Highlighting the Financial Cost of Conflict

How can we help organizations become aware of the costs of conflict in advance so they are motivated to prepare themselves and develop the insights and disciplines required to deal with it positively and constructively?  The answer, or at least a substantial part of it, is to help people reflect on the costs of conflicts in which they have been engaged.

Most of us tend to have a reactive response to conflict - we deal with it only when we feel the pain, the loss or the damage.  The benefits of dealing constructively with conflict tend come later so they often do not motivate us to put the time into developing the mindsets, the strategies and the skills that might be needed to resolve and transform conflict.  The usual reaction when the heat goes out of the conflict is "Oh, I'm glad that is over" - until the next time that is  - and then -  "I wish I had ...." , but it is too late, the conflict is in your face and you are reacting in the same old ineffective way again.

But we can motivate ourselves to put the time in to deal constructively with conflict by taking time to reflect on and learn from past conflicts - and the soon afterwards the better.  The costs of destructive conflict, such as damaged relationships, lost opportunities, damage to reputations, and financial costs can be substantial though much of it is intangible, remains hidden or is difficult to quantify. 

We often tend to kid ourselves as to what the real costs are especially if we only look selectively or at our own losses.  Awareness of the full costs are likely to motivate us to address conflict proactively and constructively and in so doing we will also discover that the benefits are not just confined to avoiding the negative effects.  Daniel Dana, whose book I reviewed last month, highlights the following on his website:-

• Unmanaged employee conflict is perhaps the largest reducible cost in organizations today ­ and probably the least recognized.  It is estimated that over 65% of performance problems result from strained relationships between employees ­not from deficits in individual employees' skill or motivation.
• A study of practicing managers ("Managers as Negotiators" by Carol Watson and Richard Hoffman, Leadership Quarterly, 7(1), 1996) showed that 42% of their time is spent reaching agreements with others when conflicts occur.
• Exit interviews, which ascertain reasons for terminations, reveal that chronic unresolved conflict acts as a decisive factor in at least 50% of all such departures.  Conflict accounts for up to 90% of involuntary departures, with the probable exception of staff reductions due to downsizing and restructuring. 
• Raytheon Corporation determined that replacing an engineer costs 150% of his/her total annual compensation. 

Dana suggests a way of estimating the financial costs of workplace conflict which helps you to calculate the hidden costs that may have impacted your business. He says the "cost factors" listed on the (adapted) worksheet below are the primary ways that conflict incurs financial costs. Not all cost factors are relevant to every conflict, but every conflict incurs cost by several of these means.  He also provides a clear rationale for the suggested calculations which you may want to view on his website http://www.mediationworks.com

Cost Estimation Worksheet

Key word/phrase to identify a conflict: ________________

COST FACTORS ESTIMATED COST

1) Wasted time €/£_________   salary/benefits per hour/day (150%) of the fraction (time spent) of the salary of every person engaged in the conflict
2) Reduced decision quality €/£_________ any decision made by you and/or others,
independently or jointly, affected by the conflict (50% of the ¬/£ impact of decisions made in duration of conflict)
3) Loss of skilled employees    €/£_________ cost of loss of human resource (150% of total annual compensation, includes recruiting fees, retraining, staffing costs etc.)
4) Restructuring     €/£_________ inefficiency of work redesigned to accommodate
conflict (10% of combined salaries of restructured staff for duration)
5) Sabotage/theft/damage   €/£_________  equipment, work processes, reputations
6) Lowered job motivation   €/£_________  reduced performance/productivity
 % reduction times salary by the No. of people by the duration of conflict.
7) Lost work time    €/£_________  number of days lost at prorated daily salary for every person involved
8) Health costs   €/£_________  stress related, illness, accidents, insurance premiums linked to rate of claims

TOTAL COST:          €/£_________

Remember this is just the estimate for one conflict - you may want to complete a similar exercise for other conflicts but a rough multiplication may give you a sense of the full extent of the financial costs - there are still the opportunity, image, relationship, morale and other potential damage.

For some businesses these costs are substantial. For others they are at least sufficient to highlight the need to address this large but reducible cost by building capability to resolve and transform conflict. 

To begin building this capability and to learn  about the skills and strategies required to deal constructively with conflict come to our November workshop on Workplace Conflict or feel free to contact us for a free initial coaching or consultation session.