Contracts - What's Your Methodology?

Part of our ongoing commitment to our philosophy of doing deals (The Value of Your Business is The Sum Total of Its Deals) is the methodology we employ to help each deal capture the potential "whole value." Part of the fun of doing deals (yeah, it really is fun) is that each new deal presents new challenges and new ways of capturing value. 

Below is a picture that shows an overview of our Whole Value Methodology (you can click the link to download a much more legible pdf). We are constantly refining our approach, because we just keep learning new things.

One of the greatest challenges facing new and small businesses (and many large and established businesses unfortunately) is developing a measured approach to doing deals. One of the best ways to implement a methodology like that outlined above is to work with an attorney to develop some standard contracts for some of your more common deals. You may not always be able to use your standard contract depending on the customer or vendor, but you will always be able to compare the terms to your standard and negotiate from a position of better understanding. 

Still, negotiation is only one piece of the methodology. In order to effectively use your standards, you need to ensure that you have followed all steps in the methodology. For instance, how will you know you've reached your intended destination if you never outlined where you wanted to the deal to end up?

Finally, just as we're refining our methodology on an ongoing basis based on what we've learned, be sure you're doing the same! If you find a better tool, better methodology, better contract, better anything... run with it!

Time to Drop Anchor?

Well, not ever blog post title is going to be a winner, but you have to start somewhere, right?

Last week, I talked about how perceptions often lead to faulty decision-making. I wanted to follow up by talking about Anchoring (and Adjustment) which can lead to altered perceptions and focusing issues in negotiations.

So what is anchoring? Anchoring can refer to a couple of related things. 

First, Anchoring can be employed as a negotiation technique. Most often one party will attempt to set the tone of a negotiation by leading with a specific number, contract terms, etc. The hope being that wherever negotiations go, the final agreement will be shaped by the initial "anchor." This can definitely backfire. In some cases, your negotiation opponent may be willing or even expecting to give up more than you ask them. In such a case, an anchor acts as a minimum they will push back against - especially if they see it as more favorable than what they had initially hoped.

Second, Anchoring can also refer to the focusing effect that happens when the way information is presented tends to skew our perception of how a given scenario will play out.  The best example I can think of here is the amount of money you are supposed to drop on an engagement ring - the ol' 2 months salary line. I'm pretty sure most ring shoppers don't figure it out to the penny, but I am certain many of them ballpark the amount they spend using the 2 months salary benchmark. Most people can't afford an expense that equals 2 months salary and end up going into debt (thus spending even more taking interest into account). While you can't put a price on love, you can certainly do better in accessing your own budgetary constraints than "2 months salary" would dictate. At any rate, the size of the diamond really won't affect future marital bliss or lack thereof (and if it will...might I suggest a nice, airtight pre-nup?).

This second instance of anchoring (sometimes referred to as a focusing illusion or cognitive bias) can be very difficult to accurately account for because our own biases inform our perceptions. The best strategy to overcome this type anchor is preparation. If you have a clear picture of your destination and the objectives you need to meet in order to ensure a favorable outcome, you'll be less likely to change your goals mid-stream in response to anchors introduced during the course of negotiations. 

If you are interested in some more academic reading - check out Tversky & Kahneman's Judgment under Uncertainty: Heuristics and Biases.