Wednesday, September 19, 2012

Everything is about Strength?

Mitt Romney's Presidential campaign is dealing with the release of a bootleg video from a private fundraising event in which he spoke in unflattering terms about many Americans.  Naturally the press is focusing on him calling 47% of Americans victims who he can't hope to persuade to take responsibility for their own lives, but as a negotiator there was a different comment that alarmed me:

My own view is that that the centerpiece of American foreign policy has to be strength. Everything I do will be calculated to increasing America's strength. When you stand by your allies, you increase your strength. When you attack your allies, you become weaker. When you stand by your principles, you get stronger. When you have a big military—that's bigger than anyone else's—you're stronger. [Unintelligible.] When you have a strong economy, you build America's strength. For me, everything is about strength and communicating to people what is and is not acceptable. It's speaking softly but carrying a very, very, very big stick.

There's nothing wrong with strength.  One of the first pieces of advice I give to people is to strengthen their bargaining position.  If you can improve your BATNA (and show your counterparts that it's improving) or worsen theirs, this can greatly improve your outcomes.  I agree with Romney that having a strong military and a strong economy are assets in diplomacy.

So why don't I like what Romney is saying?

It's his conclusion -- that "everything is about strength and communicating to people what is and is not acceptable."  That is a negotiating philosophy that could be very dangerous if applied to foreign policy.

Nations, like people, don't like being pushed around.  When long-term relationships matter and when interests and power are complex, the best negotiators use positions of great strength to create a context for cooperation and collaboration.  Romney's instinct (at least according to this talk) is to use his power advantage to force the terms of negotiation.  This can be effective, particularly in a single negotiation, but the natural response is escalation and resistance.

Have you ever had a boss who consistently used his or her power advantage to force your compliance? How loyal did you feel to that boss or to that company?  How motivated were you to help that boss?

Moreover, you can't always have the upper hand.  That may not be obvious to Romney.  One of the ways private equity firms like Bain make money is by identifying situations where a particular stakeholder in a company is capturing more value than their negotiating strength merits.  The most obvious form is when a company's workers are being paid more than alternative labor sources, whether those alternatives are unemployed local workers or overseas.  In those circumstances, the private equity firm can buy the company for what it's worth under the current distribution and then increase its value by renegotiating.  These negotiations are typically not aiming for "collaborative" and instead might take the form of, "We're firing you all, but you can reapply for your jobs with much lower pay."

Whatever you think of this tactic, it's important to note that private equity companies get to choose their battles.  If there isn't a big mismatch between what a company's workers are paid and the alternatives then the private equity firm moves on and looks for a different company to buy.

Presidents don't have that luxury.  Even a nation as powerful as ours will regularly negotiate with counterparts who have significant power with which to advance their interests.  An approach to negotiation based around superior strength enabling one to dictate terms -- our way or the highway -- is a hammer in a world full of non-nails.

Consider the first Gulf War.  Jim Baker's assembly of a world coalition against Saddam Hussein is one of the more impressive diplomatic accomplishments of modern times.  He accomplished it not by dictating terms but by dealing with allies on balanced terms.  Mutual interests, value-creating trades and problem solving were his primary tools; not a big stick that let him tell them what was acceptable.

Finally, some forms of strength have a cost.  Wanting a strong economy is almost an empty statement unless you can find a President who wants a weak one.  Standing by our principles is something I applaud and I'm glad to hear Romney say it.  Having a strong military certainly has its uses, but it also has significant costs.  There's the obvious financial cost, but there's also the policy cost.  History shows that it's extremely difficult to have a dominant military without using it.  Just as Republicans correctly point out that government has a much easier time starting a new spending program than closing one down, our military does not only serve to punish bad actors or to protect our core interests.  It inevitably comes to the forefront of policy options and becomes entangled in our external relations.

Even when we don't use our military, it functions as an implicit threat that naturally invokes resentment rather than trust.  This isn't unique to us; a study of history finds that the neighbors of any great military power tend to view it with suspicion.  If one side arranges things so they always have the option of force, the other sides are having it arranged to that force can always be used against them.

