Alternative Dispute Resolution: Why It Doesnt Work and Why It Does

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ack in the 1980s, experts and executives alike heralded alternative dispute resolution (ADR) as a sensible, cost-effective way to keep corporations out of court and away from the kind of litigation that devastates winners almost as much as losers. Over the next few years, more than 600 large corporations adopted the ADR policy statement suggested by the Center for Public Resources, and many of these companies reported considerable savings in time and money.

But the great hopes for ADR faded quickly. Damage awards, legal billings, and the number of lawsuits in the United States continued to riseeven for many of the companies that had embraced ADR. In fact, one study found that rather than reducing costs and delays, at least one form of ADRcourt-annexed arbitrationhad actually increased them.

What had gone wrong? Was ADR really just an empty promise? We believed it was not, but lack of success with ADR at so many companies prompted us to take a closer look at how managers were implementing the ADR process.

We found bad news and good. The bad news is that ADR as currently practiced too often mutates into a private judicial system that looks and costs like the litigation its supposed to prevent. At many companies, ADR procedures now typically include a lot of excess baggage in the form of motions, briefs, discovery, depositions, judges, lawyers, court reporters, expert witnesses, publicity, and damage awards beyond reason (and beyond contractual limits).

The good news is that a number of companies have learned to use ADR effectively, and those companies are in fact reaping ADRs predicted benefits: lower costs, quicker dispute resolutions, and outcomes that preserve and sometimes even improve relationships.

At Chevron, for instance, ADR-based mediation of one dispute cost $25,000, whereas mediation through outside counsel would have cost an estimated $700,000 and going to court as much as $2.5 million over a period of three to five years. At Toyotas U.S. subsidiary, a Reversal Arbitration Board, set up to ease contention between the company and its dealers concerning allocation of cars and sales credits, has brought about a steady decline in the number of these cases, from 178 cases in 1985 to 3 in 1992.

What are Chevron and Toyota doing that other companies are not? The difference between success and failure lies chiefly in the level of commitment. Companies that give ADR top priorityeven in cases where theyre sure theyre rightare realizing immense savings of time, money, and relationships. In contrast, companies that let old litigious habits worm their way into the process might as well go back to court.

Few companies have made the commitment to ADR more effectively than NCR (recently renamed AT&T Global Information Solutions). NCR executives made a firm commitment to alternative dispute resolution a decade ago, and the results have been dramatic: the number of the companys filed lawsuits (excluding insured risks) pending in the United States dropped from 263 in March 1984 to 28 in November 1993. Last year, only nine disputes incurred outside attorneys fees exceeding $20,000, and total outside legal feesnot quite $1 millionwere less than half what they were in 1984. Moreover, the reduction in outside fees has not increased the costs of in-house counsel. NCR manages its filed cases with only four in-house lawyers and four paralegals.

Several years ago, in a case in which it did not have an arbitration clause, NCR spent hundreds of thousands of dollars defending itself in a conventional lawsuit and nevertheless lost a multimillion-dollar jury verdict. In the past five years, NCR has paid out less in awards and settlementsand in outside and in-house counsel fees for all of its ADR mattersthan the outlays for that single case.

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