Category Archives: Negotiation

Contracting Disease

It is somewhat interesting to me that you can both “catch” a disease, and you can “contract” a disease. So what is the difference? The principal difference is that catch suggests a transmittable infection (ex. You can catch a cold or the flu), while contract can refer to a wider variety of diseases, including those that are not contagious (ex. You don’t catch cancer or leukemia, you contract them). I had to look this up. I didn’t say that it was engrossingly interesting to me; I said it was only somewhat interesting to me. In the business world the equivalent would be that you don’t catch a bad deal with a customer or supplier, you contract it.

So many businesses do so many things right in the ongoing process of trying to satisfy customers, so it is truly a shame that when it comes down to consummating the relationship with the customer, in the form of a contract, that they fall short of the good contractual goal. It is almost as if the business entity gets so excited at the prospect of completing the deal that they forget to write a good contract. Contracts at their most basic are very simple: Both entities in a contract want to get something, and in return are prepared to give something. Buyers want to get products or services and in return expect to provide money, and sellers want to get money and in return are prepared to provide products or services.

Beyond this it gets complicated.

Buyers want to get more products and provide less money and sellers want to get more money and provide fewer products. Herein lies the rub. How do you make sure everyone delivers what they should and pays what they should? You create a good contract.

There are many benefits and detriments associated with the advent of contracts. The greatest detriment that I can think of is that contracts gave rise to a new species of life, commonly referred to as “lawyers”. To bring a little circular logic into play here, it is good to remember that it is very difficult to “catch” a lawyer (at anything). Invariably you must “contract” them, but if you wash your hands thoroughly afterwards, while you probably will not reduce any of your risks, you will definitely feel cleaner.

I know it sounds a little trite but contracts are definitely a necessity in business. There must be some way for both parties to enforce the agreement that they are pursuing. Promises are good, and I am sure that everyone involved is both reasonable and honorable, but it still needs to be put in writing. Understand that agreements and requirements of any type can span multiple years. During that period it is not uncommon for the people who were party to the initial deal and who may understand the reasons for what was done, to move on to other roles. At the very least there needs to be a historical record of the agreement in the form of a contract so that those who follow on both sides of the agreement have something to refer to when questions arise.

This brings us to “Contracting Disease”. This is a malady that affects many businesses and is very prevalent particularly around business deadlines or at the end of any measurement period. A measurement period is usually the end of a month, quarter or year. It is during these deadlines or end of the measurement periods where usually reasonably sane organizations will succumb to one of any number of pressures and sign what is known as a bad contract.

A bad contract is the result where for whatever reason one of the parties to the contract either temporarily or permanently seemed to lose their mind and the other party to the contract lets them.

Contracts are normally designed to balance each party’s risks against the specific values that they are to receive. The standard risks are normally associated with how much of a good or service is to be supplied, how long it will be supplied, how much is to be paid for it and when it is to be paid for. There are normally many other items to be considered in a contract, but these are the primary ones, and usually any others somehow relate to these.

Contracting Disease can strike buyers at almost any time but usually occurs when the buyer either puts themselves in a position where very few if any suppliers can fulfill their product specification requests, or they find themselves in a position where an external factor has occurred and they must obtain a good or service at almost any cost in order to remain functioning. The US government is a perfect example of the self inflicted product specification contract. Government contract specifications and processes are usually incredibly complex and are pursued by only a limited number of specialized businesses. This is the type of process that results in contracts for five hundred dollar hammers and twenty five hundred dollar toilet seats. This is not an example of “you get what you pay for”. This is an example of “you pay, and you pay a lot, for what you needlessly over specify”.

A good example of the buyer’s need situation can be seen in the oil embargo of the 1970’s here in the US. OPEC decided that the US was not their friend, needed to be taught a lesson and as a result they were not going to ship any more oil to the US. This resulted in a reduced supply of gasoline at the pumps for all consumers and anyone else who drove a car. Consumers needed gasoline so that they could continue to drive their gas-guzzling cars. Enterprising gas stations recognized this opportunity and started raising their prices for gasoline far beyond any rational level based on the newly limited supply. In short they took advantage of the situation and raised the price of gasoline to unheard of exorbitant levels, but back then they would at least clean your windshield when you filled up so it wasn’t quite so bad.

Gas stations raised their price for gasoline to far more than ONE DOLLAR per gallon during the OPEC oil embargo. Can you image the nerve of those places charging more than a dollar for gas?

This was seen as price gouging and federal laws were quickly enacted to stop the practice. However, at the time, gas buyers who wanted to drive their cars had no choice but to agree the gas station’s contract and to pay the exorbitant price if they wanted any gas.

Contracting Disease can strike sellers in a myriad of ways, but it usually boils down to the fact that the buyer for whatever reason wants the buyer’s money and will agree to almost anything the buyers’ want in order to get the money. As I noted, Contracting Disease in sellers appears to be primarily a seasonal related malady. It seems to strike at the end of each quarter and especially hard at the end of the year. It is no coincidence that these periods coincide with the end of the various financial reporting periods. It is at these times that some sellers’ drives for incremental revenue (and contracts) can reach a fevered pitch.

Unfortunately (or fortunately depending on which side of the contract that you are on) there are no laws to protect sellers from themselves when it comes to selling their goods or services. This has to be one of the ultimate self regulating environments; the environment where the long term costs of signing a contract outweighs the short term inflows of money. When this self regulation does not occur, Contracting Disease sets in. In many markets it appears that buyers have recognized the periodic nature of sellers’ Contracting Disease and purposely try to wait until these high risk periods to negotiate and sign contracts.