Of course, this is one snippet from a fundraiser, and I'm adding my own interpretation.  Perhaps by "communicating what is and is not acceptable" Romney merely means that attacks on U.S. interests won't be ignored and I should emphasize his discussion of values.  At the same time, I can't help but think that if someone came to the negotiating table brandishing "a very, very, very big stick" I'd start looking for other partners or a stick of my own.  Foreign policy is negotiation; if Governor Romney becomes President I hope he has a broader repertoire of negotiation tools than this one clip suggests.

Saturday, August 25, 2012

Kickstarter and Deal Design

One of my favorite web startups is crowd-funding leader Kickstarter.  The core idea is pretty simple.  You have a project and need funding.  Kickstarter provides a platform for you to promote your project to people who might be interesting in providing part of that funding, either because they love the idea or because of tangible rewards you offer.  (Many Kickstarter projects are funded with what amount to pre-orders of the game, book, film, art, etc.)  If you get funded, Kickstarter collects a commission.


This is a pretty straightforward value proposition.  Kickstarter can be thought of as an intermediary, a virtual place for people who are interested in cool projects to meet with people who have cool projects and need money.  There are all sorts of interesting facets to this site but I want to focus on what we can learn about deal design -- and not just for people on Kickstarter itself.


A key part of a Kickstarter deal is that the project owner specifies a minimum amount they need to raise and all pledges are conditional on that target being met.  If it's going to cost you $10,000 to do your project you can set that as your target.  If your combined sponsor pledges are $10,000 or less then the sponsors are charged and your project goes ahead.  If the pledges are less than $10,000 then the project doesn't go ahead.  (Of course, you're not required to set your target at the cost of doing the project.  More on that later.)

This simple facet offers some substantial benefits.  Most obviously, it reduces risk.  Instead of  investing money up front and hoping to recoup that investment, the seller can pre-sell her project.  Risk is reduced for the buyer, too -- if he sees a project he likes he can make a pledge and then continue to learn about it, potentially increasing (or retracting) his pledge.

A more subtle benefit is the interaction it enables between seller and buyers.  Because a project's sponsorship period lasts for a period of weeks, the seller gets an excellent opportunity to connect with buyers and to customize her offering to their wants.  A conventional product launch requires much more time before feedback from early adopters can be incorporated.  A Kickstarter deal is more like a software project with beta testers providing immediate feedback before the "real" launch.

Third, a Kickstarter approach enables potential customers to see other potential customers.  This can offer psychological benefits for the seller (it's well-documented that people are more apt to buy something that they believe is popular) but in some cases the visibility of other customers creates tangible value in and of itself.

Let's take a step back from the website to see how this approach can be applied elsewhere.  Sadly the deal I'm going to discuss was not successful, but a "Kickstarter" approach increased my chances of success from zero to something reasonable and kept my personal risk very low.

Some years ago I thought it could be very interesting to help young job seekers understand potential career paths.  My concept was to do in-depth video interviews with people at different points along a particular path, exploring the measures of success, the rewards and challenges and how they changed as someone advanced within the company or field.

After consulting with a number of people in the recruiting field I concluded that charging users was a non-starter and that hoping for sufficient ad revenues was dubious and highly risky -- but that companies that recruited a lot of people out of school might pay to be part of the service.  These firms spend millions on recruiting and getting the right people is very important for them.

I refined my pitch and got a meeting with senior recruiting partners at McKinsey and Boston Consulting Group.  I didn't ask them to sign up but rather to explore the concept with me.  They connected me with the right people at Bain Consulting.  Having those three firms interested in the project made it easy to have the right conversations with other leading consulting firms.

During those discussions I got very useful feedback on what each firm wanted.  Each agreed that they wanted a service that included only the best firms their peers.  A small boutique firm could be acceptable if it had an excellent reputation but they didn't want to be alongside second-tier firms.  (This would extend to other fields as well.)  Other wants were varied.  One firm really valued the ability to connect with top students at smaller colleges or graduate programs; another had a laser focus on a very small number of schools and only wanted to increase their presence at those schools.  The service morphed considerably from what I'd first envisioned, becoming potentially more valuable to my clients.

