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Business Relationship by Design

balanceThe balance of alternatives

Almost every external facing business relationship requires activation in the form of a negotiation and a contract..  When I see good deals stall on small details it is usually because the discussions were initiated on a poor foundation.  Getting the ‘big picture’ correct before getting involved in the negotiation and contract details  is critical:  Is this a win-win for both sides?  How will healthy, normal communications take place during the execution period of the contract?  What will happen when dissatisfaction, mistrust, or irrationality steps into the relationship?

This last question is rarely considered at the ‘design stage’ but it should be.  Far too many contracts amplify the smallest conflicts by giving enforcement powers and ultimatums to one side or another.  Look at the default terms and conditions from a big company like BMW and imagine that one or both sides are dissatisfied.  The lawyers usually have ensured that there are lots of ‘sharp sticks’ and other weapons because they want to have a good foundation for a lawsuit.  Courtrooms are  “the nuclear option” where there are no winners or losers; there are only losers and bigger losers at the end of any court case.   For this reason it is important that business people include a soft conflict resolution processes that will reduce tensions and that all ‘nuclear options’ in the contract have safety devices lest they be used too quickly.

In the first paragraph we described “win-win”.  As a governing principle, we c could also describe it as ‘the balance of win’.  I would suggest that there is a second, almost equally important, principle that I would call “‘the balance of alternatives’.  Years ago,  a sales trainer, Aiden McGraw, described that the essence of  negotiations as ” what is the best alternative to further negotiations for each side?”.  So long as both sides do not have a better alternative, they will continue negotiating indefinitely and will ultimately  reach a conclusion.  If one side has an alternative and the other has no alternative, then you no longer have a negotiation– you have a one sided declaration.  Of course we all know what happens when the weaker party of a one-sided relationship suddenly gets power….  The important point here is that both sides must have an alternative or neither side must have an alternative.  This happens when they are mutually dependent on each other or when they are mutually independent from each other.

If there is any question in your mind about this validity, just think of male-female relationships.  The social rules are set up so that each is independent (flirting, casual dating) or mutually dependent (going steady, engaged, married).  If one side is dependent while the other is not (this is called ‘cheating’), breakup is inevitable.

Now,  to a more business oriented example.  Imagine a software development company(named  ‘Develop’  Inc) wants to invest into a product that another company (named ‘Sell inc)’ will sell.  Such cases are common (and problematic) in the real world.  The deal starts smoothly as Sell has access to the market and Develop has access to the people who can make the product.  Develop will invest in the product and Sell will use its sales channel to keep a share of the revenue and return most of the money to Develop.  They create a win-win business relationship and plan to conquer the world.

In this case, Develop releases the product  and Sell’s salesmen find that the product is just not sufficiently good enough to displace the existing products and too hard to sell– they prefer to continue selling other products in order to meet their quarterly sales targets.  As you might image, Develop thinks that Sell is simply not investing enough effort into marketing and selling the product. In fact, I can guarantee that this old sales vs delivery conflict will always show itself at some point–  the only uncertainty is in how the conflict will resolve itself.

Unless special provisions are enacted, Sell is relatively independent of Develop’s product and can simply sell their other products or even possibly re-sell a competitive product.  Develop has already made a sunk cost and has a product with no track record.  With no existing track record, it is not likely that Develop’s product will be attractive to other sales channels.  In effect, even though the initial business relationship/contract was balanced and win-win, the nature of the investment timing created an imbalance of alternatives and ultimately disaster.

What special provisions could avoid such a breakup?  We need to re-balance the alternatives that each company faces throughout the deal.  Some ideas:

  • ‘Sell’ could, up front,  make a financial commitment to some revenue results and therefore they would have up front sunk costs (or comittment for costs) like Develop.
  • One management team could be in charge of the total success for the two companies (e.g.Joint Venture) and the full investment of both companies.
  • Both Develop and Sell could have multiple partners in order to keep the other side honest at all times.
  • One side could ‘own the business’ and contract to the other side for their services in way where they take all the risk and get all the upside reward.

All of these will create an environment where both sides have equal ‘alternatives to continued cooperation and negotiation’.  Design your business relationships up front with a ‘balance of win’ and a ‘balance of alternatives’ through the full life of the contract– the negotiations and contracts will develop as a natural consequence if you get this right.

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