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Managing the Cost of Conflict

by Alessandra Sgubini
May 2015

Coauthored with Roxanne De La Roche.

Alessandra Sgubini

Conflict is a common occurrence in society. It arises everywhere, among different types of parties, in different parts of the world, and for different reasons. If conflict is not addressed properly it can escalate and degenerate leaving serious consequences in its wake. This article explores the true costs of conflict, methods to address conflict, and how to prevent conflicts from escalating in the first place.

Those who practice business are aware of how important it is to be able to have many skills and we believe that one of the most important skills is be able to assess and resolve conflicts, and more importantly to be able to prevent conflict in the workplace and in life.

There are two main types of conflicts: External (External) Conflicts and Internal (Subtle) conflicts. The External Conflicts are those that arise between two entities or individuals, and Internal Subtle Conflicts arise between individuals in the same organization or group (Internal Subtle Conflict).

We generalized and identified External conflicts as: General breach of contract, Nondisclosure agreement, Trade secret, Patent and trademark, Debt collection, Intellectual property, and Disputes about merchandise quality. Those conflicts arise for various reasons that we were able to summarize as: unfulfilled expectations, misunderstandings, bad negotiation, cultural differences, and competition.

For the purposes of this article we identified 4 Types of Internal Subtle conflicts:

Intrapersonal Conflicts: can be defined as a conflict occurring in the mind of the single individual. We identify these types of conflicts as: Conflicts related to criticism, conflicts related to self-­-esteem and conflict caused by the influence of medication, alcohol or drugs.

Interpersonal Conflicts: can be defined as a conflict associate between two people. Based on our research, interpersonal conflict occurs between an individual and other people. We identify these types of conflicts as: Conflicts related to delegation, Conflicts related to quality of the final outcome, conflict caused by the influence of medication, alcohol or drugs.

Intragroup Conflicts: can be defined as a conflict occurring between the individuals in a community or an institution. We identify these types of conflicts as: Conflicts related to Personality differences, Cultural Differences, Conflict between line managers and their reports.

Intergroup Conflicts: can be defined as a conflict occurring between two or more social groups. We identify these types of conflicts as: Conflict between employees in entry-­-level/front-­-line roles, between different levels of management, between 2 middle managers, and between first-­-line management/supervisors.

For each type of conflict (external and internal) there are three main factors that must be considered in order to properly assess and resolve the conflict. First, there is the economical cost: these include the tangible financial costs such as attorney fees. Next, there is the cost of time lost as a result of the conflict: this includes loss of worker productivity and time spent arguing and getting frustrated over the conflict. Last, we believe, there is the cost of health, which affects the parties involved. As we will see, conflict negatively affects health, such as loss of sleep, loss of appetite, and depression that translate both as economic costs and serious health consequences.

We began by calculating the actual damages resulting from the business conflicts. We asked businesses to identify the consequences of external conflicts. The results can be summarized as the following categories: Negative impact on the reputation, loss of productivity, loss of good customers, bad investments, and loss of time and money.

We spent months in calculating the actual total cost of litigation and at the end of the process is about $367,500 (refer the study article How conflict cost by Bridge Mediation published on Bridge-­-mediation.com) To calculate the total cost of litigation in the USA, we multiplied the average of an attorney fee ($350 per hour) by the time spent in litigation yearly. In order to calculate the time spent in litigation we estimated an average of 2 hours per day dealing with a single case and 2.5 years to get to a solution, which equals 1,050 working hours spent in litigation yearly. ( based on our researches)

We compared the cost of litigation with the cost of two different Alternative Dispute Resolution (ADR) methods: Arbitration and Mediation. We researched real data for Arbitration and we estimated that the time spent in arbitration is 60 hours. The total cost of arbitration is estimated to equal $49,000 (which includes attorney fees, arbitrator fees, administrative fees, depositions, and experts).

We followed the same process for Mediation and we estimated an average of 8 hours for the process plus 2 hours of administrative time for a total of 10 hours. The total cost of mediation is approximately $7,100 (which includes attorneys’ fees, mediator fees and administrative fees).

