It’s Friday, and you are in the process of clearing your desk before you leave work for the day. One of your client managers comes into your office and asks “Do you have a minute?’ and your gut tells you that “minute” is about to be an hour long discussion. Human Resource managers typically get called in to manage conflicts between employees by their internal clients – other managers. Much of the work involves listening, analyzing and strategizing how to resolve the conflict. The time spent in this process is usually not valued by the organization because it does not show up on the company’s financial statements. But what if you could quantify the lost productivity and opportunity costs that on-going workplace conflict creates?
Measuring Conflict – What is it?
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 serious disagreement over needs or goals that are signified by a wide range of behaviors such as: gossip, avoidance, verbal abuse, passive/aggressive communication, and hostility. Conflict can be demonstrated by not returning phone calls, filing complaints, grievances or lawsuits. At its extreme, conflict involves physical violence.
The most noticed HR related expense is legal fees paid for conflict that escalates into the courtroom or an attorney’s office. These fees can be measured within the company’s financial statements as operating expenses. 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 easily be computed, too. 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 for HR managers seeking to be a catalyst for change in workplace practices. These costs can influence the executive team to focus on the way the organization is dealing with conflict. The trick is convincing the executive team that conflict within the company is a problem that is costing money and is eroding shareholder value. Providing the executive team with quantitative and qualitative data (as opposed to anecdotes) about the costs of conflict will build the HR manager’s credibility as a business partner as 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. If the 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. Interestingly enough, this research applies to executive teams and implies that the role of the CEO in managing conflict at the executive level is crucial. (James Wallace Bishop and K. Dow Scott, “How Commitment Affects Team Performance,” HR Magazine, 42 (2), February 1997, pp. 107-111.)
Typically the work of resolving team conflict does not fall solely on the team leader. Most managers who see HR as a strategic resource will call upon the HR manager to solve the problem. Now the cost of resolving team conflict can involve the salaries of as many as four employees: the two who are in conflict, their manager, and the HR manager.
The Evidence of the Hidden Costs of Conflict
Several commonly tracked employee metrics can provide the HR manager with a wealth of data to analyze and track the true costs of conflict. We believe that time spent, absenteeism, turnover and grievance filing are indicators of workplace conflict. Measuring the costs of each of these factors can be used by HR managers to prove the added value of human resources interventions such as training and performance management.
Quantifying Time Spent Dealing with Conflict
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. Multiply the time of the four employees’s involved in our hypothetical team conflict and the estimated cost per conflict can be an alarming jolt to the bottom-line. As an experienced CFO told us, “this is a case where ‘horror stories’ actually work quite effectively”.
Absenteeism is a conflict-related 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 cost of unresolved conflict. The business costs and impact of employee turnover can be grouped into four major categories:
1. Severance costs – voluntary or involuntary
2. Benefits costs – compensation, etc.
3. Recruitment & staffing cycle time costs,
4. Training & Development costs,
5. Lost productivity costs.
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, the HR manager can benchmark the number of grievances filed per month with the number filed after training or other performance improvement intervention. The cost per grievance number can be distilled to determine the estimated costs to resolve a grievance at the first, secondary and termination levels.
Quantifying Productivity Increases
If your organization tracks billable vs. non-billable hours, then quantifying productivity increases is a possibility. It requires an analysis of non-billable hours using metrics that can highlight the time spent on conflict resolution.
Another way is to track the productivity increases associated with learning how to manage conflict. 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
It is a challenge for HR managers to convince senior executives that conflict is a costly problem and to demonstrate that a particular HR or OD intervention is the correct way to fix the problem. HR managers can, in addition to assessment metrics, benchmark other companies’ best practices in managing conflict. A good place to start is to look at Fortune’s 100 Best Companies to determine what strategies these companies deploy to manage conflict within their workforce.
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. Demonstrating the costs of conflict and to assess in financial terms the benefits of conflict management interventions can assist the HR manager in their role as a credible, strategic partner to the executive team.