In the end, the project didn't go ahead.  The legal and marketing departments of the firms each wanted a level of control over content that I thought would undermine the project (the recruiters agreed with me) and one of the key firms decided not to go forward.  This was a disappointment, obviously but the approach had made success possible...and all I lost was my time.

In thinking about whether and how to apply a Kickstarter structure to negotiations, consider the following questions:

1. How useful will it be to get indications of interest from potential counterparties?  Are people more likely to be interested if they see that their peers (or rivals) are interested?
2. How valuable do you think feedback will be and how can you set things up to get the most useful feedback?
3. How do you close the deal?

The last question is important, because it's very easy for a Kickstarter-style conversation to keep moving forward but never cross the finish line.  Kickstarter deals with this in the most obvious way; it has a deadline.  Unsurprisingly, projects tend to get most of their pledges shortly after launch and right as the project closes.  Think about how you can convert interest into closure.

Kickstarter within a Kickstarter?

I'm going to end with an anecdote that I think illustrates not only the power of the Kickstarter approach but more generally how useful it can be to think openly about deal design and negotiation.

I was working with a client on raising equity investment for a start-up business.  He had a good team and an exciting initial product that had the potential to be a home run success but also entailed considerable risk.  He had found a group of angel investors that were ready to put up the seed money, but only at a valuation he couldn't accept.  He needed a way to increase the perceived value of the deal.

We discussed Kickstarter and unsurprisingly he was already planning to use it in his launch.  The snag was that Kickstarter alone was unlikely to meet his full funding needs, creating a risk that even a successful Kickstarter launch (say, one that raised a third of what he needed) would create fundraising problems because he would need to raise the rest of the money quickly enough to continue product development aggressively.

My suggestion was to pitch an investment agreement that would be contingent on the Kickstarter launch hitting an ambitious target.  That is, the investors would agree to a more favorable valuation (i.e. get a smaller piece of the company) but their investment commitment would be contingent on a Kickstarter result that would merit that higher valuation.  (Contingent agreements like this are often a good solution to different expectations about the future, e.g. how successful a product or company will be.)

Again, this approach does not have to involve Kickstarter itself.  Imagine a start-up that has received interest from a VC firm and from a few potential big clients.  The VCs are reluctant to invest until the firm has at least one large client but the clients don't want to commit to a service from an unfunded startup.  A contingent agreement might be a natural solution; if the clients know that the VC is in if they are, the deal is much more attractive.  (In practice, of course, VCs will often take the initiative in making this happen.)




Sunday, August 12, 2012

Breaking the Rules

One of my most consistent pieces of advice to negotiators is to break the rules.  By this I don't mean the rules of law or of ethics, but rather the self-imposed rules we're often unaware of that limit our choices.  George Perkins refused to think only about the terrible BATNA facing Teddy Roosevelt's campaign and as a result got paid rather than paying out a fortune.  Pat Toomey tried to gain leverage in negotiating the debt ceiling with Obama by changing the no-deal outcome so that it became a credible threat.  Not every move succeeds, but many of the most successful examples of value creation and of value capture involve one or both parties going past the conventional approach.

A reader of the blog sent me the following clip, which absolutely made my day.  It's a perfect example of breaking the rules.  The clip shows the finale of a UK game show called Golden Balls.  During the show the players accumulate money in a jackpot and then in the final round they are presented with a Prisoner's Dilemma.  Each must secretly choose either "Steal" or "Split".  If both choose Split they split the jackpot.  If one chooses Split and the other chooses Steal then he takes the whole jackpot.  If both choose Steal, they get nothing.  Before they decide they get 30 seconds to talk about what they're going to do.


Let's break down what happened.