Below is a comparison of the economic savings between each of the methods:

 

To put the amount of time saved into perspective, we also compared each method side by side:

While alternative dispute resolution mechanisms have been accepted as a viable method to resolve conflict in the legal community, many people still have a difficult time recognizing the benefits of choosing such mechanisms over the traditional legal system. It is universally known that conflict harms businesses and personal lives, but many do not know the actual financial, emotional, and physical costs of conflicts. Regardless of the complexity of the issue, many individuals believe that litigation is the only option to bring justice and peace to their situation and even when they may win they will have to collect the monetary compensation and often is not a easy process and/or doable.

In order to calculate the costs of Internal Conflict we created a hypothetical based on our interviews for confidentiality purposes. In this hypothetical situation the salary in the United States for one employee was $15 per hour. We then multiplied $15 by 8 working hours per day to determine a salary of: $600 per week or $2400 per month.

In order to calculate the cost of subtle conflict, we took and combined our data with a Research Study conducted by Jeff Hayes in 2008. In this study the cost of conflict for each employee varies between 140% and 300% of his base salary. Which means that according to this research, the business pays an extra of 40% for the subtle conflicts up to the 200%, in addition to the actual salary. This data can be quantified as $10,080 for minor subtle internal conflicts per year or $50,400 for more serious subtle conflicts. This means that a business would pay between $10,080 and $50,400 more per year for one employee.

In order to calculate the time loss caused by conflicts we combined the findings from the 2008 research by Jeff Hayes with our own data from case studies. In this research we see that in 2008, 2.8 hours per week are spent dealing with conflicts in United States. Put another way, 117.6 hours per year are spent dealing with subtle internal conflicts, which translates as a loss of productivity that costs $1,764 per employee.

The total loss for a business dealing with conflict per year for one employee is between $11, 844 and $ 52,164. Litigation Saving 1,030 hours between Mediation and Litigation 80 hours 950 hours 20 hours 100 hours 1,050 hours Mediation Arbitration 4

In our research, we decided to investigate deeper and researched the financial, emotional and physical health costs associated with external and internal conflicts for the individual involve in the conflict.

To determine the underlining health consequences that accompany conflict, through case studies, we analyzed the effects conflict has on individuals who are involved in external and internal subtle conflicts. We identified and summarized some of the health consequences to include (but not limited to): waste of time and resources, stress, frustration, anxiety, anger, loss of sleep, loss of appetite or overeating, headaches, the feeling of being unapproachable, violence among individuals (personal insults or attacks), absenteeism, sick leave, and demotivation.

Through our research, we calculated the monetary damages that the individual faces while involved in a conflict and after the conflict is over. Specifically, we calculated what the out-­- of-­-pocket costs were for the individual.

Below is a breakdown of the possible expenses an individual might spend. These costs are separate from the costs listed above.

The evidence and results make it abundantly clear that Alternative Dispute Resolution methods greatly decrease financial and productivity loss, as well as prevent adverse health consequences. It is our responsibility to make decisions that will help resolve conflicts. There are always at least two parties to a conflict and when we face unreasonable people we need to fight to protect our values and rights. Even in this scenario, always keep in mind the economical and health consequences when you start or respond to a fight.

Preventing the Escalation of Conflict:

In a perfect world, conflict would not exist. However, the diversity of thoughts, beliefs, and cultures (among others) that make our world unique can also be the cause of conflict. While avoiding conflict in the first place is ideal, it is not always possible. When conflict does arise though, it can be managed using techniques to contain it and resolve it efficiently. By preventing a conflict from escalating, one also prevents the costs associated with conflict from degenerating.

There are four main steps to manage a conflict effectively: (1) Identify the disagreement, (2) Understand the parties involved, (3) Understand the reason why conflict arose, and (4) Act in real time. While these may appear obvious, when properly applied conflict can be Doctors Approx. $1,500 $500 first visit $175 other visits once a month $2,000 USD/hour Twice a week Therapist Psychiatric Prescriptions $100/month for about 1 year 5 contained and damages can be significantly reduced.

