consider an annual return of 20 percent to 25 percent satisfactory. In other words, if funds were invested in a loss management program, the company would expect to recoup the amount in invested over a four- to five-year period. However, in the case of loss management, most dollars are not funneled into facilities or equipment but rather into operating expenses such as salary, travel and miscellaneous operating costs. Accordingly, it would be difficult to apply the 20 percent measure to investment in loss control.
What would then be a reasonable basis for management to consider their investment in loss control cost effective? In the case where loss experience data for the past three to five years is available, the annual cost of loss can be calculated. Loss trends can then be developed to project future annual losses. Based on the demonstrated effect of loss control resources already in place, or those that are planned, a reduction in the cost of loss should be projected. Management could then compare the value of its dollars invested in loss control resources to the actual or projected reduction in losses. A successful loss management operation should return $4 to the bottom line for every $1 of operating expense. The $4 is a direct cost which includes payment for medical services, hospitals, disability, litigation and property damage. Indirect costs, such as damage to equipment, time spent filling out forms, hiring and training of replacement employees, reduced productivity, miscellaneous paperwork and telephone calls, are not considered in this estimate. These indirect or "hidden" costs are generally believed to be from four to eight times the amount of the direct cost.
Given this rationale, it would seem to be relatively straigthforward to justify the start-up costs of a loss control program in most companies. There are not many activities which have the possibility of generating an initial return of more than 400 percent. Of course, the return will vary from company to company, and the initial two- to three-year period during which these returns can be generated will not continue indefinitely. Management should be made aware that there will come a time when the return on dollars will not be significant in terms of annual loss reduction. This is a difficult concept to convey, since management is geared to increasing rather than diminishing returns.
Unfortunately, a typical scenario for the loss management function is that after achieving continuous loss reduction for a number of years, losses tend to stabilize. At that point the question usually raised is "Why must we continue to spend significant dollars on loss control?" It is then that loss management resources are reduced, or sometimes eliminated, and losses inevitably start to increase. Management must understand that once a level of loss performance has been achieved, the emphasis should be to keep losses from escalating, not to continually reduce them.
A loss management program is not cost effective if it cannot clearly demonstrate a significant reduction in losses. In other words, if the program is properly designed and executed, there should be no question that it will return a substantial amount to the bottom line. The basic philosophy at Burger King is that the company does not pay the loss that has not occurred. Therefore, the primary approach is to reduce the frequency of loss through engineering and training. The other element, which will be further explored in Part II of this article, is that once a loss occurs the company must take control of the claim so if it does, in effect, owe a duty, it is settled as quickly and fairly as possible.
Developing and implementing an effective program requires an understanding of the dynamics of an organization as well as a thorough knowledge of loss control. There is a tendency to look at loss management as an independent function. This approach, however, fails to realize that if the support and cooperation of the entire organization is lacking, efforts will not be as effective.
Understand the Problems
Before answers are achieved, questions must be asked. To ask the proper questions, information is needed concerning losses. There are many information sources available. For instance, prior years loss experience should be available from the insurance carrier or from a source at company headquarters. Techniques, including personal observations, inspections and employee surveys, can be used to gain first-hand knowledge of the daily goings-on in the operations area. If data from within a company is not available, there are comparable situations for similar companies within a given industry. This information is usually available through an insurance carrier's data base, the National Safety Council, the Bureau of Labor Statistics and trade groups.
Design a Program
Once the information is complete, it must be analyzed for facts about the types of occuring losses. It is important to look at accident frequency, a measure of how often accidents occur at various locations. In the fast food restaurant business, accident frequency is related to store months, since this base is used for many other categories of measurement. Another important category is accident severity. This information reveals the locations of the serious and costly accidents. A relationship between accident severity and frequency can then be developed. The severity of any given incident cannot be predicted, but for a given number of incidents (frequency), there will be a certain number that meet the company's criteria for a serious accident. The types of accident, including slips and falls, cuts, burns and back injuries, is another important area. Where on the premises the accidents are occurring, broken down by severity and type, is another area of concern. Causative factors are the primary causes of accidents. For example, consider slip and fall incidents. Are they related to wet or greasy floors, foreign objects on the floor, unguarded elevations or defective ladders?