First, let's review the incentive problem that a Prisoner's Dilemma creates.  Imagine that you're one of the players and you know the other person is going to choose Split.  You can then either choose Steal (and get the whole thing) or Split (and get half).  You're better off choosing Steal.  Now imagine you know he's going to choose Steal.  You get nothing either way.  Thus, Steal can be better than Split but Split can never be better than Steal.  In game theory terms, Steal dominates Split.

Given this, the normal play is to spend thirty seconds persuading the other person to choose Split, presumably with the promise that you're going to choose it yourself.  Each player will pledge to "do the right thing" and then worry that the other one will choose Steal -- and, of course, some of them will choose Steal themselves.

In this case, however, the gentleman on the right broke the rules.  He declared that he was going to choose Steal but promised that if the other player chose Split he would split the money with him after the show.

His move is based on two key insights.  First, the show doesn't have to be the endpoint of the game.  The whole gambit only becomes possible with the recognition that even if the show awards all the money to one player, the players could have a separate agreement to split it.

The second insight is that this particular Prisoner's Dilemma can be broken.  A typical Prisoner's Dilemma requires both players to choose the "cooperate" option (in this case, Split) in order to gain the best combined outcome.  In Golden Balls, however, it only requires one person choosing Split for the full jackpot to be awarded.  This, combined with the ability to offer an after-the-show promise, allowed him to reverse the game theory implication for his opponent.

Imagine you're the player on the left.  You believe that the other player is going to choose Steal.  That leaves you with two choices -- Steal (and get nothing) or Split (and hope that he's honest and will divide the money with you).  Unless you're really angry with the strong-arm tactics or really want to avoid being suckered when he says, "Thanks for choosing Split but I have no intention of sharing the money with you," your best choice is to choose Split.  Instead of the Dilemma pushing you towards a "defect" option, it now pushes you to cooperate.

That leaves one small problem.  People aren't always rational, especially under pressure.  There has to be a non-zero chance that the player on the left will choose Steal either out of anger or confusion or simply because he really doesn't want to be suckered.  Our hero solves this problem by choosing Split in the end!  If his gambit succeeds then the players split the money (which was his intention anyway) but if it doesn't then the other player might decide that he had good intentions all along and agree to split the money as they'd both said they wanted to do.

In my experience, opportunities to break the rules aren't rare -- they are the rule rather than the exception.  The more we can free ourselves of artificial constraints, the more likely we are to find win-win opportunities (or ways to capture value) that would otherwise have gone unnoticed.




Friday, August 10, 2012

Deconstructing an Offer

Today we step out of theory for a bit and look at a very mundane negotiation; the type each of us faces regularly at home and at work.  Hopefully it will be useful for your own negotiations but naturally I'm going to try tying it to a larger theoretical idea.

Part of the renovations of the school next door to my home included putting up a new fence along the abutting side of my property.  At the start of the project there were two fences there; an old chain-link fence on the school side of the line and a wooden one on ours.  The renovation called for the school to replace the chain-link fence with a new cedar fence.

Our fence is both old and, to use a technical term, cheap.  It was already in rough shape and it sustained some damage during the project.  There was an obvious win-win opportunity here; rather than ask the town to fix the damage to our fence we asked them to remove that section entirely so that when the project is complete there is only one fence -- the new wooden one.

As the date of the fence work approached, my wife and I decided we should also look at replacing our fence that ran along the back of our yard to match the new fence along the side.  This also seemed like a natural win-win since the additional cost for the fencing company to add in another section of the same fence they were installing for the school would be significantly lower than for a new job.  (Their crew and equipment would already be here, and they might get a further volume discount on the fence itself.)

As I contacted the fence company, I knew I was missing some potentially important information.  I knew what the new fence looked like and what it was made of, but I didn't know the wholesale cost or the specific product information that would let me get a bid from another fence company.  I wasn't too worried about that, however, since this was easily findable information (and the fencing company would know that).

I would never begin a large negotiation without having that homework in place but for something relatively small it can make sense to move forward and only spend time getting information if it proves necessary.  As with anything, the benefits have to be weighed against the costs.

