The Naked Negotiator

You may not be able to “fight city hall,” but you can negotiate with government - if you know how.

The first ‘Don’t’ when negotiating with government officials is, don’t use the word “negotiation” writes Jeswald Salacuse in Seven Secrets for Negotiating with Government (Amazom, 2008).

Government officials would much prefer you call your negotiations, “discussions,” “conversations,” “requests” or “interactions.”

Government officials don’t like talking about compromises and tradeoffs. Government officials view their role as enforcing the law, implementing regulations and pursuing policy. “Negotiated decisions” make officials uncomfortable.

Before you negotiate with government, you need to appreciate government’s power base. Salacuse identifies four sources of power that governments leverage at the bargaining table.

1. Monopoly. Governments are, for the most part, monopolies. As a negotiator in the private sector you usually have the fallback of talking to a competitor. If you’re negotiating approval with a government agency e.g. to sell a drug, you can’t get the approval from anyone else.
2. Privilege and Immunity. Governments pass laws, set regulations that private citizens and private companies cannot. In many countries, governments can’t be sued. These privileges can force you to make additional concessions.
3. Protocol. Government is much more likely to use protocols that dictate how you will interact with government departments and officials.
4. The Public Interest. At any time, governments can play the public interest card. You may be legally in the right, but it’s hard to beat a government player who claims public opinion is preventing them from going along with the terms you originally negotiated. Governments find it much easier than private players to renegotiate deals.

Popularity: 14% [?]

The best deals are the ones you have the courage to walk away from. Bad deals entrap you, destroy rather than add value, and suck up vast amounts of management fix-up time. The best deal makers go into a deal with a clear list of non-negotiable must haves.

Frank Borelli, the former chief financial officer of financial services from Marsh and McLennan won’t buy a firm unless it meets his non-negotiable list of must-haves. Borelli’s three must haves are:

1. The acquired company must earn at least the company’s cost of capital
2. The expenses of acquiring the company must not be so high they decrease his firm’s earnings
3. The target company’s growth rate has to be greater than Marsh and McLennan’s own.

Between 1992 and 1996 Borelli turned down the chance to buy 3 companies before he found Johnson & Higgins, a firm that met all three of his must haves. The acquisition proved of great value.

Patience, discipline and clear priorities are signs of great dealmaking.

Popularity: 11% [?]

In a South Park sketch, the gnomes steal underpants as part of a three-phase business plan. The business plan reads:

1. Collect underpants
2. ?
3. Profits

Pixieland dealmakers buy companies or assets with no proven profits or business models in the vain hope that they can make money where no one has before, and big dealmakers are not exempt from this madness.

Meg Whitman, CEO of eBay, bought Skype from it’s inventors for $2.6 billion in the illusory hope it could find a way to turn Skype clients who were attracted by Skype’s free services into profitable fee-paying customers.

eBay hasn’t succeeded so it has written down the Skype purchase by over 50%.

Forbe’s software columnist, Daniel Lyons writes Sun Microsystem’s purchase of MySQL for $1 billion looks to be another Pixieland deal.

MySQL has sales of only $70 million and doesn’t according to Lyons seem to be making much money from selling its open source software.

The MySQL Chief Executive Marten Mickos believes Sun’s ownership will leverage it’s sales to $1 billion.

I suspect it won’t be long before the purchase is written off as a moment of madness.

Popularity: 21% [?]

In November 2007, The New York Times wrote an expose on the fiasco surrounding the federal government’s purchase of spy satellites.

In 1998, the U.S. spy satellite agency sought bids to build a fleet of inexpensive spy satellites. The two bidders, Lockheed Martin and Boeing were told the project would operate under a tight price-cap. The government procurement agency made price 50% of the rating score when scoring contract bids. Previously, price had rarely accounted for more than 25 percent of the company’s score.

The front runner based on experience had to be Lockheed Martin. They had years of experience building similar complex projects. By contrast, Lockheed Martin had no track record of building spy satellites.

To win the deal, Boeing came up with a revolutionary play which they claimed could be built for a bargain price.

The Satellite Agency accepted Boeing’s bid. Even so, creating high-concept technology on a fast schedule inside a tightly managed budget - was high risk.

Boeing’s formula to win the bid only on cost and correct the government’s sins with price changes was a train wreck waiting to happen. The project cost $2billion to $3 billion more than planned. The project ran years behind schedule until the government finally killed the project. (The government’s write-off costs have been estimated at $4 billion).

The New York Times investigation reveals that the “multiple failures that led to the program’s demise reveal weaknesses in the government’s ability to manage complex projects.”

Here are some lessons for would-be procurement negotiators.

1. If a price for a complex project looks too good to be true, it probably is.
2. Carefully manage your contractor’s incentives. Incentives for Boeing encouraged them to hide setbacks and dilly dally.
3. Tightly manage big projects. If necessary break them into smaller chunks. Use a traffic light audit system to alert you to problems.
4. Remember if the contractor has a problem, you have a problem. You need to build in contingencies for failure or an early exit.

I help a number of clients negotiate with governments at both the local and central level. It’s remarkable how often you hear suppliers, when formulating a bid comment, lets give them a low price and claw back our margin in “spec charges.”

Is there a flaw in the way many government agencies and big companies manage their big procurements? There is a lot of anecdotal evidence to suggest there is. For a sobering read on the perils of poor contract management, read the full NY Times article.

Popularity: 26% [?]

“He who owns the most when he dies wins.” - Ivan Boesky

Since your opening offer is arguably the most critical thing that will shape your final deal you need to plan your opening offer carefully.

So how should you open? Should you open aggressively and pitch high or should you start with a fair and reasonable offer?

If you want to build a long-term relationship you should open with a fair and reasonable offer. Aggressive opening pitches can easily antagonize the other side and undermine the changes of any win-win arrangements.

If the relationship is unimportant, and the bottom line is all important, then it pays to play hardball. Open high and concede slowly. This doesn’t mean you should ask for the moon. You still have to be credible. A credible offer is one that can be logically supported and justified.

Research shows, negotiators who start high end up with more of the final pie than those who start with lower aspirations.

Negotiators typically judge their success by how much they move their opponent from their opening figure.

Negotiators who start high have more room to move.

Tips and Tactics

• Don’t open high where you have a weak BATNA (Best Alternative to no Agreement) and the other side knows it. You’re simply inviting the other side to expose your weak hand.
• Don’t highball, where the other party hates haggling. Research shows 15% of Americans detest haggling and won’t do business with hardball negotiators.
• Don’t be afraid to open high in a relationship-based negotiation where your ambitious proposal can be backed by solid credible evidence.
• Making concessions is not a sign of weakness. Rational concessions show the other side that you accept the legitimacy of their demands.

Popularity: 10% [?]