Ultra-competitve mindset costs dealmakers

Deepak Malhotra (co-author of "Negotiation Genius," one of last year's top 5 books) and colleagues have once again dived into the psychology of negotiators and dealmakers in May's Harvard Business Review ("When Winning is Everything").

They find that certain factors present in many deals can drive irrational thinking and, ultimately, overpaying for acquisitions. The factors are:

1. Rivalry - animosity toward a competitive rival for an acquisition, say, can create a "win at all costs" mentality.
   
2. Time Pressure - racing to meet a stated or internal deadline can lead to accepting a poor deal
   
3. The Spotlight - if people are watching--coworkers or the public--a dealmaker may act less rationally than if the spotlight were off.
   

Malhotra et al write: "Rivalry, time pressure and a bright spotlight can each fuel competitive arousal. Collectively, they can lead to decision disasters." They point to the Boston Scientific acquisition of Guidant and Viacom's purchase of Paramount as two costly examples of this type.

What to do? As in "Negotiation Genius," Malhotra urges dealmakers, first of all, to be aware that these factors exist. Mere awareness of a feeling of time pressure is a tool to prompt reflection: "Is there a reason this has to be done this week?" Almost always, the answer is no. The world won't end if the deal is delayed.

As for rivalry and the spotlight, companies can put approaches in place to manage them. Often, it means spreading the responsibility among teams of dealmakers rather than allowing individuals to shoulder the entire burden. [Microsoft might have managed the recent Yahoo engagement better if it had not allowed it to become Steve Ballmer's deal.]

Malhotra and his colleagues are probing into new and important territory in business research. By bringing behavioral economics and psychology into the forefront of dealmaking and negotiation, they are providing a valuable service to businesspeople everywhere.

Most refreshingly, their focus on the costs of dealmakers' irrationality and aggression is a welcome antidote to the lionizing of ultracompetitive CEOs and moguls elsewhere in the business press.

(Photo: a still from the infamous Steve Ballmer monkey dance)


Related posts:
"The Best Negotating Book I've Ever Read"

Tags:
negotiation, psychology, dealmaking, competition, irrationality,
Harvard Business Review

Don't let negotiating counterparts overcommit

The most useful part of Danny Ertel and Mark Gordon's recent book "The Point of the Deal," to me, is this lesson: in a negotiation, if you convince the other side to do more than it can reasonably deliver, you have not won anything. More likely, you have set up the project for failure.

It's easy to say "it's their problem" when the counterpart agrees to a concession that you demand. But if the concession causes long-term issues for the counterpart, eventually your company will suffer.

Here's an example: when I was a product manager, we sold a usage-data collection product to a large wireless telecom carrier. It turned out that the service level that the customer insisted on added costs that made the deal unprofitable for us.

We agreed to the service level, and certainly made serious errors. I made some optimistic assumptions about future customers we could sign on, cost efficiencies we would gain with experience, etc., that didn't occur. We really needed that anchor customer, and stretched too far to get it.

But the point is that, while the customer had a couple of years of getting more service than they were paying for, our problem eventually became their problem. Our company looked at this money-losing account and said, "Something's got to change," and they insisted on a price increase. The customer refused--they had not been previously aware of the cost issue. The contract was not renewed, the product was pulled out--even though it was adding value. Goodwill evaporated.

Ertel and Gordon recommend the following steps to ensure that the other side doesn't overcommit:

• Avoid extracting pointless overcommitments
• Adopt an implementation mindset
• Take the "80/20" hindsight challenge (identify with your counterpart, while negotiating, the 20% of decisions and commitments which in the future you will wish you had clarified further)
• Engage with all the key implementation stakeholders
  

(Photo: "Overload" by brage)

negotiation, dealmaking, reading list

Negotiating a joint venture isn't like buying a used car

For most people, the prototypical negotiation is buying a used car from an untrustworthy dealer. And the negotiating strategy for this situation can be summed up in two words: Caveat emptor.

