2 ROI and the Costs of Conflict: Pay Now or Pay Later
I appreciate being able to handle this matter without investing any more time, effort, and money than was necessary.
Karl Bareither, President, Family Business Consultants
In 2006, 17.3 million civil actions were filed in state courts and in 2007, 1.12 million civil cases were filed in federal courts of the United States. You can imagine the cost of those lawsuits.
I once read that 20% of Fortune 500 senior executives’ time is spent in litigation-related activities. Imagine the tally that adds up to. It’s commonplace for legal fees to exceed the value of the amount at stake. Years ago, if a situation had more than $100,000 at stake, litigation was a viable alternative. Today the benchmark is $1 million and growing quickly. Old thinking is very costly!
Although the use of Alternative Dispute Resolution (ADR) is growing, the cost of conflict is a resource drain of huge proportion, and a source of great unhappiness and discomfort.
Why So Expensive?
Traditional court systems, which many think of as the usual way of resolving conflicts, do not foster resolution. Their operative premise is that someone will win. Unfortunately, our dispute resolution machinery often fuels the fire of conflict and impedes resolution. Worse, while engaged in the conflict resolution process, your productive activity, what your life is really about, is diluted. The system does not foster resolutions that address the underlying sources of conflict—breakdowns in relationship. The process is not designed to get people back to an optimal state of productivity.
The current formal system embodies struggle, control, and a survival-of-the-fittest mentality. It is based on dialectic, right/wrong, either/or patterns that originated in Aristotelian logic. Even though we live in a densely populated, rapidly changing technological world that cries out for systems that foster collaboration, individuals and institutions tenaciously cling to old habits.
Elected representatives, often lawyers, to whom we cede control, sometimes believe that we can legislate ways of treating each other. Mostly for personal or political reasons they often have a knee-jerk response to enact a new rule or regulation in response to a problem. This does not work! Standards essential for a functional social fabric cannot be legislated. What’s missing are the bedrock ethics and values that traditionally were taught by the educational community and religious institutions, and fostered in extended families. These values have become clouded in our me-oriented modern, mobile, sound-bite techno-society.
Because family structures and religious institutions have become so fragmented, we no longer rely on them to provide an education of core values. Many people seek external standards that will tell them what to do. People often have little grounding in collaborative skills. Real partnership flows from within the covenant-type relationships that community, family, and religious institutions have traditionally demanded and fostered. Many people have no role models and sadly, in many instances, don’t know how to treat each other from within a common covenant.
Noted futurist Alvin Toffler has said that “the place we need really imaginative new ideas is in conflict theory. That’s true with respect to war and peace, but also it’s true domestically. The real weakness throughout the country is the lack of conflict resolution methods other than litigation and guns.” Although there had been a great deal of nominal change by way of the ADR movement, the basic premise is still adversarial and Toffler is on track. The problem is caused by both the aspects of today’s conflict resolution system and the way that it is administered. This includes:
• Increase in the body of statuary and case law reflecting the growing numbers of lawyers, and complex transactions requiring regulation.
• Commercialization of the legal tradition fostered by competition and advertising.
• Growing reliance on counselors and therapists who care for our internal conflict and feed our conflict-avoidance mentality.
• Breakdown of trust and the inability to assess the value of, or need for, specific actions that therapists or lawyers take (evidenced by growing malpractice claims).
• Attorneys’ conflict of interest because their practice of hourly billing results in a devotion to process, not results.
• The growth of the contingent fee and a class of cases in which there is nothing to lose by taking a chance.
• The legal, economic, and emotional minefields of the litigation process.
• The myth of finding truth and justice in a courtroom, a myth that has been perpetuated by the role models celebrated on TV.
These reasons are symptoms. They evidence a breakdown in the covenants of trust between people who are members of the same “community.” They point to a lack of communication. People are focusing on themselves. They are concerned about their rights and entitlements without thinking about their responsibilities toward others. This all flows from the win/lose systems and practices that are in place.
Many people are looking for guideposts and rules that will tell them how to treat each other. This requires new practices and new ways of thinking, which are the subject of this book. Before discussing them, let’s examine the cost of doing things the way they are done now. As we review the many different costs, imagine how much more you might accomplish if you could harness the resources expended, the money and energy used in the battle of traditional conflict resolution. Imagine using those resources to produce the outcomes you want.
The Cost of Conflict
The cost of conflict is composed of the following:
1. Direct cost, fees of lawyers and other professionals.
2. Productivity cost, value of lost time. The opportunity cost of what those involved would otherwise be producing
3. Continuity cost, loss of ongoing relationships including the “community” they embody.
4. Emotional cost, the pain of focusing on and being held hostage by our emotions.
It’s important to identify the costs of conflict and examine some tangible examples. Recognizing the cost will, I hope, motivate change as quantifying the real cost demonstrates that there are no winners.
Direct Costs
Because of an inability to face conflicts, many of you spend money you can’t afford on professional gladiators hired to do your bidding. A divorce between two people whose only asset is their home can transform that residence into legal fees. The process brings out the worst in people who thought enough of each other to marry, but now can’t even sit down and talk.
