Sikorsky Aircraft Corporation The Value of Safety

Sikorsky Aircraft Corporation AGENDA Background What is ROI? What is ROHSEI? Benefits Business Case EGPWS SMS Summary Questions

Sikorsky Aircraft Corporation THE PARADIGM Sikorsky Aircraft Corporation “Safety people have their hearts in the right place but seldom understand true business objectives” Safety has the high moral ground No one can publicly disagree with what we represent But Safety people are seldom seen as true business partners Our requests are compared with competing business objectives We’re never seen as balancing Safety objectives with business reality We seldom make a credible business case Safety is the high moral ground, but we need to make a ‘business case’ for investing in safety.

WHAT LANGUAGE DO YOU SPEAK? Sikorsky Aircraft Corporation WHAT LANGUAGE DO YOU SPEAK? -OR- Safety managers speak in their own language, normally centered on safety risk management terms But the financial managers speak a different language. To be successful, safety managers must present their proposals for safety investments in financial terms.

METRICS USED BY CFO’s Metric % Time Used Internal Rate of Return 75.6% Net Present Value 74.9% Payback Period 56.7% Discounted Payback Period 29.5% Account Rate of Return 30.3% Profitability Index 11.9% Source: Graham, John R. and Harvey R. Campbell, “The Theory and Practice of Corporate Finance: Evidence from the Field”, Journal of Financial Economics 2001

Sikorsky Aircraft Corporation FINANCIAL METRICS The financial metrics are built around the concept of the: $ Time Value of Money $ That is, a dollar today is worth more than a dollar tomorrow. The worth of a dollar today is different than the worth of a dollar in the future.

INFLATION AND DISCOUNTING Sikorsky Aircraft Corporation October 23-24, 2007 INFLATION AND DISCOUNTING An investment can be viewed in two ways—its future value or its present value. Future Value Inflation Discounting An investment can be viewed in two ways – its future value or its present value. Present Value ROHSEI, Washington, DC 7

Sikorsky Aircraft Corporation U.S. JHSIT PROCESS MODEL Initiate Top Level Safety Intervention Actions (e.g. promoting IHST, SMS, Infrastructure changes) Assign JHSIT Average Feasibility Value Review JHSAT Recommendations & Assign Number JHSAT Overall Effectiveness Value (OE) Prioritize Recommendations (OE x F) Prepare Preliminary Safety Enhancement Plan Group Recommendations By Common Theme Prepare Detailed Safety Implementation Plan IHST Approval The JHSIT process includes evaluating the “value” of the recommended intervention. Execute and Monitor Progress Of Safety Implementation Plan IHST Approval

Sikorsky Aircraft Corporation Technical Feasibility: The ability of the project to take advantage of the current state of technology in pursuing further development. 3 - Off-the-shelf technology, no development required 2 - Some development required, not currently in public use 1 - Major technology development effort required Financial Feasibility: Should consider the total cost of the implementation, including the planning process. Financial feasibility also involves the capability of the participating organizations (FAA, Manufacturers, and Airlines and Operators) to provide the appropriate funding needed to implement the project. 3 - Relatively low cost to implement 2 - Relatively medium cost to implement 1 - Relatively high cost to implement Operational Feasibility: Involves the “practicality” of the project within the context of the operating environment, including NAS, ground operations, maintenance, inspection, etc. Considers which organizations within the aviation system are impacted. 3 - Minimal change to entities within the operating environment 2 - Modest change to operating environment 1 - Major change to operating environment Schedule Feasibility: Can the project to contribute to achieving the goal in a selected timeframe? Must consider implementation schedule by project. 3 - Less than 2 years to full implementation 2 - Full implementation in 2-5 years 1 - Longer than 5 years to full implementation Regulatory Feasibility: Should be evaluated against current rules and certification process. Could be a deterrent due to a long approval process. 3 - No policy change 2 - Guidance change only (orders, handbooks, policy) 1 - Rule change The JHSIT process includes evaluating the feasibility of implementing the intervention. One of the 5 feasibility factors evaluated is the “FINANCIAL” feasibility.

