By John Ford
If we are going to measure the cost of conflict to an organization, we must know what to look for. What should we consider as conflict? Conflict is a difference about how expected needs are going to be met and we typically know we are in a conflict because of the emotional tension we experience. At a behavioral level we become aware of either distancing or combative strategies: gossip, avoidance, verbal abuse, passive/aggressive communication, and hostility. Conflict can be demonstrated by not returning phone calls, not having coffee with your colleague any more and filing complaints, grievances or lawsuits. At its combative extreme, conflict involves physical violence.
Legal fees paid for conflict that escalates into a legal dispute are the most visible costs. Another cost that is easy to measure is insurance. Both legal fees and insurance costs can be determined from the company’s financial statements. In 1986 the Rand Corporation estimated that it cost $100 000 to defend a wrongful termination suit. Today, employer defense fees are much higher, when the cost of defending a company’s reputation as an employer of choice is factored in the balance. Theft and sabotage are both direct costs that can also be computed. The challenge is in showing the relationship of these costs to a particular conflict or employee.
The “Hidden” Costs of Conflict
Computing direct “conflict-related” costs can provide useful data; however, there are significant hidden costs within employee conflicts, costs that an organization incurs long before a lawsuit is filed.
For example, a team member’s commitment to the team and the team mission can decrease if intra-team conflict remains unresolved. Conversely, if intra-team conflict is actively managed and resolved, the team member’s chances for success within the team increases. Research shows that if unhealthy conflict goes unresolved for too long, team members are likely to leave the company or use valuable time to search for alternatives.
Evidence of the hidden costs
Several commonly tracked employee metrics can provide a wealth of data to analyze and track the true costs of conflict. Time spent, absenteeism, turnover and grievance filing are the prime indicators of workplace conflict. Measuring the costs of each of these factors can be used to demonstrate the added value of human resources interventions such as training and performance management.
Quantifying time spent on conflict
The cost of resolving a conflict can involve the salaries of as many as four employees: the two who are in conflict, their manager, and the HR manager. It is estimated that Fortune 500 senior HR executives spend up to 20% of their time in litigation activities. Studies show that up to 30% of a typical manager’s time is spent dealing with conflict.
Absenteeism is a conflict-related hidden cost that can be measured using a simple formula provided by the U.S. Department of Labor. Experts suggest that your absenteeism goal should be 3% or lower rather than the current average of 6% percent per annum.
Absenteeism Rate = Number of lost working days due to absence / (Number of employees) x (Number of Workdays) x 100
The Journal of Occupational and Environmental Medicine reports that health care expenditures are nearly 50% greater for workers who report high levels of stress and many studies suggest that stress is a byproduct of a conflicted work environment. Stress has seen a 316% increase as a reason for absenteeism since 1995. (1999 Unscheduled Absence Survey by CCH Inc)
Turnover is another hidden cost of unresolved conflict. The business costs and impact of employee turnover can be grouped into four major categories:
- Severance costs – voluntary or involuntary
- Benefits costs – compensation,
- Recruitment & staffing cycle time costs,
- Training & Development costs,
- Lost productivity
Figures vary, but the turnover cost of one employee can be anywhere from 30% to 150% of the employees annual salary.
For companies with union represented employees, it is possible to benchmark the number of grievances filed per month. The cost per grievance can be distilled to determine the estimated costs to resolve a grievance at the first, secondary and termination levels. It is also useful to compare grievances filed per month with the number filed after training or other performance improvement intervention.
Increasing Litigation Costs
According to the Rand Corporation, the average amount spent by companies in defending wrongful termination lawsuits from 1980 to 1986 was about $100,000 per case.
Risser, R (1993) “Stay out of Court: The Manager’s Guide to Preventing Employee’s Lawsuits,” Prentice Hall.
“Even when the employer prevails on summary judgment, he has usually spent $50,000 or more in attorney’s fees, in addition to the organizations time and resources.”
McDermott, E with Berkeley, A (1996) “Alternative Dispute Resolution in the Workplace: Concepts and Techniques for Human Resource Executives and their Counsel.” Quorum Books, at pxviii
Years ago, if a situation had more than $100,000 at stake, litigation was a viable alternative. Today, the benchmark is $1 million and growing quickly.
Quantifying productivity increases
It is also possible to track the productivity increases associated with learning how to manage conflict better. For example: the time a manager spends dealing with conflict is noted for a five-day period. The manager’s base salary is $35,000 per annum (excluding benefits and bonus). This manager typically spends 10 hours within a 40-hour work week dealing with conflicts between employees.
After attending a conflict resolution training that costs the company $300 per employee, the manager is more effective and only spends 7 hours per week on managing conflict within her team. If he/she spends 3 hours less per week in conflict, that is $18 X 3 hours X 52 weeks, a productivity increase of $2808 per year as a result of conflict resolution training.
ROI for Conflict Resolution Training
To calculate the return on investment, the following formula is helpful:
ROI=PI- Cost/ Cost
(where PI equals performance improvement)
Finally, the payback period can be calculated as follows: Payback Period=Cost X 52 weeks/ PI
$300 X 52 weeks = 5.5 weeks
The ability to manage conflict is a critical skill in today’s workplace: many organizations have identified it as a core competency for managers at all levels. It is ironic that many executives hesitate to invest time and money in improving their employees’ conflict management resiliency when the net added value to the company’s bottom line can be documented.