When discussing Contracting Disease it is best to remember that buyers are usually protected in one form or another when it comes to the purchase (contract) of necessities and staples required for ongoing survival. Collusive or predatory practices by vendors are illegal. However Contracting Disease that results in a contract with incremental self inflicted risks and expenses associated with either the purchase of, or the sale of goods and services has no regulatory limit.

stead of caveat emptor (“buyer beware”) or caveat vendor (“Seller beware”), it should more accurately be Caveat Contractor.

Arguing and Negotiating

When two people are have a discussion with opposing points of view it is usually called an argument. Webster’s Dictionary (an all time favorite of mine) defines an argument as: “An argument usually arises from a disagreement between two persons, each of whom advances facts supporting his or her own point of view.” This is a great description for what goes on between two friends when they are arguing if the beer does in fact taste great or is in fact less filling. I don’t drink that particular beer so it doesn’t matter to me.

However, if these two individuals are no longer representing themselves in the beer argument, but are now representing their respective different companies with opposing points of view, they are no longer arguing. They are negotiating. Going back to Webster’s we find the following definition for a negotiation: “a discussion set up or intended to produce a settlement or agreement”. To me these two descriptions appear to be the two sides of the same coin. There are many reasons to have an agreement, one of which is to avoid future disagreements. Once there is a disagreement you definitely want to have a negotiation to resolve it as an argument probably won’t provide a solution.

Now we are getting somewhere. When two people disagree, they have a discussion called an argument. When two companies disagree, they send people to have a discussion called a negotiation.

One of the key points required for both arguing and negotiating is to clearly establish what each participant’s starting positions are. Who is claiming what, and who is denying what? Who says “yes” and who says “no”. Who says “up” and who says “down”. Who thinks they should be paid a lot of money and who thinks they shouldn’t have to pay any money at all. That sort of thing. This is a very important point in the process.

If the two parties find that their initial positions are similar, or even the same, then it will be difficult to have a meaningful argument, and the negotiation will consist mainly of nodding heads and the shaking of hands. This type of premature negotiation has a tendency to leave both parties vaguely unfulfilled from the negotiation process.

The next part of the process should be the justification and validation of the respective initial positions. I think this is the key part to many arguments and is critical to any negotiation, or argument for that matter. The respective positions on the topic in question need to be defined and justified. Why does each participant believe that they are correct, and why do they believe the other party is not?

In a recent discussion with my wife (it was a discussion not an argument as she does not allow me to argue with her) she put forth the position that “I should have fed the dogs”. I never feed the dogs unless I am specifically asked to feed the dogs because she always feeds the dogs and if I also fed them we would very quickly have obese Chihuahuas. Hence my position was that I do not feed the dogs unless asked to feed them. We therefore started out with very well defined positions for the ensuing discussion with our differing points of view (argument).

As you might guess this was a discussion that I was not going to win.

Fast forwarding to the end of the discussion, it was decided (by her) that either I was asked to feed the dogs and forgot, or I was asked to feed the dogs and did not hear the request. The fact that I was at work in my office in another building in another part of town when this request was made was inadmissible evidence. So I went and fed the dogs.

In business, depending on who has made the claim or demand, there may be a similar tendency to accept the same type of behavior and response when it comes to requesting positional justification prior to a negotiation. Why does on party feel that they are due a large sum of money from the other party? What specifically justifies the claim? What specifically validates the amount? In too many instances businesses seem to rush to try and deal directly with the claim, regardless how potentially outrageous it may be, before they understand the basis for the claim itself.

Please do not misunderstand me. For the most part most businesses perform and act in a reasonably appropriate and logical manner. They usually only make claims requiring a negotiation when there is a justifiable cause for such behavior. I think that part of the reason for this general behavior is that businesses are usually made up of honorable and logical people. Those types of people are prone to logical and honorable behavior.

I also think that logical people fully expect to have to be able to justify and defend any claim that they may make. If in general the first response to any claim being made is to ask for a justification of why the claim was made, then there is a certain amount of preparatory work that should be expected.

When it comes to customers, sometimes this check and balance claim expectation validation can break down. In today’s hyper-competitive world, where the customer is always right and vendors strive to be identified as “partners” instead of just “vendors”, customer service is sometimes the only differentiating factor available in the market. In this new commercial world where the speed with which you respond to a customer request or demand can be the difference between keeping that customer and losing them to the more responsive competition, jumping when the customer says jump is rapidly becoming the expectation.

In this type of environment, where “partners” are working together to achieve a mutually beneficial solution (It’s true. That’s what it now says on every sales presentation I have seen, and they wouldn’t be exaggerating, would they?) it is sometimes easy to forget to ask why partners are making any specific demand, or making the claim that they are making.

Vendors and customers ask these sorts of questions of each other. Just as good fences make for good neighbors; these good questions make for good contracts and relationships. Sometimes partners can forget or neglect to ask these questions. Those exclusions can eventually make for some significantly misplaced expectations, expenditures and possible difficulties in the partnership relationship when the necessary reset on the expected demand response occurs.

Good customer service and customer relationships require vendors to not only understand what is wanted, but why it is expected. Asking for this justification of demands and claims is not the sign of a weak partnership. It is more the sign of an engaged relationship. To blindly respond to any customer generated stimulus will create an unbalanced and unsustainable situation. In this event the desire for a partnership will devolve into more of a master and servant arrangement where one party makes demands and the other fulfills them.

Asking for the justification of expectations, demands and claims is probably the best way to validate what the other party actual desires. Are they looking for a problem to be rectified, or is it something else? Are they testing your responsiveness, or do they have a genuine need? Is there something that they actually want, or are they just seeing what they can get? It is not the sign of distrust in the partnership. It is more the sign of parity in the relationship.

Or as in the case with my wife, it was probably just my turn to feed the dogs.