ADR Dispute-WiseSM Management Study Reveals Positive Economic And Non-Economic Outcomes Of Effective Conflict Management

Thursday, April 1, 2004 - 01:00

Richard Naimark
American Arbitration Association

For more than half a century, there has been steadily growing acceptance of and trust in the processes of alternative dispute resolution (ADR) - primarily mediation and arbitration. Acceptance has been driven by growing executive sensitivity to the importance of preserving valuable business relationships, and an increasing determination to steer clear of costly litigation when dealing with business disputes of virtually every kind.

Businesses of all sizes are opting for a wider palette of strategic dispute resolution mechanisms - and accruing measurable benefits - according to a new study sponsored by the American Arbitration Association (AAA). Commenced in February 2003, this major research study in the area of ADR, entitled "Dispute-WiseSM Management: Improving Economic and Non-Economic Outcomes in Managing Business Conflicts," investigates the practices, attitudes, and experiences of a broad sampling of corporate legal departments from Fortune 1000 companies, mid-size public companies, and privately-held businesses in their use of non-judicial dispute resolution.

This pioneering study on the links between ADR and positive corporate outcomes shows that a company may enjoy greater benefits by taking a strategic, multi-faceted approach to managing the body of existing and future disputes rather than by aggressively litigating each case. It also demonstrated that companies taking this approach can effectively maximize the output of their legal staff while at the same time minimizing their legal department costs.
The Shape Of The Study

Conducted by an independent market research firm, the study involved telephone interviews with 254 corporate general counsel, associate general counsel, or people in similar positions of seniority within legal departments. Interviewees were drawn from:

101 Fortune 1000 companies with mean annual revenues of $9.09 billion,

103 mid-size public companies with mean annual revenues of $384 million, and

50 privately-held companies with mean annual revenues of $690 million (most had revenues of less than $1 billion).

The study is one of the few empirical studies in the dispute resolution field since 1998 when David B. Lipsky and Ronald L. Seeber, both professors at Cornell University, published The Appropriate Resolution of Corporate Disputes: A Report of the Growing Use of ADR by U.S. Corporations. The 2003 study takes a fresh look at the arbitration and mediation usage trends discussed in the Cornell study. Most importantly, it went a significant step beyond the earlier study by posing two critical questions:

Can companies that might be characterized as "dispute-wise" be identified, and if so, what are their characteristics?

Is there any relationship between "dispute-wise management practices" and favorable "outcomes" of both an economic and non-economic nature?

In brief, the study identified an index of eight particular traits that characterize the legal departments of "dispute-wise" companies (see table). In addition, the survey found that there are, indeed, a number of specific benefits associated with dispute-wise business management practices along with some interesting parallels between dispute-wise management and specific economic benefits.

The survey asked each respondent to rank the defining characteristics of dispute-wise behavior in terms of how his or her own legal department handles disputes. Interviewees gave each item a score from one to 10, with 10 indicating "describes my legal department very well."

Thus, the scores for each respondent's legal department for the eight-item dispute-wise management index could run from eight to 80. When the scores were tabulated, the results were divided into three tiers: "most dispute-wise" (35%), "moderate dispute-wise" (32%), and "least dispute wise" (33%). Interestingly, it was found that each level of dispute-wise behavior was distributed fairly evenly across companies of all sizes and industry types.
Defining A Dispute-Wise Corporate Legal Department: Survey Results

Companies which have what the research found to be "most dispute-wise" legal departments stand to fare better in two important respects as compared to their "least dispute-wise" counterparts. They experience lower internal legal department overhead costs, and their risk management program is enhanced because they benefit in demonstrable ways from a set of dispute-wise practices in the handling of conflict.

The attributes of ADR, by their very nature, encourage the use of a "portfolio approach" to disputes. Such an approach recognizes that "winning" should be measured by how well the organization manages over time the overall total economic and non-economic impact of the full array - or portfolio - of disputes it faces across all facets of its business. Moreover, the utilization of a portfolio approach appears to be a differentiating characteristic of well-managed corporate legal departments, one that is very much in tune with other risk management practices in what are generally considered well-managed business organizations.