An Empty Victory. The Cobbs were involved in a lawsuit about water run-off and erosion problems that had not been disclosed to them when they purchased a new home from a professional relocation company. What started as their claim for $30,000 to repair water damage and reroute a driveway resulted in a four-year battle with legal fees of over $175,000 and engineering experts’ fees of $25,000.
As the situation escalated, the Cobbs realized they had invested so much in professional fees they couldn’t afford to lose their suit. They had to continue the fight. Mrs. Cobb was increasingly agitated because her husband had pushed the battle forward. The relocation company became more resolute in wanting to prove it was right. The company tied up the energy of its in-house counsel, two lawyers from a litigation firm, a senior company executive, and a real estate broker. All of this energy was focused on something that had happened four years earlier in which no one had intentionally done anything to harm anyone else. The end result was an empty victory. The Cobbs won, but the judge did not award them attorney fees— their only hope of getting even financially because the actual cost to repair the loss was only $30,000.
Sally and Frank. Sally and Frank were married for more than 20 years. While she was not committed to a divorce, Sally was clear that she could no longer tolerate things as they were. Sally finally mustered the courage to tell Frank her vision of the changes needed if the marriage were to continue. Frank became immovable. Sally and her closest friends tried to convince Frank that it was best for them to separate; maybe, during a cooling-off period with some distance between them, they could create a new foundation for their relationship. Frank could not hear the advice of his peers, professionals, or family.
After many unanswered requests for Frank to sit down and work out a solution, Sally filed for divorce. Frank dug in his heels. He cut off financial support. Although Frank was advised that to get the reconciliation he wanted he was better off leaving for a while, he chose to engage in a battle that could have no winners. Frank hired an attorney who mirrored his own attitude. They would not pay one dime or cooperate until ordered by a judge.
Sally and Frank ran up tens of thousands of dollars in lawyers’ fees. Thousands were spent on psychological evaluations by therapists and by accountants who valued Frank’s business. Each side had their own experts, as well as those appointed by the court.
Although part of the current paradigm, these fees are a waste of resources. The amount would have been better spent on setting up new households for Frank and Sally. The experts’ fees could have been devoted to building self-esteem in the present and counseling for the transition. Instead, they were devoted to an already-dead past. For Sally and Frank, a simple process at the outset would have made the situation history.
Productivity Cost
Time is a valuable, limited commodity. When people are focused on rehashing the past, they cannot create and produce value in the present. There are two aspects of this cost—direct loss and opportunity cost. The direct loss is the value of a person’s time—what litigants should be earning but are not being paid because they are engaged in the conflict. The opportunity cost is the value the person might have produced if that energy had been focused on creation and innovation.
Intellectual Property. Two colleagues designed two innovative forms of management “technology.” These processes were significant additions to the knowledge base about personal productivity and leadership. They battled for over a year about who owned the intellectual property they had developed. The productivity loss from their feud was enormous. Instead of giving many students and clients the value of what they discovered, their time was devoted to fighting. That direct loss was their loss in revenue. The opportunity cost consisted of the value of innovations that might have been developed during the conflict, and the value each student might have produced.
Sally and Frank, Part 2. In Sally and Frank’s situation, Frank was focused on the conflict, not on his business; his capacity was diminished during the entire conflict because of his mental preoccupation. To create an example, if he earned $2,000 per week, he was completely out of work for six weeks of court time, and his capacity was diminished by 25% for the two-year period of litigation, the direct productivity loss would be $64,000.
The opportunity cost is harder to calculate, but probably Frank’s attention to the divorce caused him to miss opportunities such as designing new profit centers for his business, capitalizing on special sales of merchandise, or expanding his operations.
Continuity Cost
Continuity costs result from being stuck in the past and include such things as the loss of relationship and community.
Lifelong Friends. Mira and Angela were like sisters. They had grown up together and had married and raised children at the same time. They lived in the same community. They were enriched by the strength of their relationship. Hardly a day went by that they did not spend time together. Their connection was a lifeline, a great blessing for both of them. When their children entered high school, they decided it was time to go into business together.
They were children of the 1960s who had always sparked each other’s creativity. Their lives had never been about accumulating wealth; they just wanted to hang out together. They opened a modern-day general store staffed by pleasant people. The casual mood of the shop was a respite from the cold experience of many retail establishments.
The store was an instant hit. They grew. They added a cafe. They opened a second and third store. Eight years later there were 23 outlets, and Mira and Angela were making more money than they dreamed possible. They got to spend most days together and were very happy. What a life! Their husbands and children joined the business. They were building a solid foundation.
Years before, Mira and Angela had pledged never to let money or possessions come between them. Unfortunately, their husbands had not taken the same vow. Mira’s husband Alberto had worked in the financial services industry. The idea of taking the company public put dollar signs in his eyes. His early investigation revealed that Mira and Angela could each pocket $6 million by selling 40% of the company stock. Angela wanted nothing to do with investment bankers and the close scrutiny that federal regulators would bring. She was very concerned about losing the flavor of what had made them successful. But Alberto was hungry … aggressive … and greedy!