But as more and more business becomes collaborative and partner-driven, a new kind of negotiation is becoming common. Sometimes it is called "win-win," or "implementation-oriented." At any rate, it is not a transaction that ends with signing papers and handing over money. It is one that begins that way.

Examples include joint ventures, channel agreements, long-term outsourcing contracts, and long-term purchasing commitments.

An important feature of these types of arrangements is that the contract cannot include everything needed to make the deal successful. The parties must also work in good faith after the contract is signed to create the value anticipated by the agreement. And given that the arrangements last years or decades, the parties must also build in flexibility to adapt to market, regulatory or other changes. Such thinking is the polar opposite of the used-car negotiation.

Such types of agreements are the subject of the new book "The Point of the Deal," by Danny Ertel and Mark Gordon, an expansion of their 2004 Harvard Business Review article called "Getting Past Yes: Negotiating As If Implementation Mattered" (link - $$).

Ertel and Gordon, from the consulting firm Vantage Partners, discuss at length how traditional negotiation approaches--such as using surprise, withholding information, entrusting negotiations to specialists, and pressing for quick closure--frequently undermine long-term arrangements.

For example, the authors say this about limiting the information disclosed to the other side in a negotiation:

Traditionally, negotiators have treated information as a precious commodity, to be preserved and protected and not given away freely.... Many negotiators assume that the more information they disclose, the weaker they become; that it is up to the other side to do their due diligence and discover whatever information they need.... Such behavior[, however,]...tends to lead to lots of surprises when the parties turn to implementation.

If you're encountering more negotiations of this type, where the old rules don't work well any more, you'd be well advised to read "The Point of the Deal."

Some other negotiation resources:
Barbara McFadden podcast
Negotiation Genius review
HBR podcast with Danny Ertel

negotiation, dealmaking, reading list

When things get tough, you need to negotiate face-to-face

There is a moment early in the movie "Local Hero" where MacIntyre, the executive who is being dispatched to Scotland to negotiate a land purchase for an oil company, complains to a colleague about the trip. "I don't need to travel there; I'm more of a Telex man." Yet he goes anyway, and finds the Scots extremely challenging (and shrewd) negotiators. The deal wouldn't have gotten done via Telex.

I was thinking of this while reflecting on the experience I had negotiating with a client was dragging their feet on signing the contract. Our general manager requested that I travel to New York and try and get the contract closed myself and I protested and said we can get it done on a conference call. He said, "Sometimes you have to go there in person." And so I did. Here's what happened...


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negotiation, narrative, psychology, dealmaking, customer relationships

The Bancrofts--in need of a "best alternative," apparently

Hot on the heels of yesterday's podcast, which encouraged anyone contemplating a negotiation to spend time formulating and agreeing on a Plan B--a "best alternative to a negotiated agreement"--comes today's latest news on the saga of the Bancroft family and their response to Rupert Murdoch's $5B offer to buy their family business, Dow Jones.

The Wall Street Journal (a Dow Jones subsidiary) features a story on one family member, Leslie Hill, who, after growing disenchanted with the Murdoch negotiation, has gone off on a road trip in search of investors to present as an alternative ("Bancroft Heir Pursues Alternative To Murdoch" - link - $$).

This after other potential suitors (including Pearson/GE, which appeared to be different but not necessarily better for the Journal's editorial excellence than Murdoch) have contemplated bids but backed away.

The Journal also reports that the Dow Jones board did not even prepare a "book"--an overview of the business and its prospects for potential bidders.

In sum, the Journal's board and the Bancrofts were caught unprepared by the Murdoch bid, despite (as Ken Auletta reports in this week's New Yorker) family members learning informally of Murdoch's intentions in late 2006, months before Murdoch's proposal to Dow Jones CEO Richard Zannino over breakfast this March 29.

There were months of time available for the Bancrofts and the Dow Jones board to have formulated a strategy, including a "best alternative." They chose not to.

Do you think there's a chance in hell that Murdoch won't win this negotiation?

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