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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.
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Cost Estimation Worksheet
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Key word/phrase to identify a conflict: ________________
COST FACTORS ESTIMATED COST
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: $_________
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