Quentin Hafner

The Economic Case for Improved Workplace Relationship Health

It might be fun, and even feel good, to win a “best place to work” award by creating a culture where people are happy, but at the end of day, businesses are in business to make money.  And the best reason to be concerned with relationship challenges in the workplace is an economic one. When relationships aren’t clicking well in the workplace, it costs organizations a lot of money.  What’s difficult about quantifying workplace relationship challenges is that the economics are hidden.  We don’t see it directly in the P&L, but rest assured, it’s buried in there. Either in diminished revenue, or increased costs. The relational health between managers and employees, and also the relational health between members of management teams and boards, is often a metric that doesn’t get its deserved attention due to the direct impact it has on the bottom line of any organization. Let me share a quick fictional story that everyone can relate with to illustrate how costly relationship challenges can be to organizations.

The story of a CEO & VP of Marketing

Sarah is a CEO of a growing mid-sized technology company.  Her business is growing fast and she has a lot on her plate.  Sarah is busy delegating non-essentials, hiring the right people for a strong management team, and also getting more comfortable making hard decisions.  All the stuff that comes with being a CEO of a growing organization. One of Sarah’s direct reports – Michael, the VP of marketing, was becoming a thorn in her side.  He would undermine her decisions and question her authority in a disrespectful way during meetings.  And she couldn’t understand why. When she tried to address the problem with Michael, he dismissed it as “nothing”.  But the problem persisted.  Was this just his personality?  Did he not like Sarah for some unknown reason?  She tried to talk with him about it, but it never seemed to get anywhere. This went on for a long time.  Too long. Should she keep trying to work it out with him? Could it ever get better? Should she cut him loose and chalk it up to a “bad fit”?  Sarah needed Michael’s contribution as the marketing person and feared firing him would be too costly to the company, but was realizing that she might need to let him go.
This is a common story, or some derivative of a story like this, I hear often in my practice.  Some type of unsolved or unaddressed relationship challenge that is affecting the organization’s bottom line via wasted time and money.  Let’s take a closer look at this fictional story and examine the associated costs of a simple, but common type of relationship challenge in the workplace.

Costs Associated with Lost Time:

Sarah’s Sunk Time:

If we look at this story in hindsight of a 90-day timeline, we could reasonably estimate that Sarah spent approximately 5 hours per week thinking & strategizing about how to deal with her situation with Michael.  If we attach a $500/hour figure to Sarah’s time, we could safely conclude that Michael being a thorn in Sarah’s side cost her $30,000 of invaluable, but wasted time.

Michael’s Sunk Time:

This relationship challenge was also a real cost to the organization for Michaels time.  Because he and Sarah weren’t clicking, he was having to spend time dealing with this problem and was asked to meet with Sarah to resolve it.  We could reasonably estimate it also cost Michael about 5 hours per week over the preceding 90 days dealing with Sarah around this challenge. If we give Michael a $200/hour wage, we could safely estimate the organization spent $12,000 on Michael’s salary over a 90-day period to deal with this relationship challenge. 

Management Team Sunk Time:

Because Sarah and Michael shared their relationship challenge in public for the rest of the management team to witness, there was also time spent by other members of the management team talking about, thinking about, and strategizing with one another on how to deal with or help the problem between Sarah & Michael.   We could safely and conservatively estimate that another 5 hours per week in total for all other managers were spent dealing with this issue between Sarah and Michael. And another sunk cost of wasted portions of salaries of $12,000 for members of the management team in 90 days. 

Opportunity Cost for Time:

It’s essential to note that in the figures of lost time for Sarah & Michael & the others in the management team over the prior 90 days,  not calculated in this figure is the opportunity cost for both Sarah & Michael, and the management team with loss of creativity, loss of strategic thinking, loss of business planning, loss of leadership team building, etc., loss of new marketing initiatives, and the emotional toll/energy drain this benign relationship challenge was also costing the organization.  There are ways to calculate the opportunity cost of this type of relationship challenge, but for the sake of this simple illustration, we’ll leave it at the real hours spent dealing with the problem; $54,0000.

Potential Cost to Terminate Michael:

If Sarah can’t solve the challenge between her and Michael, the time requirement to the organization dealing with it will likely escalate and become an increasing real cost and distraction for everyone involved.  So naturally, when leaders encounter relationship difficulties like this, the simple answer seems to terminate someone like Michael. But we know that firing someone, and rehiring for that position is an incredible expense to the organization and a decision that can’t be taken lightly. However, if Sarah did decide to terminate Michael, we could make some reasonable, and conservative real expenses to the organization for such a decision:
  • Reduced marketing initiatives (opportunity cost)
  • Lost productivity & decrease in sales revenue (opportunity cost)
  • Diminished morale throughout the organization (opportunity cost)
  • Decreased employee engagement company-wide (opportunity cost)
  • Potential other loss of employees loyal to Michael (opportunity cost)
  • Severance package (real cost)
  • Hiring bonuses (real cost)
  • Relocation costs (real cost)
  • Legal fees (real cost)
Only looking at the real costs of terminating Michael and hiring his replacement could be conservatively estimated to cost the company $100,000. So, in this simple fictional story where two senior leaders are experiencing unresolved conflict and a potential termination is being considered, it could potentially cost the organization $164,000.   Anyone reading this story having worked in a corporate environment can relate to how common relationship challenges such as this exist in the workplace.  The energy drain, the distraction, and the wasted time on something such as this, surely isn’t the highest and best use of company resources; both in terms of real capital and human capital.  The interesting part about the fictional story described above is how benign it seemingly is, but yet how costly it is.  What about the relationship challenges that exist in other organizations that are more dysfunction, and more toxic, and go on for years instead of a 90-day period?  What about the dozens of relationship challenges that exist at the same time, across the organization, or even in the same department? What are the real costs and the opportunity costs to those organizations for those types of dynamics?   I think we might all cringe at the sums of wasted time and money, as well as the lost revenue opportunities, on people problems. More than ever leaders are busy.  They have important high-level work to do, and dealing with relationship challenges isn’t top on their list of priorities.  But they have to be dealt with, or else they have a way of usurping the more important work of leaders, and costing companies an enormous expense.  There is a lot of talk in leadership circles today about creating great places to work.  Creating great cultures. Empowering people. Improving engagement. All of that stuff is wonderful, but what’s really important is how creating great cultures and great places to work, is directly correlated to the overall relational health that exists inside the organization. It’s all about how well relationships are thriving inside the organization. And the overall relational health inside the organization directly translates to the overall economics of the company.  When people problems are present in an organization, as mentioned in the simple story above, it means real dollars spent, and in impact to the organization’s bottom line.
  • How would you describe the relationship dynamics inside your organization?  
  • Are relationship challenges costing you money?
  • Or are relationship challenges keeping you from missed opportunities?
Keeping a finger on the pulse of the relationship health inside the organization is a characteristic of an effective leader. Because they ultimately know the impact it has on the bottom line.  If you’re a leader and you’d like to take a closer look at how relationship challenges may be keeping your organization from optimal performance, consider doing an organizational relationship assessment, or begin a coaching relationship to discover the areas of relationship dynamics inside your organization that are costing you time and money.   It will serve your bottom line, and help you get back those much-needed and precious emotional resources too.


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