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Measuring The Financial Cost Of Organizational Conflict
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By Daniel Dana

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.

Interdependent workplace relationships are a fertile soil from which conflict can sprout. Organizations are lush gardens hosting many flourishing varieties of this annoying and resource-sapping weed.

Now let´s look at how this weed saps financial health and vitality. This article can be used as a self-administered instrument.

* Use the worksheet at the end of this article with the following instructions to calculate the strictly financial costs that a particular conflict incurs, aside from its impact on quality of worklife and job satisfaction.

Worksheet Instructions

First, identify one conflict that is very familiar to you, either by having been a participant or a close observer. It may be a conflict that is still current, or one that happened in the past. Jot down a key word or phrase to help you stay targeted on that particular conflict.

The "cost factors" listed on the worksheet 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. Analyze your targeted conflict by asking yourself, with regard to each cost factor in turn, "Did/does the conflict I am analyzing have the effect of . . . . . . " If you answer yes, calculate its dollar cost in the ways suggested, and enter your estimate in the space provided. When you are completed, sum the column to derive an estimated total cost.

Factor 1: Wasted time

Invariably, conflict distracts employees from otherwise productive use of their time. A classic management study ("A Survey of Managerial Interests with Respect to Conflict" by Kenneth W. Thomas and W. H. Schmidt, Academy of Management Journal, June 1976) revealed that up to 30% of a typical manager´s time is spent dealing with conflict. A more current 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.

Estimate the amount of time wasted by each person who is/was affected by the team conflict. Then calculate the financial cost as a fraction of monthly or annual salary or wage, including the value of insurance and other fringe benefits (typically at least 50% of gross salary).

For example, let´s say each of four employees wasted 40 hours during a six month period because conflict disrupted their work. And, let´s say the annual salary of each employee is $40,000. Forty hours is one week of work time, which is one-fifty-second of one year´s salary. A year´s salary is generally about two-thirds of total compensation. So, the dollar value of the four employees´ wasted time is $4615.38.

Factor 2: Reduced decision quality

Decisions made under conditions of conflict are always inferior to decisions made when cooperation prevails. This is true for two reasons. First, we know that good decisions must be based on an optimum quantity and quality of objective information. If information is withheld or distorted by those who are depended upon to provide it (which nearly always happens when information providers are in conflict with the decision-maker), then the decision cannot be the best one possible.

Second, if conflict is present between people who share decision-making authority, as in the case of team-based decisions, the resulting decisions are likely to be contaminated by the power struggles between those people. A precise estimate of cost is probably impossible. But ask yourself, "What opportunities were lost by poor decisions that were affected by this conflict, and what might have been gained if a better decision had been made?"

Considering these influences on decisions made by the people affected by your target conflict, estimate their cost and put the figure on the line provided. Place a conservative (i.e., on the low side of the range of its potential financial impact) figure there, even though the actual cost may be highly variable and very uncertain. Guideline: 50% of the dollar impact of decisions that were made while the conflict was going on (e.g., estimate \ if a team was disputing whether to purchase a \ piece of equipment.)

Factor 3: Loss of skilled employees

Organizations invest in employees´ skills by paying a premium salary upon hiring and by providing training thereafter. 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. This determination was reached by accounting for lost productivity, recruiting fees, interviewing time, staffing department employee salaries, orientation and retraining costs, etc. So, replacing an employee whose annual salary is $40,000 incurs a cost of $90,000. If one or more employees departed at least partially because of the conflict you are analyzing, figure the cost to your organization.

For example, using conservative estimates, let´s say that one employee voluntarily resigned, and that his/her decision to leave was only 50% due to the conflict. Using Raytheon´s figures, the dollar cost of this factor is half of $90,000, or $45,000.

Factor 4: Restructuring

Often, design of workflow is altered in an attempt to reduce the amount of interaction required between employees in conflict. Unfortunately, the restructured work is usually less efficient than the original design, which would have been satisfactory if the conflicting employees had been able to work together. As with Factor 2 above, it is impossible to precisely calculate the resulting inefficiency, but your subjective assessment will give a reasonable estimate.

Again, be sure to enter a conservative (low side) figure on your worksheet. Guideline: 10% of the combined salaries of employees whose relationship was restructured for the time the restructuring is in effect. Example: Estimate $8000 if four employees, each of whom is paid $40,000 annually, were reassigned to different task groups for a six month period, i.e., (($40,000 X 4)/10)/2). Rationale: The financial value of employees (i.e., "human resources") to an employer for performing specified work is, by definition, roughly equivalent to their salaries. If that work must later be restructured to control interpersonal conflict, the redesigned work relationship is probably not the most efficient allocation of the human resources.