Once the information is assembled, it is possible to evaluate the issues which should be dealt with immediately and those which can be addressed over a period of time. Obviously, catastrophe potential is the first concern. If there is a situation which could result in serious injury or fatality and/or extensive property damage, it should be taken care of in the loss control program. The next priority is related to the frequency of accidents. Some conditions result in many incidents of relatively low severity, such as minor cuts and lacerations, but do not require days away from the job or expensive medical treatment. This problem should be addressed, but not at the expense of other issues that may occur less frequently and result in more extensive injury and/or property damage.
Frequency is important because it is the most easily measured parameter of a loss program. The change in frequency is a good indicator of whether a loss control effort is successful. In addition, workers' compensation insurers focuss on loss frequency when adjusting a company's experience modification factor. The rate will increase more for having five relatively minor cuts that cost $1,500, than one back injury valued at $25,000. While there is merit to the frequency approach, it is rather simplistic, and a loss control program should have parameters that relate to both frequency and severity. At Burger King, slips and falls and materials handling injuries, while having a lower frequency, are certainly more significant than cuts and are dealt with on that basis.
After the accident causation factors and priorities have been determined, specific responses to the problems can be developed. In the restaurant environment, fire potential from both a property and customer safety standpoint are a concern. To minimize the potential for serious fire, basic fire protection equipment for cooking appliances is installed and portable fire extinguishers are provided. Also, automatic fire sprinkler systems are installed in many restaurants. Unfortunately, the cost of installing a complete system has become so expensive that this level of protection cannot be provided by our company unless required by code. However, A CPVC automatic fire sprinkler system in the kitchen and storage areas is another fire protection apparatus used in our restaurants. There is also an extensive emergency fire training program for our employees, which is available on videotape as well as in a loss control manual.
Slips and falls are Burger King's major area of loss for customer and employee injuries. Approximately 90 percent of our general liability claims relate to falls in the restaurant or parking lot. Again, specific corrective action has been taken based on an analysis of where people are falling and what conditions are causing these falls. The company's approach has been to provide mats at critical areas in the restaurant, including the entry area and self-serve drink station, and to upgrade the floor maintenance procedures to reduce slip potential in the customer service area and dining room. Clean quarry tile is a good walking surface dry or wet. However, if there is a film of grease covering the quarry tile, it becomes extremely slippery, especially when wet. Slip resistant shoes are made available to restaurant employees. Parking lot issues deal with cracked sidewalks, holes and depressions, missing grates, displaced parking bumpers, metal rods protruding from parking bumpers, grease spots and other slippery spills on the parking lot surface, improper handicap ramps and wet weather conditions. While most falls occur inside the restaurant, approximately 40 percent of customers slips and falls occur in the parking lot.
Cuts are the most frequent source of employee injury. Improper use of knives, slicing tomatoes, salad preparation, sharp edges on stainless steel products and equipment cleaning are all sources of cuts. One effective method of addressing these problems has been to use the Whizard Glove, which provides more than adequate protection against cuts and lacerations. The problem with this glove has been to overcome reluctance on the part of the employee to wear it while slicing or cutting. Also, for whatever reason, these gloves have a tendency to disappear. The company is now issuing protective gloves to individual employees and making them responsible for their availability and use. A key element in reducing these types of injury is to get the manager to make sure that employees use the appropriate protective equipment.
A major concern of management is employee stability. At the average fast-food restaurant, the annual turnover rate of hourly employees is 300 percent to 400 percent. It is 75 percent to 125 percent for assistant managers and 25 percent to 50 percent for managers. Consequently, if a safety training program is initiated in January, by the middle of the year, there will be probably be few employees at the restaurant who have firsthand knowledge of the program. There are several ways around this but, of course, the best would be to reduce turnover and periodically reinforce the message to the same employees.