Identifying the disagreement helps to define the parameters of the situation and will later help with steps 2 and 3 (analyze and understand the conflict). Often the best way to identify the conflict is to gather information about the situation. Once the facts have been gathered it facilitates the analysis portion of conflict management.

Understanding the parties involved facilitates the process of determining what the underlying issues are. By taking the time to understand the personalities and characteristics of the parties, their values and beliefs, and the interests and motivations of each party, it provides everyone involved in the conflict a comprehensive view of the situation as well as a gateway towards exploring why the conflict arose. Conflict often boils down to the underlying issues and interests of the parties involved and the assumptions made by each party based on their own perceptions of reality. Spending time to understand the situation fully helps mitigate and avoid conflict in the future. Understanding why the conflict arose helps address the true issues behind the conflict. Exploring the underlying issues and interests prevents the same conflict from reoccurring because when both parties feel heard and understood a lasting resolution is more likely to follow.

The last step consists of taking action using all of the information gathered from the three previous steps. “Acting in real time” means not delaying to implement the actions: the earlier a conflict is addressed, the sooner it can be resolved, which means there is less time for the conflict to generate serious damages created by the emotions of the parties. There are several tools that one can use to address a conflict situation depending on the type and/or the level and seriousness of the conflict.

As mentioned above, mediation is the quickest and less expensive option to resolve conflicts. Mediators are especially helpful in external conflicts, but they can also play a vital role in complex internal conflicts. For internal conflicts that have had the time develop into complex multi-­-level situations, a mediator is often recommended to fully address the situation.

If a conflict is identified in the initial stages of its development, there are techniques that can be implemented by the parties or by a third party such as a manager to address the situation. One of the most important concepts to understand when dealing with conflict is that the perception of reality is different for every person. In order to explore each party’s perception of reality one can use open-­-ended questions to gain a deeper understanding of that person’s underlying issues and interests. It is essential that during this process all individuals respect each other and prevent assumptions from being formed. Assumptions can be limited through the use of clarifying questions. The main point is to make sure the party is open to understanding how the other person perceives the situation. By providing a space for the parties to “put themselves in the other person’s shoes”, it allows for an open constructive dialogue between them. 6

The only thing to avoid entirely is to ignore a conflict because it will become worse over time. There is no such thing as a conflict that resolves itself because even if the actual situation dissipates, the parties involved will still have been affected and the residue of the conflict will never go away until the underlying issues have been addressed. In this global society it is necessary for a business to implement a conflict resolution mechanism and promote problem-­-solving training for all of their employees (including upper management) in order to rapidly and efficiently address conflicts that arise. These skills are vital for the business as well for the individuals that work in the organization. Being aware of alternative dispute resolution methods is important for businesses to prevent conflict from escalating. Every conflict must be assessed and analyzed; and when a conflict is out of control, it is vital to choose the best course of action to resolve it. In a perfect world each individual would be able to prevent conflict from occurring in the first place, but perfect is an illusion. In our world however, with the proper training it is possible and realistic for each individual to recognize when a conflict exists and address it effectively before it degenerates out of control.

Biography


Alessandra Sgubini is an Italian attorney and professional mediator. Ms. Sgubini has over 10 years experience in the field of law, international law, and dispute resolution.  She holds the J.D. degree from the University of Milan, Italy, and is currently a licensed attorney in Italy and a member of the Milan Bar Association.  In 2001 Ms. Sgubini completed advanced studies in International Business Transactions from the University of San Diego, California.  In 2003, she earned an L.L.M. degree at California Western School of Law with a specialty in International Law and Dispute Resolution.

Presently she is a professional mediator and CEO of Bridge Mediation LLC an international alternative dispute resolution consulting company specialized in mediation for domestic and international businesses.  Bridge is based in San Diego, California with offices locate in Milan, Italy.

In addition, Ms. Sgubini teaches as a guest lecturer in Universities in San Diego, California, Italy, and Spain. She also serves as a speaker in national internationally organizations and businesses. Ms. Sgubini is author of several articles on ADR and mediation.



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