Negotiating Contracts
“I’m uneasy about this most trendy and oversold community. Visionaries see a future of telecommuting workers, interactive libraries, and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make government more democratic. Baloney. Do our computer pundits lack all common sense? … What’s missing from this electronic wonderland? Human contact. Discount the fawning techno-burble about virtual communities. Computers and networks isolate us from one another. A network chat line is a limp substitute for meeting friends over coffee.” – Newsweek
Negotiating contracts with vendors might be a new experience for you. We need to discuss it because as the entrepreneur of a virtual company, there is no one else to do the job for you. You are now chief negotiator and head attorney in your business. I meet many people who have an inbuilt fear of negotiating.
One reason for fear of negotiating is that an army of experts who teach negotiating skills for a living makes it seem much more difficult than it really is. They often give the impression that negotiating is like a battle with two sides trying to out-maneuver each other, with the aim of getting one over on the other side. That does happen and I have experienced it, but it is only because people have let their egos control their emotions.
The secret, however, is not to get the best contract terms, but the best vendor, and knowing that takes all the pressure off. So what if you pay more than you should? One day you will be successful enough to hire a negotiator to get the best terms. At the start focus on just getting the best vendor. That also takes the stress away.
In my regular career, I attended many negotiation skills classes, and the games played out in the classroom were a lot of fun. It sometimes felt a bit like being inside an Indiana Jones adventure as I dodged traps thrown in by the coach and eventually got my treasure. The classroom is a very safe place to practice and learn from mistakes. If you have never experienced negotiating before then I recommend you search for a local class. Your local SBA can probably recommend a location or company that provides regular skills classes. There are some small tips that you can pick up, but the main benefit is in raising your self-confidence by demystifying the whole process. Unless you plan to negotiate the release of hostages in a war zone there is very little to it, and it is fun. You may also surprise yourself. The best negotiators I ever worked with were also the least confident at the outset.
When I started out in sales I could not sell a rope to a drowning man. I knew nothing about the techniques, what was a buy signal or the various psychological profiles of customers. I learned all that and decided it was utter nonsense. Ten years later, I I taught negotiating skills classes to groups of people. I simply demystified it for myself and then felt I could do the same for others… a bit like my courses really.
The attendees at my classes were divided into two teams with each team playing the role of a planetary negotiating committee. One planet had an abundance of cheap labor to export, but no natural food or water supply at home to feed themselves. They relied on importing food from the second planet that had an abundance of supplies, but a shortage of labor to work its oxygen generating machines. The game starts with the announcement that the workforce on the populated planet has gone on strike for more food and water. In response, and with their survival threatened by a lack of workers to keep the oxygen supply going, the second planet had threatened a nuclear holocaust if the workers continued to strike. Each team had five nuclear weapons, the detonation of each capable of wiping out one fifth of the labor or one fifth of the food and water supply.
The games always started in a cordial atmosphere with no one taking the matter seriously. Each team nominated a different spokesperson for one of five rounds of negotiation with the aim of reaching a peaceful settlement. Either team could fire their weapons between the negotiation sessions. The first round almost always went the same way. The teams were reasonable, and the spokespeople polite to each other. There was, however, complete impasse. Back in their huddled groups, the atmospheres changed to ones of slight indignation.
The next round had a tension that had not been there before. The spokespeople were more emotional, and started to take the other side’s stubbornness personally. By the third round, there was a sense of anger on both sides and it was no longer a game.
At that point I would select the quieter of the two teams and inform them that while they were planning for their next meeting, the other side had fired one missile and destroyed twenty percent of their people or supplies. Then it really kicked off, and in most cases the negotiations deteriorated into all out warfare, and I sometimes had to stop people saying and doing things they would later regret. They took a game and made it personal… and that is exactly what happens in the real world especially when attorneys get involved.
The point I was always trying to make was that once common sense is replaced by ego, everything breaks down and it all becomes about winning the negotiation rather than doing the right thing.
In one remarkable class, both sides were theoretically wiped out. The spokespeople played very well, won lots of points for skillful negotiation wins at the sessions, but at the end they were all technically dead!
What was the point of winning little gains but losing the planet?
Successful negotiations are not a confrontation or battle, but achieved when common sense and reasonableness are allowed to mix. In the majority of my experiences the process of negotiation is straightforward and painless.
When you are a new or small business, it is far more important to attract the best vendor than it is to get the best price. When you are a multi-million dollar company, you will have the clout to negotiate from a position of power. When you start out, does it really matter that one company charges $5000 a month management fee and another wants a $7000 fee? Right now that might seem a lot of difference, but imagine yourself in a few years’ time when your company is growing but having time-consuming quality problems with the cheaper company. How much will you regret making a wrong decision for the sake of two thousand dollars?