Greed can do amazing things to people. Alberto started to undermine the Mira/Angela team. He created a crack that turned into a huge chasm. Ramon, Angela’s husband, tried to open a dialogue, but Alberto was too headstrong. He was intent on proving he was right, that not taking the company public would lead to its downfall. The mood that had made the company successful was lost. The spark was fading. Profits were falling. Angela stopped talking to Mira because she couldn’t control Alberto. One after another, the stores were closed. Angela and Mira were alone. They never spoke again.
Three Feet of Real Estate. Joanne asked me to represent her in a lawsuit filed by her next door neighbor. For more than 30 years Joanne had treated a three-foot strip of property adjacent to her driveway as if she owned it. Joanne planted flowers and maintained the lawn. On a visual inspection it was obvious that the property belonged to her. One day, however, her neighbor Ruth required a survey as part of a refinancing. The survey revealed that technically the strip was owned by Ruth.
Because the relationship was cordial, I was surprised that no informal demand or letter had been sent by Ruth before the lawsuit. I reviewed the documents and replied to the suit. I suggested that Joanne meet with Ruth to discuss the situation. She agreed, but to Joanne’s surprise Ruth refused to speak about the situation. Her attorney took a similar posture with me. I believed Joanne had an 80% chance of prevailing if we went to court because her long-term use of the land had never been protested. I told Joanne, however, that there was always risk in going to court and it would be wise to make a settlement offer. She agreed to do that. The other side refused to negotiate. We did go to court. The judge suggested a settlement. Again no response from Ruth. We won, but it was an empty victory.
Joanne found out that Ruth was acting on the advice of her attorney, including the refusal to communicate. Joanne could not let go of her anger. She felt like a criminal, even though she never had any evil intent and she had won the lawsuit. Two years later Joanne sold the home she loved. She could no longer stand the anger she felt whenever she looked at the strip of land.
Brother and Sister. Seth and Sarah had a bitter fight over their father’s estate. Growing up, they had been close confidants. And even though distance grew between them because of a geographical separation, they remained devoted to each other. When their father died, however, they had a disagreement about family money that had been given to Seth to invest in a business. Was that money a gift or an advance on his inheritance? They were both partly correct in their positions and were both convinced they could win in court. They both lost the war. Seth and Sarah did not speak for 30 years. At the funeral of their brother Steve, they looked at each other and broke down in tears, knowing they could never regain what they had lost.
Most people do not realize that when a business has to replace a managerial-level employee it costs the organization between 1.5 and 2 times the annual salary to recruit, hire, train, and get a new employee fully functional. Consider that the next time you are thinking of firing someone.
Emotional Cost
Sometimes there are situations you can’t let go of: a fight with a spouse, boss, co-worker, neighbor, friend, partner, or the person who ran into your car. The emotions of anger, fear, and blame grip you and force a reaction that saps your current productive capacity. Instead of going about your business, you are riveted on the injustice done to you and the untoward behavior of the perpetrator. You are consumed with vengeance and desire to punish the wrongdoer. You expend energy on your anger in addition to the loss you already have suffered. All of this energy will never be recovered.
The Revenge of the Past. Randy finally received the promotion he was longing for. That was the good news. The bad news was his inability to focus on his job. He was going through a messy child custody battle with his ex-wife. That stirred up all of the anger he was holding about the past relationship. She wanted to mediate the dispute, but Randy was set on winning. Unfortunately he lost—his job. It was a position that required all of his attention. He missed two important deadlines because his mind was focused on the past.
Sally and Frank, Part 3. Sally and Frank remained embroiled in legal turmoil for almost two years. Sally had to go to court for every ounce of relief: to get Frank out of their marital home, to force him to provide basic support, and to get him to pay the mortgage. She won each little skirmish, but Sally and Frank, and their children, have suffered huge amounts of emotional trauma. Sally and Frank hardly speak to each other; their children are having very difficult teenage years; their respective parents, previously social friends, do not speak to each other; and they were paralyzed in getting on with their lives. They will never be the same.
Major life changes are never easy, but doing legal battle over issues that are essentially emotional is like playing baseball on an ice hockey rink. For the balance of their lives, Sally and Frank will suffer because they would not let go of the past. They will never be friends. Their children are scarred. You can’t put a price tag on these emotional losses, but the cost is huge. What might have been a simple process turned into a situation in which the conflicts escalated and the pain, suffering, and scars are magnified.
Summary
• Current attitudes and systems of conflict resolution foster conflict.
• Conflict is very expensive. It consists of the following, never to be recovered, costs: (1) direct cost—professional fees; (2) opportunity cost—what would otherwise be produced; (3) continuity cost—the loss of relationships and “community”; (4) emotional cost—the pain of being held prisoner by emotions.
• Think about the expensive conflicts in your own life.
• What was the direct cost? The cost of professionals? The opportunity cost? The emotional cost? The relationship cost?
• As you reflect on your situation, think about the different actions and results you might have had if you had taken a different tack.
• How might you do it differently next time? How would your life be different?