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Cost of Conflict: Hidden Outflow or Investment Opportunity?

Imagine an escalating dispute between a purchaser and a key supplier, or between the pater familias of a family company and his managing daughter, or between a CEO and his high value-adding employee – what do all these real-life workplace conflicts have in common? One of the right answers is: an increasing cost of conflict for the organization.

Possibly the largest unbudgeted and unmanaged items on every balance sheet are the costs1 directly associated with significant business conflicts2, such as:

• staff underperformance due to high emotional and distracted mind-sets (such as stress, irritation and fear) negatively affecting the corporate culture and team spirit
• loss of personal standing and/or organisational reputation causing (all or not hidden) lost opportunities and increased marketing efforts
• increased absence from work related duties (e.g. increased sick leave)
• extraordinary employee turnover (such as extra staff retention efforts, recruitment and training & development).

With the continuous desire to maximize profits, company decision-makers have several opportunities to reveal and control any actual and future costs of conflict. These include amongst others the rational design and implementation of proven ‘dispute systems’ to prevent, manage and resolve any business disputes, and the adoption of an activity-based costing approach to the conflict at hand.

To ease the selection of that particular conflict settlement option that minimizes the cost of conflict, a cost/benefit analysis can be carried out. By carefully breaking down all resources and cost factors involved in the business dispute, the real cost of conflict can be expressed as a single dollar value and used as a reference to assess the various courses of action available.

These options include – besides negotiation, litigation and arbitration – the bespoke avenue of out-of-Court Business Mediation3. This resolution method is increasingly encouraged within the private and public domain as well as on a European Union level4. Its use is justified by the time-saving and cost-effective nature of Business Mediation with the chance of being less costly than outright litigation where ‘the nominal winner is often a real loser in fees and expenses and time’5.

Financial professionals, in particular CFOs, Accountants and Finance Managers, ought to play a key role in settling significant business disputes based on their first-hand insight into an organization’s financial performance and close dealings with shareholders and executives based on ethics and mutual trust. Their responsibilities therefore include the pragmatic revealing of any hidden cost of conflict and actively encouraging the consideration of alternative dispute resolution methods.

Involving a duly accredited and creative Business Mediator allows for independently addressing the cost of conflict aspect and putting this in the wider context of dispute resolution options and immediate solutions available. The purpose remains to justify any investments required for achieving soonest dispute settlement in order to safeguard the organisational efficiency and (re-)align the organization to its actual mission and purpose at a minimal cost.

1 In this context, ‘cost’ is a financial measure of the impact of business conflicts on an organization’s performance, further defined as ‘a combination of foregone opportunities’, ‘attrition of resources devoted to the dispute’, and ‘secondary damage to productive resources’ (Hirshleifer, Jack, 1991, The Technology of Conflict as an Economic Activity, The American Economic Review, Nashville (USA), May 1991).
2 A business conflict is defined as any solvable interpersonal, interest-based and/or cultural conflict between the dispute stakeholders which causes disturbances in the organization’s value-adding activities and results in a significant reduction of the business performance and delay in the achievement of the organisational mission whilst at the same time being a recognized or hidden opportunity for organisational and personal improvement.
3 Mediation is a ‘flexible process conducted confidentiality in which a neutral person actively assists parties in working towards a negotiated agreement of a dispute or difference, with the parties in ultimate control of the decision to settle and the terms of resolution’ (Centre for Effective Dispute Resolution (CEDR), London,
4 See amongst others the EU Directive (2008) on Mediation in civil and commercial matters.
5 Phillips, Gerald F and Arianna Tatum. 1999. Survey: A look at ADR in the entertainment industry. Dispute Resolution Journal. May 1999. New York: American Arbitration Association Inc.


Herman Zandt

Herman Zandt MBA (Henley), Accr. Mediator (CEDR, London) is Director of Syrtis (Malta) Limited, provider of effective business solutions to an international clientele. In his management consultancy practice, he has experienced the significant impact business disputes have on the performance of people and their organisations, regardless of size, industry, success and… MORE >

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