The initial quote from the fencer was significantly higher than I'd anticipated.  Without having done my homework I was now in that uncomfortable position of wanting to negotiate them down in price while not knowing what would be a realistic counter-offer.

A useful technique in this situation is simply to ask the other party to explain their offer, providing some context as to why it seems high but not making a counter-offer of your own yet.  I told the company that I'd expected a fairly low cost for the this fence given that they would already have their crew and equipment on site and asked them to break their quote down, including detailing the cost of the fence materials (to them) and labor.

This sort of framing is useful in multiple respects.  First, it sets the other party's expectations that this is a competitive negotiation without becoming hostile or aggressive.  Second, by breaking down their bid into material cost, labor and profit it becomes very hard for the vendor to keep their bid inflated.  Any fence company can confirm their wholesale cost (so it's both fruitless and dangerous for them to lie about it) and labor is also hard to fudge.  Thus, when they come back to me they either need a rationale for the original bid (assuming I wasn't just underestimating the fence cost) or they need to come down in price before I even make a counter-offer.

In this case they did both.  The owner explained that because the school project was a public-sector job they had to pay "prevailing union wages" but that she was willing to come down 10% on the price of the job.  Now I was 99% sure that nothing prevented them from having their crew do a separate job right next to the school job and pay them normal rates (even assuming they actually had to pay higher rates for the fence along the school property line) but I didn't want to accuse her of lying.  So how do we get them to lower their bid further?

If a counterpart is telling you something that you think isn't true in order to justify a higher price, see if you can find a decision that makes sense if they're telling the truth but that they would want to prevent if they aren't.  In this case, I answered that I'd assumed that already being on-site would make the job cheaper for them.  If, in fact, it was making it more expensive then instead of having them do the extra fence we would just wait.  I asked her to give me a quote for doing the work at a later date and said that with the time pressure off we could see how we liked the new fence installed and whether we wanted to replace it after all.  We could also get a couple of other quotes before moving ahead.

If, in fact, they had to pay higher labor costs because of the proximity to the school project then this was the rational response on my end.  If, however, they can pay their normal wage rates it's a terrible outcome for them.  They risk not getting the job at all and if they do get it their costs would be higher.  Rather than accusing anyone of lying I created a situation where if they were lying they would correct the lie themselves.

It seems that my initial assumptions were correct; the fence company could indeed pay normal labor rates for the work on our fence and since they were already there they could take a lower margin on the additional work than would normally make sense.  They called back and said they had "figured out a way" that they could handle the wage issue by making it a separate job and their offer now came in at just over half the original quote.  Calls to two other fencing companies confirmed that this bid was more than competitive; no one else would match it.  One guy even said, "At that price I wouldn't make enough money to cover the cost of coming out there."


Friday, July 20, 2012

Yale and the Unions

I usually write about constructive, win-win approaches to negotiation that build trust and lead to sustainable agreements that both sides are happy with.  This isn't just because I'm a nice guy but because in most negotiations that's the optimal approach to take.  Today, however, we're going to look at a negotiation that may well have been won (a term I rarely use with respect to negotiations!) by an application of strong-arm tactics.

Yale University recently agreed a new contract with Locals 34 and 35, representing its office and blue-collar workers.  Both sides, naturally, expressed happiness with the agreement, with Yale's President expressing pleasure at the positive relationship Yale has built with its unions and how Yale will continue to be able to attract top-quality staff and the unions cheering the "unprecedented" raises, maintenance of free comprehensive healthcare, and guarantees of interviews for union employees for new job openings.  Local 35 even got a "no layoffs" clause, which its own members could scarcely believe.

By all outside accounts, the unions -- whose workers are already paid well above the norm -- captured the lion's share of the value in this negotiation.  Yale union workers may now be the best-paid university staff in the nation, with very high job security and unsurpassed benefits.

Some of the success no doubt came from conventional, even value-creating, negotiating tactics.  Yale has had difficult labor relations in the past and has a strong interest in avoiding strikes or street demonstrations.  Yale also wanted a four-year contract instead of three and was willing to pay more in wages to get it.

