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Costs versus benefits of compliance

August 17, 2017

Do you feel like you are banging your head against a wall whenever you try to discuss compliance with senior executives at your company? Do the ‘bean counters’ cut short your argument with statements like ‘but the costs of compliance …’.

Transport lawyer at Holding Redlich, Nathan Cecil, understands your pain. He says this is a short-sighted analysis.

“Numerous studies have shown that compliance is not synonymous with cost. Compliance can, in fact, produce benefits – including economic benefits – that far outweigh the costs,” he says.

Nathan says that rather than trying to counter an argument about the costs of compliance (e.g. the costs of consultation, development, implementation and monitoring relating to a compliance framework) managers who understand the benefits of Chain of Responsibility (CoR) obligations should focus on putting forward a case about the costs of non-compliance.

“If avoided or reduced, these costs of non-compliance are actually ‘compliance savings’. As we will see, these compliance savings can quickly add up to far exceed the costs of compliance.”

Equipment costs

There are a range of hard costs associated with non-compliance and resulting accidents, incidents and poor operating practices.

Vehicles and equipment involved in accidents and incidents are subject to damage and repair or replacement costs, increased operating and maintenance costs, and decreased resale value.

Non-compliant operating practices often result in vehicles being driven at higher speeds, more aggressively (e.g. to meet tight time limits) and farther than they need to be (e.g. compared with when good journey planning and driver scheduling practices are in place).

All of this results in greater wear and tear, and increased maintenance and inspection costs.

In addition, where vehicles are subject to increased maintenance and inspection due to the above, businesses incur the corresponding costs of fleet downtime.

People costs

Accidents, injuries and poor operating practices don’t just damage vehicles and equipment; a business’s employees can also be affected, says Nathan.

“Working hours lost due to injury or fatality and the need for medical care can be a significant outlay. Related ongoing medical and rehabilitation costs are often incurred on top of the direct costs,” he says.

Employee downtime can also result in additional indirect costs, such as the costs of temporary replacement personnel, recruiting and training new personnel, and reassessing/retraining returning employees after injury-related downtime.

In addition, a bad compliance and safety record can act as a deterrent to good employees because no-one wants to be injured or exposed to risk at work – regardless of whether a good pay packet is attached.

Third-party costs

Accidents and incidents often result in third-party costs, including liability for vehicle and property damage, personal injury and resulting business losses. Such matters often end up in court, resulting in further investigation and medical fees, direct legal costs, court costs and fines.

Legal costs

Direct legal costs of non-compliance include the costs of defending a prosecution for breach, as well as court costs and fines, and (typically) having to pay the prosecutor’s legal costs as well. The legal costs of a non-compliance prosecution often outweigh the physical costs of any incident (e.g. vehicle damage) as well as the penalty or fine imposed.

Business costs

Accidents, incidents and poor operating practices arising from non-compliance often have broader and more indirect costs implications as well.

Non-compliance incidents and delays associated with them will often result in failing to meet contract KPIs with customers, resulting in withholding of payments and potential suspension or termination of contracts.

Nathan says a history of non-compliance can also even prevent you from getting business in the first place. Many businesses now engage in compliance screening as part of their procurement and tender process. Businesses with a rap sheet of non-compliance or those that cannot demonstrate compliance are often excluded from contract consideration or only engaged as ‘tier 3’ (standby/fall-back) contractors.

In addition, businesses with a poor track record of accidents and liability will be faced with substantially increased insurance premiums.

Finally, the cost of executive and management time involved in managing and responding to non-compliance incidents should not be underestimated. Damage control and customer complaint management efforts are often all-consuming. For every hour spent putting out such fires, executives and managers are not spending them developing business or ensuring that the business delivers solid performance.

Compliance cost analysis

The typical approach of just considering the direct costs of developing, implementing and monitoring a compliance program only looks at one side of the cost/benefit equation.

Next time a compliance program is being considered, make sure you point out the other side of the equation and factor in the avoidance or mitigation of all of the above costs – the ones that your business is incurring today but which, for whatever reason, have been put into the category of ‘a cost of doing business’.

For more information on CoR laws and why your company needs to adopt them, subscribe to CoR Adviser. The monthly newsletter, with contributions written in plain English by Nathan and the transport experts at Holding Redlich, has the latest news, tips, hints and downloadable templates on CoR and how it applies to your business.

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