Sikorsky Aircraft Corporation MANAGEMENT SYSTEM = SAFETY SYSTEM Financial Management System Safety Management System Finance Plan Safety Plan Targets & Objectives Targets & Objectives Budget Budget Accountabilities Accountabilities Levels of Authority Line Management Authorities Procedures Procedures The management tools used to manage safety are the same as the elements used to manage the business. Checks and Balances Monitoring/Line Checks Audit Plan Accountants Audit Plan Safety Committee Audits Balance Sheets Audits Safety Achievement

ROI – WHAT IS SAFETY’s PAYBACK? Sikorsky Aircraft Corporation ROI – WHAT IS SAFETY’s PAYBACK? Net Present Value Present Value of Project Cost ROI = ROI = Present Value of Project Benefit – Present Value of Project Cost Present Value of Project Cost To be successful, safety managers must be able to show the financial benefits of proposed safety investments! There has to be a financial return on the investment if you want the financial community to support it!

Sikorsky Aircraft Corporation ROHSEI One Way To Change The Paradigm. Return on Health, Safety and Environmental Investment (ROHSEI) ROHSEI is a proven financial software tool used by safety managers to calculate the financial return on safety investments.

Sikorsky Aircraft Corporation GENESIS OF ROHSEI Sikorsky Aircraft Corporation October 23-24, 2007 In 1995 a taskforce of fifteen Fortune 500 companies sponsored the development of a process and supporting tool set to answer important questions such as: What safety investments should we make? How do we know we are doing the “right things” in the “right way” To which projects should we allocate our resources? Which EHS investments create the greatest value to the organization? How do we demonstrate the value of our investment decisions? How do we demonstrate our value and justify our existence? ROHSEI, Washington, DC 13

Sikorsky Aircraft Corporation October 23-24, 2007 BRIDGING FINANCE & SAFETY BUSINESS TALK SAFETY TALK Finance/Operations Safety/Industrial Hygiene Earnings/EPS Accident rates ROI Property loss Payback Insurance premiums PVRR Fines and citations Internal Rate of Return No. of people trained Production rates Exposure Assessments ROHSEI Earnings/employee Near misses Bridges Net Present Value Behavioral Observations the Gap Cost Benefit Audit findings ROHSEI, Washington, DC 14

WHAT ROHESI DOES ROHSEI offers a standardized approach to evaluating health, safety and environmental investments.

WHAT DOES A SAFETY GUY KNOW ABOUT FINANCE? – ROHSEI!

THE CHALLENGING QUESTIONS Sikorsky Aircraft Corporation THE CHALLENGING QUESTIONS What investments should we make? Should we make the investment this year or next? How do we compare an operational investment decision to a health and safety investment decision? To which projects should we allocate our human resources?

ROHSEI NAVIGATION SCREEN Process – Horizontal Tools – Vertical

THE CASE FOR ENHANCED GROUND PROXIMITY WARNING SYSTEM (EGPWS)

DEVELOP AND DOCUMENT The Focus Of Opportunity

DETERMINE ASSUMPTIONS

DOCUMENT BENEFITS AND COSTS

EXPENSE AND CAPITAL COSTS:

ACCIDENT RATES With And Without Equipment

ACCIDENT RATES With And Without Equipment

SOFTWARE DOES THE CALCULATIONS:

PRESENT RESULTS :

THE CASE FOR SAFETY MANAGEMENT SYSTEMS (SMS)

DEVELOP AND DOCUMENT The Focus Of Opportunity - SMS

BRAINSTORM PARAMETERS

DETERMINE ASSUMPTIONS

DOCUMENT BENEFITS AND COSTS:

RELATIVE NUMBER OF INCIDENTS:

FINANCIAL COST OF AN ACCIDENT:

INCIDENT MODULE CALCULATES BENEFIT

ENTER COSTS OF IMPLEMENTATION:

HIT CALCULATIONS BUTTON:

PRESENT RESULTS:

Sikorsky Aircraft Corporation BENEFITS ROHSEI offers a standardized approach to evaluating safety investments

Remember…there is a lot more to safety than economics. Work the business case…but don’t lose focus on what safety is all about. Remember…there is a lot more to safety than economics. 40

ADDITIONAl ROHESI INFORMATION Sikorsky Aircraft Corporation ADDITIONAl ROHESI INFORMATION Dave Eherts 203-386-8666 deherts@sikorsky.com Jo Linhard 202-822-3691 linhard@orc-dc.com