But there is also indication that the unions may have found an external power lever and used it to great advantage.

Last August the unions backed a slate of Aldermen (all with strong union ties).  The unions called this an attempt to rebalance power between the Mayor and the Aldermen (their view was that the Board of Aldermen was largely controlled by New Haven's Mayor); others called it a union takeover that might lead to the Aldermen acting in the best interests of the unions rather than of New Haven.

In discussing his success, Local 35 President Proto allegedly said, "Right now we control 20 out of 30 seats on the Board of Aldermen.  The University is planning to build two new residential colleges.  Any brick they want to lay down has to get approval from the new supermajority on the Board."

Mr. Proto has said he was misquoted (the newspaper originally modified the quote online and then reconsidered and stated it was confident the quote was correct).  But let's take an academic look at this and do two things.  First, let's assume for the sake of discussion that the unions supported a slate of candidates for Alderman with the explicit intention of holding up Yale by linking the union employment contracts to (ostensibly independent) decisions by the Board of Aldermen over whether to grant Yale building rights for two new colleges.  Second, let's suspend our views on whether this would be ethical or even legal if it were shown to be true.

What remains is a textbook example of one party gaining leverage in a negotiation by securing the ability to harm the other party in an unrelated area.  In simple terms, the unions worsened Yale's BATNA from "strikes and protests" to "strikes, protests, and Yale can't build the residential college buildings it needs."  Worse, for Yale, this isn't a single bullet.  Yale will presumably need regular approval from the Aldermen for various developments.  A four-year contract may provide some breathing room, but I would expect to see Local 35 workers getting a high percentage of construction jobs on new contracts.

We tend to look at negotiations somewhat in isolation.  That is, while we're aware of potential effects on relationships and reputation we tend to think about each negotiation as a self-contained exercise that focuses on the interests relevant to what is under discussion.  The negotiation between Yale and its unions is a reminder that we have to broaden our view of possibilities.

That's not to say that we should do what the unions are alleged to have done, but rather that we need to consider a broader range of possibilities.  For Yale, this could have meant recognizing the potential for the unions to add government leverage to the negotiation and looking for ways to mitigate that.  More broadly, however, negotiators need to cast their nets wide when thinking about parties that might be brought to the table, levers of power that might be pulled (for or against them) and tactical and strategic moves the other side might be considering.  I'll be looking at some examples of this in the coming weeks.







Wednesday, July 18, 2012

Mitt Romney and the Power of Norms

Mitt Romney is coming under increasing pressure to release more than just two years worth of tax returns.  Traditionally, Presidential candidates release around twelve years of returns but Romney is arguing that this is no longer sound.  During an interview with NBC in Pittsburgh he explained:

My experience is that the Democratic Party these days has approached taxes in a very different way than in the past. Their opposition people look for anything they can find to distort, to twist, and to try and make negative, and I want to make this a campaign about the economy and creating jobs. And they want to make this campaign about attacking people and diverting attention from our job picture in this country.


Let's take Governor Romney at his word.  That is, let's assume that there is absolutely no impropriety in his returns and that his only reluctance to release them stems from a belief that opposition research by Democrats has become particularly nasty in recent years.  If that's his sincere view, what's wrong with his approach?


It violates norms...those powerful, often-unwritten rules that govern the behavior we expect from each other.  When someone violates a norm we tend to have an immediate and emotional response of mistrust and/or anger which makes it very unlikely that we'll be open to the other party's reasons for doing so.


Enough Presidential candidates have released a dozen or so years of tax returns that it has become expected.  As a result, very few people are open to hearing a rational argument from Romney that he should follow a different path.  He can talk about spin and distortion all he wants; the bulk of the electorate (and the media that filters the news) isn't listening.  As a result, the only reason we will think of for Romney's choice is that he has something to hide.  It looks like he's making a terrible mistake, one that will either taint his perception among voters all the way to November or force an embarrassing reversal.  (It's unfortunate for Romney that he didn't learn from a similar controversy during the primaries, when he originally intended to keep his returns private until closer to the general election.)


