The cost/benefit analysis is a well-known business gauge that can shed telling light on the actual value of a proposed course of action. But for risk managers who must measure the potential value of preventative practices--especially regarding security issues--those cost and benefit figures can be hard to capture, and this gauge may not seem to have the legs it needs to stand on.
Employee screening is one such preventative practice that may come under the risk manager's cost/benefit scrutiny. Conceptually, it is not difficult to visualize a positive cost/benefit analysis for screening measures such as background checks and drug tests. Relatively small expenditures in these areas can help preserve a company's invaluable assets of safety, security, reputation and competitiveness. But when it comes to justifying employee screening as a budget expenditure, an abstract value analysis of this nature will probably not cut it.
So how does a risk manager put together a dollars-and-cents demonstration in support of employee screening? On its most basic level, the cost/benefit analysis entails subtracting the cost of a particular course of action from the benefits of that course of action to arrive at a positive or negative benefit outcome. The analysis also typically includes a payback period calculation, which shows how long it will take for the benefits of the course of action to repay its costs.
In contrast to employee screening, other preventative practices may appear to more readily lend themselves to a cost/benefit analysis. Consider the practice of getting regular oil changes for your car. Very simply, the cost could be estimated at four oil changes per year at $30 each, for a total of $120 annually. If the car is driven for seven years, the total preventative maintenance cost is $840.
If you fail to get regular oil changes for your car, the engine will likely seize up and require replacement, at an estimated cost of $3,000. This $3,000 savings could be quantified as the benefit of the practice.
To arrive at the cost/benefit analysis, simply subtract the cost ($840) from the benefit ($3,000), which shows a positive $2,160 outcome. To determine the payback period, divide the cost ($840) by the benefit ($3,000), which shows that the practice will pay for itself in approximately two years.
Unlike the analysis above, however, quantifying employee screening's true costs and benefits may seem a slippery slope of subjective, intangible values. But it is possible to put real numbers around these programs.
First, the cost of specific employee screening practices can readily be calculated, especially if a consistent program is put in place company-wide. On the benefit side, you could factor in the savings realized by avoiding the staffing, training and vacancy costs of replacing a bad employee, which are estimated by the Employment Policy Foundation to be $12,506 per full-time vacancy. However, a more complete analysis will show the bottom-line benefits of screening go far beyond saving the simple replacement costs for unsuitable employees.
The primary benefit to employee screening lies in avoiding the potentially enormous financial fallout from liability, lawsuits and damage to the company's reputation stemming from a bad hire. According to a 2001 report by Public Personnel Management, employers have lost more than 79% of negligent hiring cases and settlements average $1.6 million. While it may be difficult to put an exact number on the savings employee screening can help your company realize, some very persuasive ballpark figures can be gleaned by taking a forensic look at several case studies.
For each of the real cases that follow, a simple cost/benefit analysis has been constructed, based solely on the actual legal and other liability expenses that resulted after a failure to conduct background checks, drug tests or other screening measures.
Scenario #1: A Cost/Benefit Analysis In Progress
An emerging case involving retail giant Wal-Mart could be considered a cost/benefit analysis in progress. …