The Naked Negotiator

In my book, The StreetSmart Negotiator (Amazom, 2005) I list a number of psychological persuasion traps deal makers fall into. Like it or not, negotiators are not always rational, Dr. Spok like characters.

Minds play tricks on the very best of negotiators. In mergers and acquisitions, the time when negotiators are most vulnerable to mind traps is during the price setting stage - when we are conducting the preliminary due diligence.

Overconfident negotiators often overlook evidence that points to deal problems. They fall victim to what behavioural psychologists call confirmation bias.The very time you need to guard against overconfidence and confirmation bias is during the preliminary due diligence. It is here that you formulate your letter of intent which includes your price range, which you hope will propel the deal forward.

Since deal makers rarely recover from an initial offer that’s too high its a mistake you have to guard against or you’ll make the same fatal mistake as Career Education Corporation (CEC).

In Deal without Delusions (HBR Dec 2007) McKinsey authors Dan Lovallo, Patrick Viguerie, Robert Uhlaner and John Horn highlight the case of CEC paying $245 million - 14 times its annual operating earning for Whitman Education Group in 2003 (the historical multiple in this industry is six to eight times earnings).

CEC executives rationalized the sector was in a phase where high prices were the norm. They weren’t. Prices have fallen back to their historical levels.

Overconfidence coupled with confirmation bias is a fatal mix when acquiring companies. So beware!

Popularity: 58% [?]

Churchill’s Greatest Speech?
In 1946 Churchill was a beaten man. The previous year, he had lost the prime ministership after his Conservative government has suffered an overwhelming election defeat.

Churchill wanted to warn the Western world about the spreading menace of Soviet communism, but he worried that Americans wouldn’t listen to someone who was now just the leader of an opposition party, rather than the head of an elected government.

Churchill’s opportunity to convince American’s came when he was invited to speak in Fulton, Missouri. He knew that he had to paint a vivid, graphic picture of what was happening in countries like Poland and Czechoslovakia.

He toyed with words like “Soviet imperialism,” “militarism,” and “tyranny,” but he rejected these as shapeless abstractions. None of these would paint a vivid enough picture in his listeners’ minds.

On the train trip down to Missouri, Churchill scanned his map of Europe. To highlight the spread of communism, he drew a black pen line from the Baltic Sea through Poland down to the Adriatic Sea. He retraced the line, searching his mind for the right image to describe the Soviet threat.

The inspiration came at 2 a.m. during an overnight stop in Salem, Illinois, when the right word picture appeared — which Churchill quickly added to his speech.

The next day, Churchill delivered the words that would mobilize the United States and move it to action:

“From Stettin in the Baltic to Trieste in the Adriatic an iron curtain has descended across the continent.”

The iron-curtain metaphor became one of the galvanizing images of the Cold War. When China fell to Mao Tse-tung’s communists in 1949, the metaphor changed to bamboo curtain.

The iron curtain speech was, according to James C. Humes (author of Churchill: Speaker of the Century), Churchill’s greatest speech.

Why was it the greatest? Because a single speech triggered a change in American feelings about the Soviet Union (America’s wartime ally), and started the Americans to rearm.

Whenever you present a persuasive case, look for an organizing metaphor. The right metaphor will clinch a deal or sale.

Popularity: 80% [?]

The year: 1912. Teddy Roosevelt was nearing the climax of a hard fought presidential campaign. The final push was a whistlestop tour through middle America. At each stop Roosevelt planned to deliver an inspiring address and hand out thousands of pamphlets. On the cover of each pamphlet was an imposing Presidential portrait; inside was a rousing speech. Hopefully, these would win over vital undecided voters.

The final tour was about to begin when a campaign worker noticed a small printed notice on each photo: Moffett Studios - Chicago. The photograph was copyright and no one had obtained a clearance from Moffett.

Unauthorized use of the photo could cost a dollar for each pamphlet distributed. The prospect of a three million dollar bill sent a chill through campaign workers. They simply couldn’t afford it. The pamphlets were a crucial part of the re-election strategy. If they went ahead without Moffett’s permission and were caught out, they’d be branded lawbreakers and be liable for a small fortune.

The campaign workers concluded they had no choice; they had to negotiate with Moffett, and there was no time to lose.

You can imagine how they felt, Moffett seemingly had them over a barrel.

Dejected, they sought campaign manager George Perkins’s help. Perkins immediately instructed his typist to cable Moffett.

“We are planning to distribute many pamphlets with Roosevelt’s picture on the cover. It will be great publicity for the studio whose photograph we use. How much will you pay us to use yours?”

The reply came back soon:

“We’ve never done this before, but under the circumstances, we’d be pleased to offer you $250.”

Legend has it Perkins accepted without asking for more. Perkins understood the power of information; the critical role it plays in shaping a negotiation. By selectively controlling the flow of information to Moffett, Perkins created the illusion that he held the upper hand.

Information power lies at the heart of the bargaining process. In even the simplest of negotiations, both parties take a position, then present facts, arguments, data and other information to support that position. Both sides then use information to get the other side to modify their position until there is enough common ground to reach a mutually satisfactory settlement.

To guard against information being manipulated or concealed, you must do your homework. The more information you have, the more power you have. It’s that simple.

Popularity: 65% [?]

Between 1969 and 1973 Henry Kissinger conducted secret negotiations with North Vietnamese diplomats in an effort to negotiate a face-saving end to the Vietnam War for President Nixon.

Kissinger was undoubtedly very bright, he had three degrees from Harvard and had written a raft of papers and books on international diplomacy and arms control. Kissinger also rated himself as a formidable negotiator. When a journalist asked him what personal qualities it took to be a diplomat Henry replied,

“Knowledge of what I am trying to do. Knowledge of the subject. Knowledge of the history and psychology of the people I am dealing with. And some human rapport…To have some human relations with the people I am negotiating with. This takes some rough edges off. They will make concessions they wouldn’t otherwise make.”

In his first secret meeting with North Vietnamese diplomats in Paris he believed he had made progress. He reported back to Nixon the North Vietnamese had signaled possible concession.

Later Kissinger had to admit, the North Vietnamese had agreed to “nothing more than a willingness to hold future secret discussions at unspecified future dates.”

Xuan Thuy Hanois’s representative “had no authority to negotiate. His job was psychological warfare,” Kissinger later concluded.

Kissinger had made the elementary error of confusing “the monkey with the organgrinder.”

The dangers of negotiating with someone who has no authority is something we all need to guard against.

Popularity: 65% [?]

Our lack of skill in negotiating complex, multi-party deals may be the death of the planet.

Before the collapse of the Soviet Union in 1989, only two countries bordered the Caspian Sea: Iran and the USSR.

Now Iran, Russia and Kazakhstan, Turkmenistan, and Azerbaijan all border it and have been unable to negotiate fishing limits.

The Caspian sturgeon population, and thus the world production of Beluga caviar is under threat.

Negotiating with multiple parties invariably multiplies the risks. In fact, deal risk increases exponentially as the number of parties you have to negotiate with increases.

To calculate your deal risk in an upcoming negotiation, square the number of the parties you will have to negotiate with. If you are negotiating with just one other party, the risk level is 1 (1 x 1). If you are negotiating with two other parties the deal risk is 4 (2 x 2). If your deal involves 5 parties the deal risk escalates to 25 (5 x 5).

Popularity: 33% [?]