Companies are often surprised when customers reject proposals that seem sensible analytically but which violate norms.  Coke and Pepsi floated the idea of soda machines with thermostats that would alter the price of a cold soda depending on the temperature of the day.  Why not?  Soda companies have already established very different price points for sodas that have nothing to do with cents per ounce.  A 20-ounce bottle typically costs more than a 2-liter bottle, and cans and bottles bought in packs cost a fraction of what individual servings cost in a convenience store.  Surely cola customers have fully embraced the fact that we pay mainly for convenience and immediate refreshment than we do for the specific mix of carbonated water and high-fructose corn syrup we happen to drink?

But no.  Testing showed universal dislike for the concept.

Negotiators should be mindful of norms, particularly when negotiating in unfamiliar territory (e.g. in another culture where we may not know the norms) and when we have come up with something particularly clever as a reason to do things differently.  As Governor Romney is learning, an argument can only work if people are willing to listen to it, and clever ideas (like variable pricing for soda) can easily blind us when the underlying problem isn't logic but the violation of a norm.

Consider banks.  Commercial banking has been consistently growing the amount of income it generates from fees, and for the most part its consumers have grumbled but gone along.  The fee too far?  Charging a monthly fee for the use of debit cards.  Similar revolts have been experienced when banks have tried to charge for checking services.

If we look at this from a purely rational point of view, what could be more natural than a service provider charging a fee for a service?  If checking or debit cards had never existed and banks introduced them with a fee then certainly some customers would choose not to buy these services but would any of them be angry at the offer?  Unlikely...but it is now a norm that these services be free.

Now let's look at a pair of moves that, while generating some blowback, seems to have stuck.  Airlines have made two significant moves that both violate long history and thus could easily be responded to as norm violations.  First, they began charging for luggage.  Second, and more recently, they have begun charging more for window and aisle seats.

I think the airlines have probably fared better for two reasons.  First, they had a near-unanimous front.  Both the change to bag fees and reserving better seats for premium fares were initiated by nearly all major airlines at the same time.  Second, while few people are really fans of airlines, it was widely understood that rising fuel costs and economic recession had pushed them to the brink.  As a result, while we may not have liked the changes, we understood them.

As a negotiator I try very rarely to break norms.  Sometimes, however, it's unavoidable.  In those cases, the following guidelines are often useful:


  1. Consider the responses of third parties.  Are their players (e.g. the other airlines) who can help your change become the new normal?  Are their competitors or rivals who may seize on your violation to gain ground?
  2. Get agreement on the underlying problem (or opportunity).  When you propose something that breaks a norm, this helps the other side recognize that you're not breaking it lightly.  Just as important, it gets them engaging in the logical side of the question before the emotional response is triggered.
  3. Openly acknowledge that your proposal would violate normal practice.
  4. Ask the other party for their input, including counter-proposals that might solve the problem without breaking any norms, or additional steps that might address issues related to the norm.
  5. Go slowly.


How might Mitt Romney have used this approach?  I'm not convinced he had a good solution, but his team should have anticipated the response.  One possible approach would have been to start a dialogue about the hit-job nature of modern politics and the trivial issues that often dominate news cycles.  He could have used clips of Obama bemoaning the fact that small issues decide big elections and perhaps some elder statesmen from both parties to help make that case.  Then, when he decided not to release more returns he should have explicitly acknowledged that this was an unusual step and that he understands that some people will think the worst.  (Instead, he appeared combative and arguably arrogant as though asking for more returns was a new and unreasonable demand.)  Finally, he should have discussed his plans and his reasoning with leading Republicans to make sure they were on board; or, if they could not be persuaded, he should probably have given up on this particular fight.

Thursday, June 28, 2012

Know Thyself, Know thy Enemy

Sun Tzu famously said, "Know thyself and know thy enemy; a thousand battles, a thousand victories." Understanding both yours and your enemy's strengths and weaknesses would enable you to choose battles and conditions that favored you, leading to victory even against a theoretically superior foe.