To deal with the turnover issue, Burger King focuses on frequent visits to the restaurants. The goal is to have a loss control manager (a loss control person is assigned to each of our 11 U.S. regions) visit the restaurant on a quarterly basis and have an insurer make an annual inspection of each restaurant. According to this schedule, a loss control specialist would visit each restaurant at least five times during the year, or frequently enough to assure that despite turnover the restaurant staff would be familiar with our loss control program. Other reinforcement techniques include frequent distribution of information in the form of loss control bulletins, safety brochures, safety posters designed specifically for our employees and articles in our company newsletters. Recently, a safety incentive program geared to reducing accident costs at the restaurant was introduced.
A successful way to gain the attention of operations management is to introduce a loss allocation system whereby the operating group, including each restaurant, is charged for every loss related to a customer or employee injury. Since most bonuses, including those of the restaurant manager, are related to profit and loss, any costs that reduce profit also affect bonus. In addition to charging for current year claims, Burger King has a program of keeping open claims at the regional level until settlement. By keeping prior year claims at the regional level, regional management must assure that appropriate follow-up and settlement efforts are maintained. To our way of thinking, losses due to accidents are controllable expenses, not very different from paper, food and labor costs, and can be kept to a minimum with appropriate management attention.
An important element in any loss control program is the time in which accidents are reported and the quality of information contained in those reports. If customer accidents are not reported and dealt with promptly, it is likely that the company will wind up in litigation, which generally raises the settlement cost on relatively inexpensive claims by a factor of 10. If workers' compensation claims are not reported promptly, most states will levy substantial fines against the company.
Most accident information that is collected and analyzed is contained in the accident report. Regional managers are provided with one simple form for reporting all incidents other than workers' compensation. In most cases, the manager telephones the information to a central location where the form is completed. A copy is then sent to the insurance carrier, the corporate loss control operation and the restaurant. Workers' compensation claims are handled in a similar manner except where state law requires that the manager and/or the injured party prepare and sign the form. Most regions have established a telephone hot line for phoning in information. A recording device is provided to capture information phoned in after hours or on weekends. (This is absolutely essential to the success of claims management programs as well.)
Neglected work-related injuries can get very expensive very quickly due to the availability of many types of medical treatments, rapidly rising hospital costs and increasing state benefits. In workers' compensation, Burger King's focus is on lost-time injuries which, without proper follow-up, tend to turn into costly long-term problems. Company managers are expected to stay in contact with the injured employee on at least a weekly basis. An important adjunct is a return to duty in any capacity as soon as the injured employee is medically capable. Our risk management team works with the restaurants and distribution centers to establish jobs for injured employees with work limitations. Since average hospital costs range from $1,500 a day in the San Francisco area and $1,300 a day in Miami to $300 to $400 a day on the low side, the company wants to assure that the employee is out of the hospital as quickly as possible and that only bills for legitimate treatment are paid.
Even with a loss control program, the question still persists: How does one get restaurant employees to protect themselves and the customers from injury? Even with a usable loss control manual, safety training videos on customer safety and fire protection and frequent visits to the restaurant, it is difficult to be sure that all new employees are being trained properly by management at the restaurant. The most reliable approach is "hands on training" conducted by the loss control manager and the insurance carrier's engineers. Another approach is our "train-the-trainer program" through which the significance of loss control and how to communicate this information is taught to the training staff.
Training is an extremely important element in the success of any program. Unfortunately, most companies do not spend enough time developing an effective program.
No matter how good a loss control program, it must be reviewed and approved by management before it can be implemented. In fact, if the program is to be successful, it must be endorsed and fully supported by top management. It makes a difference in the attitude and responsiveness of the operations people when the staff realizes that top management has made loss control a priority and will be held responsible for meeting specific loss reduction goals. To win this support, top management should be made aware of the current status of losses in the company. How much do losses cost on an annual basis? What have loss trends been over the past few years? What are losses projected to be next year under the current situation?
