“We lose money on every sale… but we make it up on volume.”
- Insolvent Retailer
If you substitute the word acquisition for sale, this quote describes the behavior of more than a few CEOs who pursue expansion without disciplined negotiation strategies in place. The fact is, that in the orgy of acquisitions and mergers at least 50% of buyers lose money. In essence, they overpay. The skillful ones, such as G.E. and Pitney Bowes, who pursue disciplined plays, executed by highly trained staff, enjoy markedly superior results. In the last six years, Pitney Bowes has acquired 70 companies. In the words of their CFO Bruce Nolop:
“For us buying other companies couldn’t be a seat of the pants adventure, it had to be tracked as a business process.”
Manage the process, shape the result. Smart dealmaking is much more about process management than few dealmakers care to acknowledge.
Popularity: 8% [?]
posted in Deal-Makers, Managing Risks |
As negotiations drag out, the practical responses you have to solve a problem run out.
As your options shrink, time pressure increases, you concede more and the deal turns from your Best Possible Agreement (BPA) to at best Barely Acceptable Deal (BAD).
The triangle of doom warns us:
- We need to spend more time, investigating and strengthening our alternatives.
- We need to monitor, capture and analyze problems in real time if possible.
- For large, complex negotiations projects you need a real time reporting and response process. Some times the best deals you make are the ones you walk away from.The more time we invest in a deal, the more committed we become to sealing a deal – regardless of its consequences.
Popularity: 13% [?]
posted in Managing Big Complex Deals, Managing Risks, Negotiation Mistakes |
Some of my clients are what are known as secondary consultants.
As secondary consultants they subcontract to a primary consultant.
If they are not careful, they end up taking on the risks of the primary consultant.
In The Fat Tail, The Power of Political Knowledge for Strategic Investing, authors Iam Bremmer and Preston Keat offer 6 practical ways to deal with risks and uncertainty.
- Isolating: You can isolate and separate critical assets, either to lower their overall vulnerability or simply to ensure that not all our critical assets are open to the same set of threats at the same time.
- Smoothing: You can distribute risks over time and across various theatres, business subsidiaries and entities.
- Warning: You can establish warning systems to better prepare for specific contingencies.
- Agility: You can reduce the time and costs and response to crises and lower the risks associated with them.
- Alliances: Alliances among firms and private corporations, non-governmental organisation (NGO’s), international instsiutions, and private stakeholders can help mitigate the risks inherent in uncertainty by spreading risk among them.
- Environment Shaping: You can mitigate risk by influencing the environment where they operate.
Consider these six approaches when you face having to negotiate a complex, risk riddled contract.
Read Bremme’s and Keat’s book The Long Tail as well. It is powerfully argued. Bremmer and Preston Keat have played in the political risk management game for years.
Popularity: 8% [?]
posted in Managing Risks |
Skilled blackjack players think like investors.
In his book Beat the Deal, author Ed Thorp says the main job is to assess the probability of drawing a favourable hand.
Thorp shows you how to count cards so you can work out when the probability of holding a winning hand moves in your favour.
When the odds favour the player, the best strategy is to increase the bet so you can increase your payout.
Thorp calculates that a favourable opportunity comes up just 9.8% of the time. The odds favour the house the other 90.2% of the time.
The lesson for deal makers is that long term success depends on discipline and expertise. Professional gamblers have played lots of games, they stick to a specific game such as blackjack that increases their zone of competence - then they play the odds.
Professional gamblers only bet big when the odds favour them. In the Casino you have to bet every time you play. In deal making you don’t have to play, until the odds favour you.
Popularity: 22% [?]
posted in Deal Preparation, Managing Risks, Negotiation Strategies |
When cognitive scientist Gerd Gigerenzer toured Daimler-Benz Aerospace, maker of the Ariane rocket, he noticed a poster tracking the performance of all 94 launches of Ariane 4 and 5. The poster showed eight accidents. When Gigerenzer asked why, the guide replied the security factor was around 99.6%.
“How could this be?” asked Gigerenzer. Eight accidents in ninety-four launches does convert into 99.6% certainty.
The guide replied Daimler Benz didn’t consider human failure in the calculation. The security calculation was based on the design features of the individual rocket parts.
This story echoes the probabilities that were banded around when the Space Shuttle exploded in 2003.
NASA engineers estimates the rate of failure for the shuttle at 145 (0.7%). Yet the program suffered two total write-offs in its first 113 launches. The Daimler-Benz and NASA calculations call into question how we relate uncertainty and risk to probability.
Michael J. Mauboussin, in a truly remarkable book, More than You Know (Columbia University Press, 2006) tells us we need to make the distinction between risk and uncertainty.
Risk is the probability of suffering harm or loss.
Uncertain is the condition of being uncertain; doubt.
Mouboussin argues “investing is fundamentally an exercise in probabilities” going on to say that “every day investors have to translate investment opportunities into probabilities”.
Successful negotiators have to do the same - except they have to translate deal opportunities into probabilities.
Popularity: 25% [?]
posted in Managing Risks |