Putting the Expense of Good Fire Protection in Proper Perspective

“Hey, Boss,” said the Brash Young Fire Protection Engineer (BYFPE), calling out to the Wise Old Fire Protection Engineer (WOFPE) at the other end of the corridor. “Wait up a minute. I need your advice on something.”

The WOFPE waited for the BYFPE to catch up and said, “Walk with me. I’m picking up a book I reserved in the technical library. So, what’s on your mind?”

As they walked, the BYFPE explained, “You once told me that when I talk with facility management about fire protection, I need to explain it in their terms if there’s any hope of them buying into what I’m saying?”

“That’s correct,” responded the WOFPE. “Two people can’t discuss any topic unless they use the same language and jargon. So, what’s your specific question?”

“I have a Thursday afternoon meeting with the facility manager at the New Harmony plant of Universal Integrated Widgets (UIW) to discuss our most recent fire risk assessment survey and our recommendations,” explained the BYFPE. “The last time I met with her, it didn’t go well. She pummeled me with questions about the return on investment (ROI) and the negative effects on the bottom line that fire protection expenditures represent. She said that from a business accounting perspective, fire protection is strictly an expense, not an investment, because it never shows an ROI.”

Opening the library door from the corridor, the WOFPE said, “So she’s speaking finance while you’re speaking fire protection.”

“That’s about it,” agreed the BYFPE. “I’ve got a passing understanding of what she’s talking about. But how do I explain that she shouldn’t view money invested in sprinklers or a new fire pump the same as an expenditure for a new widget production machine that produces widgets in a quarter of the time and at half the cost? I can roughly calculate the return on investment for a situation like that. But how do I apply that same logic to fire protection?”

“Frame your conversations in terms she understands,” explained the WOFPE. “From my recollection, her background before becoming facility manager was accounting and marketing, so think in those terms.”

Looking frustrated and perplexed, the BYFPE responded, “Would you mind elucidating a bit? I’m not sure how to explain fire protection in terms of marketing and accounting.”

“Sure,” voiced the WOFPE as he smiled, accepted a copy of Drysdale’s?An Introduction to Fire Dynamics?from the librarian, and leaned against the reception counter. “First, let’s think in terms of marketing. Aside from good marketing managers, what is a company’s most important marketing asset?”

“I’ll say it’s a good marketing network?” guessed the BYFPE questioningly.

“That’s close,” said the WOFPE. “But, instead of marketing network, think market share. Think of their existing customers. Explain to UIW that if a fire shuts down their production and they can’t meet their delivery commitments, their customers will go elsewhere to get their widgets. Not only will their customers be upset that UIW put them in a bad position, but they might decide to continue buying widgets from their alternate supplier even after UIW is back up and running. Those lost customers equal lost market share, which is difficult and expensive to replace. Any good manager should be able to see the effect lost market share has on the bottom line.”

“That’s a good point,” agreed the BYFPE. “I don’t think most people look at market share and customer goodwill as things that can be damaged or lost to a fire. They think just in terms of lost dollars. For example, the UIW facility manager told me that’s why they have insurance. If they have a fire, the insurance company writes them a check to repair or replace their lost or damaged property.”

The WOFPE concurred, “The insurance company will write them a check to cover the direct loss of their property and physical assets. But insurance can’t replace lost market share. It also can’t compensate a company for any reputation damage.”?

“What do you mean reputation damage?” inquired the BYFPE. “How can a fire damage their reputation?”

Suppose you were one of UIW’s customers and a fire shut down their production, so they couldn’t deliver the widgets you needed to meet your manufacturing demand,” posited the WOFPE. “Would that affect your view of UIW’s reputation as a reliable supplier?”

“I see what you mean,” said the BYFPE pensively. “But wouldn’t that quickly pass when they are back up and running and meeting customer demand again?”

The WOFPE pondered the question and added, “I might, but it might not. Some events cause long-lasting public relations damage and heavily tarnish a company’s reputation. For example, when I say ‘Valdez’ and ‘Bhopal,’ what comes to mind?”

