Wednesday, September 14, 2011

Own Your Mistakes

I started this blog while at an executive negotiation class at Harvard Business School.  It was a fantastic opportunity to negotiate with professional investors from around the world, and I take real pleasure in the fact that in all of my negotiations I reached agreements that created the maximum value possible (in one case my group was the only one that did) and captured significantly more of that value than average.

All of them but one, that is.  In one simulation, I failed to reach a deal at all.

The negotiation involved three entrepreneurs who had formed a very loose ownership agreement when they started a new venture.  A few months in, one of the founders (me, in the exercise) concluded that he was working harder and contributing more that was reflected in the original agreement and that this should be reflected with a higher share of equity.  He initiated a renegotiation, sending a proposal to his co-founders which formed the starting point of the exercise.

Our discussion didn't go well.  One of the other co-founders was keen to make a deal but the other wasn't.  He made demands that we couldn't meet, said things that were frankly insulting (always interesting in a simulation!) and ignored our responses.  As an example, one of the topics for discussion was his salary (the other co-founders were working just for equity) and neither of us could agree to anything above $110K as we didn't think the venture's cash flows could handle it.  Even after we'd made that clear he was proposing deals in which he got paid $150K.

Near the end of the exercise it looked like we might be able to reach a deal, but at the last moment he said he couldn't agree to what was on the table and we "agreed to disagree".  Upon returning to the class

My initial reaction was to blame our difficult partner.  This was reinforced as we learned more about the other roles and it became clear that salary -- what he had made the largest demands about -- was actually his least important interest and he'd failed even to bring up his most important one.  Small wonder we couldn't create enough value to reach agreement when a key player was giving poor information.

Unfortunately, life is rarely so simple.  Negotiations is a complicated endeavor and one where we rarely, if ever, get a precise read on how well we did.  For this reason it is vital that we review our negotiations candidly, gathering new information if possible and evaluate our performance as objectively as possible.  Most of all, we have to own our mistakes.  That's why I always review and analyze my negotiations to see what went well and, in particular, what I should have done differently.

In this case I did at least a few things wrong.  Foremost, I was in too aggressive a mindset.  This exercise, the second in the class, came immediately after a review of a solo exercise in which I had paid $70K for an asset on which the median purchase price was over $200K.  Our negotiation had been discussed in class and I judged (correctly) that in the next exercise my counterparts were going to be aggressive in order to avoid a similar result against "the tough negotiator".

Because I was gearing up for a fight, I didn't put as much thought as I normally would into understanding where my counterparts were coming from, something that is key to successful negotiation.  Afterwards I would blame our difficult partner for not raising his key issue but normally I would have figured it out ahead of time and been able to raise it myself.

In negotiations it is generally preferable to take an aikido approach.  If someone is being aggressive, don't meet that aggression head-on.  Doing so makes irrational escalation more likely and makes it harder  to work together to create value.  Instead, disarm him with a lateral move.  In this case if I'd put myself in his position I would have realized that he was feeling like an employee rather than a partner and that "my" initial proposal emphasized that.

Imagine that you're feeling unappreciated and are gearing up for a tough negotiation against a hard-nosed bargainer.  Imagine that he begins by saying that he tried looking at the situation from your side and realized that if he was in your position he would feel taken for granted.  He wants to start the discussion by asking if that's the case for you, apologizing for it, and then asking what factors are most important to making you feel good going forward?

Another mistake I made was in my orientation to any final deal.  As we discussed here, the value you capture in negotiations that involve ongoing relationships are a combination of the tangible factors covered in the deal itself and the intangible consequences of how your counterparts behave in the future based on their own sense of the deal.

In this exercise, three entrepreneurs were agreeing on principles of fairness and value distribution...but what value was being distributed?  The equity of the company!  This is far from a fixed pie; if we reached a deal but ended up not wanting to work together, we'd each end up owning a slice of nothing.  Even in a class exercise this should have affected my approach.

One of the most common forms of human bias is thinking we've performed better than we have.  A famous example is car drivers.  In one survey, motorists were asked to rate their own driving skill on a scale of 1 to 5 as well as the average skill of other drivers.  Other drivers came in at 2.7, while drivers rated themselves 3.9.  Unfortunately, this self-delusion can be extremely costly when it prevents us from improving.  A tough self-assessment in which we explicitly look for our own errors is one tool to help us resist it.

1 comment:

  1. I love it! This is humility expressed in other terms. I appreciate this message. Thank you.