Wednesday, January 28, 2015

Context is Critical

Note: I'd like to start by thanking the people -- many of them relative strangers -- who have expressed enjoyment with this blog and asked me to start writing again. A large part of my absence has been due to the fact that I've been heavily involved in negotiating a major business agreement that has been confidential. As you can imagine, it's hard to find inspiration to talk about negotiation while being unable to discuss the specifics you're focusing all your energy on.

That deal has come together and we will have a big announcement coming in about a month, after which I'll be able to share some of the fascinating experiences and lessons of the past years. But in the meantime, I've lifted my head up out of the weeds long enough to work on some other topics that I'd like to discuss. Today's post is the first.

Negotiation analysis often focuses on the parties and their interests & tactics. In many cases, however, the decisive factor in how a negotiation plays out is the context or environment in which it happens. This is particularly important to note because we can often affect that context, either during a negotiation or before it even begins.

To illustrate a harmful context, let’s look at a case I mediated a couple of years back. A young woman had worked as a live-in nanny for a professional couple, watching their child and helping out around the house in exchange for room & board plus a modest salary. The relationship had been good for a couple of years but had ended abruptly for reasons that weren’t entirely clear, and there was a dispute over whether the nanny was given sufficient notice or should be paid a couple of weeks of extra money (around a thousand dollars).

The nanny wrote to her consulate who wrote to the couple asking that they consider her viewpoint on the monies owed; as an afterthought the consulate suggested to the young woman that she consult with a labor lawyer and referred her to a non-profit organization that takes low-income labor cases pro-bono.

And so we ended up in small claims with her demanding over $5,000 and no interest in settling for less. A dispute that should probably have been settled fairly easily with a good chance of the parties leaving on good terms instead went to court and left both parties hating each other.

So what happened?

The biggest contributory factor was probably a Massachusetts law designed to protect workers from abusive employers. It states that if a court finds that an employer has improperly held back wages, even for $1, the employer is liable for triple damages and must pay all reasonable court costs.
The arguments in favor of such a law are easy to see. Employers often have an advantage in both power and knowledge over employees, and cynical employers might choose to cheat employees of small amounts on a systematic basis, counting on the amounts being too small to chase. (There is a similar law in place for landlords that improperly withhold security deposits, although I don't remember if that adds court costs to the triple damages.)

I imagine the law is supposed to work as follows. Worker is owed $1,000. Worker sues in small claims court. Employer (knowing the claim is legit) realizes that fighting it will cost them $3,000 plus attorney fees for both sides and agree to pay the full amount -- and, ideally, invents a time machine and goes back to tell him or herself not to cheat in the first place. Deliberate bad behavior is made riskier and small claims are more likely to be settled than tie up court resources. And maybe, just maybe, we get a time machine.

Now, let’s do some analysis. You have a legitimate claim for $1,000. If I give in to your claim, that’s what you get. If I fight your claim, you get $3,000. Are you looking for me to settle or are you looking for a fight? Your incentive is to fight.

Now, what might you do in such a circumstance? Inflate your claim.

Let’s say you add $4,000 of nonsense to your legitimate $1,000. Now the other party can’t just agree to your claim and pay $1,000 – they have to pay $5,000 or else go to court. Add to that the fact that they have to pay attorney costs and they might well choose to pay the whole five grand. (In this case the lawyer was only pro-bono if they lost or settled the case; if it went to court and won she would charge the defendants a full hourly rate.)

Under her lawyer’s guidance, the nanny brought much more to court than just some end-of-employment hours. Her lawyer went back over her entire employment history with her looking for any area they could argue she was owed money. Some of her claims were reasonable; in particular the lawyer identified that their contract wasn’t consistent with MA law and that she was owed small amounts of overtime for most of her employment.

Others were less reasonable. My favorite was the invitation to spend Thanksgiving dinners with the family; her lawyer argued (without evidence) that she couldn’t refuse these without jeopardizing her employment, that by being at the table she was watching the children (i.e. working) and that after dinner she helped clean up. (To her credit, the nanny looked embarrassed when her lawyer made this particular argument.)

The bottom line is that the law created an incentive for plaintiffs to be aggressive and less than honest. This then compounded with the emotional side of the dispute since naturally the employers were furious to hear that their former nanny was demanding overtime compensation for being invited to dinner. During private sessions the couple said they would rather go to court, lose and pay $15,000 than just give in to unfair demands.

Laws that (arguably) over-protect the little guy aren’t the only way that legal context can sour negotiations. I spoke recently with a professor of Mediation at Harvard Law School who described the failures the “Alternative Dispute Resolution” movement had had in trying to bring mediation to poor nations. They hoped to provide a venue for poor individuals to resolve claims but found that without a working legal system as a fallback the more powerful parties had no incentive to negotiate in good faith. Whereas in my mediated case the law had created "too good" a BATNA for the plaintiff, in countries with little rule of law their BATNA was too weak, meaning they had no leverage to bring the other party to the table for a serious discussion.

What can we learn from this in our own negotiations? Simply put, the environment and context matter – and we need to be aware of them.  The examples I gave above were both about legal context but the principles apply much more generally.

If you’re in or about to begin a negotiation, ask how the context affects the incentives for both sides. Does it encourage one or both parties to seek confrontation – or to be unduly afraid of it? How does it affect each party’s BATNA?

It’s also worth asking how your actions may alter the context, for good or ill. Including a neutral third party in a discussion may encourage better behavior (e.g. for reputation reasons) but could also create problems (e.g. if you're seen to be going over your counterpart's head).

Thinking about how you can influence context is particularly important for organizational leaders, and one that in my experience if often neglected. Here we shift from thinking about context as a factor for a single deal to thinking about how to create a healthy environment for negotiation and conflict resolution generally. Many of the same lessons apply. Are people encouraged (both culturally and in terms of incentives) to raise and discuss conflicts or competing interests? Does the context provide enough of a BATNA option to push reluctant parties to the table but not one that rewards overly aggressive or dishonest behavior? These aren't always easy metrics to assess, so if you're in a leadership role you should evaluate carefully. Consider some of the following options:

  • Look at how internal negotiations have played out
  • Put yourself in the role of various people and ask how you would feel about approaching a particular conflict
  • When talking with staff, take the time to ask about their experience with internal negotiation and/or conflict resolution
The same sort of longer term, strategic analysis can be very useful in improving results within long term relationships. If you have a partnership -- whether business, personal or something else -- where conflict resolution or negotiations are consistently frustrating it may not be a problem with interests or personalities. It may be a contextual factor that is blocking your discussions.

Ultimately, whether you're focusing on a single discussion or looking to make a strategic shift in the way negotiations happen, remember to include context in your analysis. In its own way, it's as important as any other factor in determining how a negotiation plays out.