“The first things that come to my mind,” explained the BYFPE, “are the Exxon Valdez oil spill in Alaska and the release of toxic gas from the Union Carbide plant in Bhopal, India. We studied those disasters in my process safety class. The oil spill from the Exxon Valdez was the largest in history until the 2010 Deepwater Horizon disaster in the Gulf of Mexico, and the Union Carbide Bhopal toxic gas release killed somewhere between 15,000 and 20,000 people.”?

“Exactly,” said the WOFPE. “I never mentioned Exxon or Union Carbide, but you identified those companies by my simply mentioning Valdez and Bhopal. Those disastrous incidents are inexorably linked to those companies forever. You’re familiar with the incidents, even though they occurred before your birth. And no amount of insurance can repair or restore that type of long-term damage to a company’s name and reputation.”

The WOFPE continued, “There’s one more thought concerning insurance that you might want to address with someone thinking only in terms of dollars and cents. And that is the true cost of an insurance policy deductible. I’m not sure what the deductible is on the property insurance policy covering UIW, but for a company of their size, it wouldn’t be unusual to have a deductible of a million dollars or more.”

Actually, it’s more like $2 million, based on the discussions I had with their risk manager and insurer during their last construction project,” offered the BYFPE.

“OK, let’s work with that,” said the WOFPE. “Let’s assume that Universal Integrated Widget suffers a fire resulting in $2 million in property damage. Remember, their insurance doesn’t kick in until a single incident exceeds their $2 million deductible.?

“I’m following you,” said the BYFPE.

The WOFPE continued, “That $2 million fire loss deductible comes right off the bottom line. There’s no insurance for that. Now, to make the math easy, let’s assume that UIW operates on a 10-percent net profit margin which overall is very good. Many companies operate with a margin of 2% to 3% percent. The American Enterprise Institute says the average margin is 6% to 7%.* So, if UIW’s margin is 10% and they have $2 million in uncompensated fire loss expenses for the year, they need to sell an additional $20 million of widgets just to break even. For someone only looking at cost, spending $250,000 on a new fire pump might not seem like such a threat to the bottom line compared to the cost and difficulty of trying to sell an additional $20 million in widgets.?

*??Perry, Mark J.,?The General Public Thinks the Average Company Makes a 36% Profit Margin, Which is About 5X Too High, Part II, American Enterprise Institute (2018),?https://www.aei.org/carpe-diem/the-public-thinks-the-average-company-makes-a-36-profit-margin-which-is-about-5x-too-high-part-ii/?(Accessed 3/5/2023).?

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Want More?

You can find more conversations between the Wise Old Fire Protection Engineer (WOFPE) and his protégé, the Brash Young Fire Protection Engineer (BYFPE), throughout?Industrial Fire Control Concepts?and in the new?51 Conversations with the Wise Old Fire Protection Engineer?by Jeffrey Moore, PE, FSFPE.

Industrial Fire Control Concepts?is a fire risk management course in a book. Originally written as the textbook for the one-week Industrial Fire Protection Course taught for decades by Industrial Risk Insurers, this 540-page third edition, updated to reflect current technology and fire protection practice, maintains the original purpose of serving as a means of providing not only technical information but also explaining the fire protection decision-making process for those responsible for facility fire protection and fire risk management. The book uses practical examples and extensive color photos and graphics to explain the “hows” and “whys” behind an effective site-specific fire protection and fire control program.?

51 Conversations with the Wise Old Fire Protection Engineer?contains the forty-six conversations between the WOFPE and the BYFPE contained in?Industrial Fire Control Concepts?and?five additional conversations not used in the book. Both books are available on Amazon. The conversations between the WOFPE and the BYFPE provide background information and context behind many common questions and misconceptions, and the methods used to make site-specific fire risk management decisions.?

Electronic versions of both books are also available in the iTunes store for Apple Books. Email [email protected]?for additional information or to obtain a fifty-page sample of?Industrial Fire Control Concepts.