Chapter 8
The ‘red zones’
In the 1980s and 1990s Sun Tzu’s book The Art of War became a handbook for the entrepreneurial person in commerce. While elusive and sometimes requiring a degree of lateral thinking to understand what Tzu is saying, it contains many lessons for the contract negotiator.
Many people have used The Art of War solely as a guide to battle. In my view this is a mistake. What The Art of War teaches you is the prudence of when not to fight as much as technique and strategy when you are in the war.
The assessment of resources and strategy should lead to decisions not to engage in a battle as much as to leaping in. In my view, the greatest lesson in The Art of War is to assess and know your respective strengths and weaknesses.
Knowing your strengths is the easy part. Rare is the successful person who does not know how to fully exploit them. However, they may be less astute as to their weaknesses for whatever reason, be it ego or fear. Ignore them at great risk.
In this sense sport is instructive. Great athletes tend not to reach the pinnacle of success by consistently working on the strengths in their games. The true champions devote more time to the weaknesses and the areas of play in which they lack felicity.
It is almost impossible to be a contract negotiator who will always hold the leverage. There will almost necessarily be times when your counterparty has more influence, money, market share or need in all the circumstances than you do. This will mean that the leverage or general power in the negotiations is, at least at the outset, with them.
By using the negotiation techniques set out here, and in particular being fully prepared and considering at every level and in every way in the commercial context of the deal so as to allow you to make informed decisions during the negotiation practice, you will go some way to righting this imbalance.
It may be that, at the end of the negotiation and while you have done your best in an astute and skilled way, there are still parts of the deal that concern you. Of course this does not mean the deal cannot be done. Part of business life is living with ripples on the pond of perfection. Doing deals without getting everything and possibly having to give a bit more than what you would have liked is simply something we all have to live with.
In this sense, the approach of a champion athlete becomes important.
If you are properly prepared and have been sufficiently focused in the negotiations you will generally know where the ‘bodies are buried’ in and around the contract. You will know the parts that are of concern to you. Generally speaking, if you have negotiated the contract well enough, they will be reasonably clear in your mind. Assess them objectively. If they go to the fundamental commercial terms of the deal, you may have a problem.
The first step is to understand them.
This is where the strengths and weaknesses analysis becomes extremely important.
As if you are an elite or champion athlete eliminating flaws from your game or technique, focus on the troublesome areas of the contract so as to ensure you understand all of the implications they may have if things go badly or otherwise than as planned. These are, what I call, the ‘red zone’ moments.
Example
Big Green Tours is an eco-friendly tourism company. It is under-performing. Part of its problem is on a marketing level. It is flying its customers to eco resorts in jet aircraft when jets are commonly believed to add to Greenhouse emissions. Its patrons know this so it seeks to buy Little Props flying service, a small regional airline that operates only propeller planes. Big Green thinks that this will be a marketing tool to attract more business. It proposes running the airline as part of its business; however, the costs of financing and operating the airline will be high. It has no experience in running the airline. During the course of the contract it becomes clear that the operation of Little Props is moderately profitable based on the relatively low price for international aviation fuel in the two years immediately preceding the contract. Any spike in avgas prices will remove the profit. Depending on the extent of the increase, it may create a real problem in the airline’s profitability. However, with its eyes open and on the belief that it can make the situation work for it, Big Green continues on with the acquisition. It puts into place some contingency plans, depending on the nature and extent of the fuel price hike.
This is an example of knowing the weaknesses of a contract. The executives of Big Green have peered down the pipeline. They forecast and plan for the business variables that may impact on the airline and the extent to which it will affect the business. This is an excellent example of understanding a red zone in a contract and planning and preparing for it.
It is a useful to deliberately undertake the exercise of analysing the weaknesses after you have entered into the contract. Look closely at the contractual terms you are concerned about and assess as best you can the dangers lurking behind them.
A proper red zone analysis of the contract contains three parts:
- understanding which terms are potentially problematic
- forecasting how the contract may work against you or circumstances conspire to create a red zone situation
- developing a contingency plan to address problems.
It is impossible to anticipate all the potential problems that may arise under a contract. Don’t attempt the impossible. Keep the analysis targeted but general.
Appointing someone in the organisation as the crisis manager — the appointment contingent on which term of the contract becomes a problem — may be a really important step. You may nominate a number of people in different parts of the organisation for separate potential issues. Identifying people in this way gives them accountability. They will need to be thinking that they will be the first to take charge of the problem and have the lead in fixing it. This will give them cause to think about the range and nature of problems that may arise prior to them coming up. This can have the benefit of, as President Bush calls it, the creation of ‘work arounds’.
Just as important is not overplanning for potential red zones that may arise. Structures, not precise fixes, are key. By putting the structures into place you serve yourself best in remedying them. By orchestrating a detailed plan, you run the risk of not being able to be as responsive as you need to be to the particular circumstances. By applying a ‘cookie cutter’ you may be not addressing all of the issues as well as you might. A remedy of this kind tends to rely on execution without tailored planning.
Plan at a macro level for the problem to allow you to give precise thought about the problem on a micro level if the need arises.
- Be prepared — like exams, there is no point being overslept and under-studied. Preparation is everything.
- Be all knowing — know:
- what you want
- what you don’t want
- what you will do
- what you won’t do.
- Ask yourself — can I do what the contract says I should?
- Are they up to it?
Depending on the answers to these questions, the negotiation should address these strengths and weaknesses so as to ensure no-one overpromises to underdeliver.
- Know the creature you are dealing with. Are they a relationship developer or a contract tyrant? Who they are should regulate how you negotiate and perform your obligations and exercise your rights.
- Use the renegotiation recap — it can be invaluable. Treat it like half-time in a sporting event, a time to restore energy, gather thoughts and review and renew strategy. Consider a heads of agreement — does it suit your purposes? If so, how binding should it be? Be as conscious of your weaknesses as of your strengths in the negotiation — keep an eye on terms that are evolving that may be a weakness. Psychologically bookmark these terms early and do your best to maximise your ability to fully perform whilst minimising potentially negative impacts of a term of this kind.
- As a seller, bear in mind all of the traps of pushing too far. At the risk of over-simplifying, simply tell it like it is — exaggeration may be your Achilles’ heel.
- As a buyer, watch for the signs of the overseller. If they won’t provide detail you should be concerned.