Typical of the portfolio approach is a willingness to take a more global view of the full spectrum of an organization's disputes - addressing each of them in relation to other disputes in the portfolio with an overall goal of minimizing risk, cost, time spent, and resources expended, while preserving important business relationships. Pragmatic and efficient, this style of conflict management - which the AAA came to think of as "dispute-wise business management" - represents a continuing evolution in attitudes toward conflict management, one that encouraged a very positive reappraisal of the value of ADR techniques among those who have adopted it.

The study suggested that even in contentious situations where a favorable judicial outcome was likely, winning was not necessarily always the primary goal. If the use of ADR methods or outright settlement were likely to lessen risk and expense, conserve scarce corporate legal department resources for higher priority matters, and help maintain good (and expensive to build and maintain) relationships with customers, suppliers, and employees, then perhaps resolution through America's contentious, costly, and over-burdened court system was to be avoided.

It is clear that the impetus for a dispute-wise orientation often receives support from the top of an organization. A dispute-wise company's legal department is more likely to be highly integrated into the general corporate planning process and have an understanding of the broader business issues facing the company and its industry. It works in an environment where senior management is focused on preserving important or strategic relationships rather than just "winning cases" through an aggressive litigation posture in each and every dispute.

Dispute-wise legal departments also spend a good deal of time on highly complex and technical issues and are often heavily involved in cross-border, international issues (the apparent goal being to avoid the risk involved in the uncertainty of judicial processes outside the borders of the home country). That same department, however, is less likely to view its role as being focused primarily on reviewing contracts and agreements.

Companies falling into the "most dispute-wise" group have significantly lower average in-house legal department budgets than those of companies in the "least dispute-wise" group. The "most dispute-wise" companies appear to manage their in-house legal department costs with greater efficiency. In addition, the study found that despite lower legal department budgets, leaders of legal departments in highly dispute-wise companies are much less likely to describe their groups as lean or stretched to the limit - a common complaint heard from legal departments.

Survey data indicate that the lower mean legal budgets that the most dispute-wise companies enjoy can be attributed primarily to lower in-house legal expenses. At the same time - among respondents with three or more full-time attorneys in their legal departments - the "most dispute-wise" companies have, on average, more full-time attorneys in their legal departments than the "least dispute-wise" group. All of this suggests that the "most dispute wise" companies - with larger staffs and lower in-house legal costs - make use of a wider range of dispute resolution options and manage their legal departments far more efficiently than those legal departments characterized as "least dispute-wise."

In addition, dispute-wise management practices, the survey found, are quite clearly associated with positive business outcomes. Among the key benefits that accrued to the "most dispute-wise" companies were stronger relationships with customers, suppliers, employees and partners, those relationships being described as "excellent" or "very good."

The research also examined the use of and attitudes toward mediation and arbitration for the entire group surveyed. Among the key findings, "most dispute-wise" and "moderately dispute-wise" companies tend to use arbitration more than those in the "least dispute-wise" category, while the use of mediation is fairly consistent across the three groups. Mediation and arbitration are most likely to be used for commercial contract and employment disputes.

The overwhelming majority of all companies surveyed say they use both mediation and arbitration, but mediation is favored somewhat over arbitration. There is modestly greater use of mediation and arbitration among Fortune 1000 companies than in mid-size and private companies, and the primary reasons for using mediation or arbitration include saving money and saving time. Similarly, the majority of those surveyed believe that both mediation and arbitration do indeed reduce the time needed to resolve disputes and also reduce costs, excluding judgments/ awards. Respondents are fairly evenly split on whether mediation and arbitration have any effect on the dollar value of final judgments/awards. However, less than one in ten believe that mediation/arbitration increases judgments/ awards.

The vast majority of companies are satisfied with their recent experience with both mediation and arbitration. Companies report using mediation because it allows parties to resolve disputes themselves, and they also report modestly higher satisfaction with mediation than arbitration, perhaps because the parties themselves reach agreement in mediation. The AAA is the preferred private provider of arbitrators, and no one source dominates for mediators.

The survey results offer substantial business reasons for senior corporate executives to reexamine both the strategic orientation of their legal teams and their day-to-day approach to conflict management.

Richard Naimark is Senior Vice President of the American Arbitration Association. Please visit our website at www.adr.org to download the Dispute-Wise Management Full Research Report.