Management also needs to know about high risk exposures. Are there potentially catastrophic problems that management cannot afford to ignore, and if so, what should be done? These can include major property damage, multiple fatalities or serious injuries. There may be other exposures that threaten to shut down the entire operation, such as a health or products problem that results in unfavorable national publicity. Other major concerns include violations of government regulations resulting in expensive fines and/or prosecution for top management and uninsurable exposure such as long-term pollution. Upper management is generally unknowledgeable in the area of loss control. It is up to risk managers to educate them and provide proposals to moderate the risk.
Implement the Program
Prior to implementation, a loss control program should be reviewed with the operations people who are going to be the primary focus of the program. In other words, it is advisable to talk to unit managers and employees to find out whether the program is workable and practical at its most basic level. If there are serious concerns, the program will probably be unsuccessful. Two initial questions usually asked by top management are: Has the operations group reviewed the program and did they have any problems with it? As mentioned earlier, the program should be launched with a written commitment from the chief executive officer, generally in the form of a letter introducing the program to regional management.
Impact on Losses
Once the program has been implemented, it is up to the risk management department to demonstrate that it reduces losses. A comparison of current results with previous loss experience can be made at the earliest in two to three months, but the true impact of the program may not be known for at least six months. Losses can be tracked using prior years loss tabs vs. current loss information. This provides an apples-to-apples comparison of loss frequency, the total cost of loss and the cost per incident. As mentioned previously, it is also important to look at the effect of specific actions. For example, in the area of slips and falls, if new floor cleaning procedures have been initiated, non-slip shoes provided to our crews and a program of placing mats in critical slip locations instituted, there should be reductions in customer and employee slip and fall incidents. These changes in accident frequency should be verified from data provided by Burger King's risk management information system.
Refine the Program
No matter how well-designed the original loss control program, there will always be changes based on experience. If some issues are operationally unacceptable, for example, floor mats proposed for certain locations might create more of a hazard than they solve, changes in the original proposal will be made. It is important that follow-up information be obtained from the field to properly evaluate response. The key in this area is to be flexible and work with the operations people. If it is necessary to modify the program, follow through even if it does not achieve 100 percent of the desired goal. Thus, the philosophy of "half a loaf is better than none" is appropriate for these situations.
Establish an Audit
It is important to monitor the performance of the program through various audit techniques. Restaurant inspections are a key element in determining compliance with requirements that mats be placed at specific locations, the parking lot be free of hazards and safety equipment be present. Obviously, if the basic physical components of the program are not being satisfied at the restaurant, it is unlikely that other issues are being addressed. Claims handling functions must be audited frequently to assure that losses are reported promptly and that contact is made with the claimant immediately. The difference between good and mediocre claims handling procedures is significant in determining the cost of a claims settlement (see Part II of this article).
An audit should also be performed on the overall results of the loss control program. The approach is not to have a detailed, financial-type audit, but a meeting of the entire loss control staff to discuss the results of the program in terms of loss reduction and specific problems or issues that have been encountered throughout the year. Burger King convenes twice a year at national loss control meetings. These conferences provide a matrix for developing a consistent approach to loss control in 11 regions. This is an important part of the program, especially when considering differences in geography and management attitudes.
It is essential that management be provided with meaningful reports that are brief, straightforward and timely in order to evaluate the performance of the loss control function. A management report should be designed specifically to suit the needs of the various levels of management receiving this information. For example, restaurant managers want detailed loss information concerning accidents that occur at their restaurants. They do not need to know what is happening elsewhere, but are very interested in their own accident record, since they are charged directly for those accident costs, which affect their bonus income.
At Burger King's regional level, a report is provided summarizing the region's experience and detailing only major accidents, which are defined as having a cost of more than $5,000. At the division and corporate level, a single-page report summarizes all regional experience on a monthly and year-to-date basis and compares it to the budgeted loss plan for similar time frames. In addition to issuing reports, it is advisable to appear at senior management meetings on a quarterly basis to update management on the status of loss control activities and loss experience compared to loss projections. Top management should also be informed whenever a critical item with significant companywide impact is encountered.
Donald Herbstman is director of safety and risk management for Burger king. This article is the first of a two-part series based on his entry in the 1989 RIMS Research Award Competition. The next part, covering claims management, will appear in April.
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|Date:||Mar 1, 1990|
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