Factor 5: Sabotage/theft/damage

Studies reveal a direct correlation between prevalence of employee conflict and the amount of damage and theft of inventory and equipment. And, covert sabotage of work processes and of management´s efforts usually occurs when employees are angry at their employer. Much of the cost incurred by this factor is hidden from management´s view, excused as "accidental" or "inadvertent" errors. This cost is almost certainly greater than you may realize. Again, enter a conservative figure on the worksheet. Guideline: 10% of the acquisition cost of equipment, tools, and supplies that conflicted employees use in performing their jobs. Example: $2500, if an operator of a $20,000 machine in a manufacturing environment is angry toward his/her supervisor ($2000 for careless operation and maintenance of the machine, plus $500 for unnecessary scrap and waste of raw materials).

Factor 6: Lowered job motivation

From time to time, most employees experience erosion of job motivation due to the stress of trying to get along with a "difficult person." As a baseline figure, use the productivity that would have occurred had no conflict occurred. Then, estimate a percentage decline of that productivity. Multiply that percentage times the dollar value of the total compensation of the person(s) affected to derive a figure for Factor 6.

For example, let´s say that the productivity of three employees was eroded by 20% for a period of three months. Using figures similar to those above, the three employees´ total compensation was 3 X $60,000, or $180,000. Since one-fourth of this amount ($45,000) was earned during the three month period, the conflict cost the organization $9000.

Factor 7: Lost work time

Absenteeism has been shown to correlate with job stress, especially the stress associated with anger toward co-workers. This stress, combined with disregard for how one´s absence impacts others, leads to employees´ choosing to take time off ­ sometimes excused as a "sick day." And, medical science has determined that nearly every physical illness and injury, from viral infections to cancer to workplace accidents, are partially "psychogenic." That is, they are caused in part by psychological or emotional conditions. The portion of lost work time that has resulted from your targeted conflict is largely hidden from your direct view, with the possible exception of your own absences. Still, you can arrive at an estimate by prorating daily or monthly compensation. Again, be sure to enter a conservative estimate on your worksheet. Guideline: 10% of annual salaries of employees in conflict. Example: $18,000 if all six members of a department, each of whom is paid $25,000 annually, are in ongoing conflict with their supervisor, who is paid $30,000, throughout the year ($25,000 X 6) divided by 10 + $30,000 divided 10.

Factor 8: Health costs

As mentioned under Factor 7, illnesses and injuries requiring medical attention are partially psychogenic, and conflict contributes to their psychogenesis. Since the rate of claims affects the premium paid by an employer to its insurer, insurance is an indirect cost of workplace conflict. Estimate the percentage of the psychogenic component of medical problems that have occurred while your targeted conflict has gone on, and multiply this percentage times the premium increase imposed by your organization´s insurer. Admittedly, this psychogenic component is difficult to ascertain, and you may not be privy to the insurance costs of your employer. So, enter a conservative figure based on your knowledge of these matters. A shortcut is to enter 10% of the number you have entered for Factor 6, "lowered job motivation," since the stress that results in reduced productivity is also related to our physical health.

What is the total cost?

Now add the figures in each of the eight cost factors to derive an estimated total cost of your targeted conflict. Remember, this accounts for the cost of just one conflict ­ how many others have occurred in your organization if you extend your estimate over the period of a year?

By repeating the analysis for other conflicts, or by multiplying the resulting figure by the number of conflicts that have occurred, we gain fuller appreciation of conflict as an expensive organizational process.

Cost Estimation Worksheet

Key word/phrase to identify a conflict: ________________


1) Wasted time $_________
- salary/benefits per hour/day (150%)

2) Reduced decision quality $_________
- any decision made by you and/or others, independently or jointly, affected by the conflict

3) Loss of skilled employees $_________
- cost of loss of human resource (150% of total annual compensation)

4) Restructuring $_________
- inefficiency of work redesigned to accommodate conflict

5) Sabotage/theft/damage $_________
- equipment, work processes, reputations

6) Lowered job motivation $_________
- reduced performance/productivity
- % reduction times salary

7) Lost work time $_________
- number of days lost at prorated daily salary

8) Health costs $_________
- stress related
- insurance premiums linked to rate of claims

TOTAL COST: $_________

Article courtesy of Family Business Strategies.

About the author: Daniel Dana, Ph.D. can be reached via email or at http://www.mediationworks.com. Daniel Dana is the President and Director of Program Development for Mediation Training Institute International.

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