As I was writing this activity I was invited to meet three entrepreneurs for coffee. I knew one of them quite well and he had confided in me that this trinity had an exciting invention. Indeed they did. I was impressed. They asked me to act as an adviser to their new company because a large firm was making overtures about providing start-up capital. A week later that big company offered $2 million for 30% equity in return for the start-up providing a small number of prototypes of the patented invention that the big company could show and tell to other potential investors. The entrepreneurs already had the prototypes made. It was a no-brainer.
My advice to the trio was to take the deal and avoid the trap of getting into lengthy negotiations over contract clauses. It was a great deal, almost too good to be true, and I would have snatched it, signed the contract and shaken hands within a day. You cannot predict the unknowns that lurk behind closed doors in other companies. Staff change positions, people leave and people are hired all the time. Every change can bring risk to a potential deal because different people have their own ideas about deals.
Instead, the three budding businessmen thought that negotiating the minutia in the contract would impress the larger company with their ability as entrepreneurs. Several weeks later the contract was finally agreed, but just before it could be signed and the money exchanged, the company changed its CEO. The new boss put an immediate hold on all deals. They never got the investment. They could have been sitting pretty but instead were bankrupt… all because of ego.
Another company I knew was also struggling for cash. They were offered a million dollars for the license to some patents for a project they had long since abandoned. The offer came out of the blue. The company that made the offer was a giant. Seeing an opportunity to negotiate, the CEO of the smaller entity could not restrain himself. He countered for five million, and they never heard from the large company again. Soon they went out of business. Later, the business development manager for the giant revealed that he typically had several deals going on at any one time. He habitually works with the ones that offer the least resistance first, and he sensed the CEO of the small company was going to be a tough negotiator. A one million dollar deal was chicken feed for someone who deals in hundreds of millions, so it was not really worth his time to play the game.
The lesson? When you are starting out and a deal is offered, take it! The secret is to be around to negotiate another deal later on.
The appropriately named investor I once worked with:
Dick, was someone I thought of as a “pathological negotiator,” a control freak who would negotiate every crossed “t” and dotted “I,” until he got his way. He was addicted to negotiating every point in every contract or deal. His unreasonableness and desire to win caused us to lose business opportunities and for vendors to stop returning our calls. I struggled to get him to appreciate that small companies couldn’t waste valuable energy fighting over meaningless lawyer jargon, but he saw that as a weakness in my leadership style.
He already had a notorious reputation for being difficult to deal with, and he certainly added to it while I knew him. His inflexibility and short-term vision literally pushed people away and soured relationships. He was a highly skilled negotiator and would probably be the star of any class or training situation. In the real world, however, his ego led his brain. Knowing his style, others and I used it against him because when you know that someone needs for their ego to experience a win, it is easy to set them up.
One time I got into a direct negotiation with him. I would have been happy with a deal at a value of 40, and if he had been a reasonable man, we probably could have sat at a dinner table and both agreed a common sense price around that number. Knowing his inability to do a deal without hard negotiating, however, I let it be known to a third party (that he thought was his spy in the building), that I would be happy with a value of 50. He could not resist the negotiation and I gave him the impression that his efforts were wearing me down over several weeks. I started at 60 and he wore me down to 50. He felt like a winner, but his foolishness cost him an extra 10… and yes we are talking millions. I would have been happy with a lower number, an amicable deal, and the chance to do other deals in the future. As it was, I took my gain and made a point never to deal with him again.
When it comes to negotiation skills there are only two rules that you must adhere to in order to successfully achieve effective contracts:
He who mentions price first loses. Always. No matter what number is thrown out at first, the purpose of negotiation, even the friendliest one, is to come to an agreement, and the agreement will rarely be on that first number. Whatever price you throw out first, the final one will be different. It is smart to always let the other side throw out a number first.
When you are a small company, don’t get greedy.
George Rathmann (built Amgen and ICOS) used to drill into his staff “when you are a small company and get offered a fair deal take it; the secret is to survive to one day be powerful enough to negotiate.” I think it sound advice and have come across many entrepreneurs who regret not doing that. Just last week I met someone still treading the boards when a few years ago he was offered $20 million to sell his shares. He thought the share price would go up.
It didn’t. He is a bitter man now.
Resources
When we start out we have to ‘act’ the part. Here is a trailer for an interview I did with famous actor, James Cosmo. (Braveheart)