Knowledge of oneself and of one's counterparts (the win-win aspect of negotiation makes enemy a rarely-appropriate term) is just as important in negotiation.  As we've already discussed, the party with superior knowledge can often capture most of the value simply because he or she understands the ZOPA.  Beyond that, however, knowledge is a fundamental requirement for creating powerful options particularly when you can't count on the other side to engage in mutual problem-solving with you.

Chris asked how I would approach her negotiation with "a crazy person".  She had engaged in a number of real estate deals, one of which was done in partnership with a contractor.  Chris had raised financing from friends and family shortly after the financial crisis dried up credit and this had enabled her to buy distressed properties, refurbish them and then flip them.  Most of the deals had gone smoothly and she'd made good money but the partnered deal had been quite challenging.

The contractor was to earn half of a development fee (Chris receiving the other half) in return for managing several sub-contractors for electrical, plumbing, etc.  As she was preparing to close the deal, however, the sub-contractors showed up with liens on the property for significantly larger amounts than had been budgeted.  Her BATNA, postponing closing and potentially losing the sale, was untenable so she'd been forced to pay off the bills.  She then put the development fee in escrow and demanded an accounting from the contractor (showing that the bills were legitimate) before he could collect any of his share.

Her contractor, in theory, was either in a good position (he had a legitimate accounting and could take her to court) or a bad one (he didn't have a legitimate accounting and thus faced losing his fee and potentially criminal charges).  Not really knowing which was the case and not wanting to pursue litigation (as an attorney herself she believed that only the lawyers win this sort of case) she decided that it was in her best interests to make an offer that was bad for her but was contingent on him providing a full accounting.

The contractor hired a lawyer for the case but she stopped returning Chris's calls.  This, combined with the refusal to accept or even to negotiate on Chris's first offer led her to believe even more strongly that he couldn't account for the costs.  But if she didn't want to go to court and he wasn't willing to negotiate, what could she do?

As I talked about the case with her, my first priority was determining what her core interests were.  One could easily imagine in a case like this that a client's top priority would be not being taken advantage of, or forcing the contractor either to produce the accounting or to face criminal charges.  (These interests could arise from personal convictions or a need to protect a particular reputation so future partners wouldn't be tempted to play loose.)  In this case, however, Chris just wanted to get as much money as possible and to put an end to the dispute.

We then looked at the negotiation from the contractor's point of view.  His actions strongly indicated that he didn't have an accounting, which explained why he wouldn't (couldn't!) accept her otherwise-favorable offer.  How could she use that to her advantage?

An obvious point of leverage is that he faces potential criminal liability.  This gives him an incentive to delay (the statute of limitations would eliminate this liability next year) and means that he can't accept any deal that requires an accounting.  On the other hand it means that his aversion to being sued may be even stronger than her aversion to suing (a court could require him to show his books or at the very least award her the whole development fee if he won't) and that a deal that allows him to keep his books private is particularly attractive.

My advice, which she is now implementing, was to give the contractor three options:

  1. A repeat of her initial offer (favorable to him, but contingent on an accounting),
  2. A new offer (giving him much less money but not requiring any accounting), and
  3. If neither offer is accepted by a deadline, she will sue.
Sun Tzu often advised allowing the enemy to retreat:
If you surround the enemy, leave an outlet; do not press an enemy that is cornered.
One of Sun Tzu's points is that a cornered enemy is forced to fight and will gain bravery from desperation.  A similar point applies here; while the threat of criminal liability gives Chris leverage the smart play for her is to give the contractor a way out.  As long as her only offer was contingent on an accounting he couldn't provide he couldn't cooperate.  She needed to adjust her approach to give him an avenue of retreat from what was otherwise an untenable situation.

By adding a "no accounting" option that still gives the contractor a small share of the escrowed money and by making it clear that not accepting either offer will lead to litigation, Chris will hopefully get significantly more money than she was willing to settle for while avoiding a costly legal battle.