Mysteries, Heuristics & Algorithms, Oh My!

I had a great opportunity last night to be a small part of a business book club meeting in Minneapolis. Before I go too much into this, how genius was this idea anyway!? I mean, we all have a stack of business books that we have been putting off reading and if you think about it, the purpose of such books is to spread ideas. So, what better way to knock off some of those books and be able to talk about the ideas presented in them with people who actually cared enough to read the book and show up? Like I said, genius. 

Now, on the to book: The Design of Business - Why Design Thinking Is The Next Competitive Advantage, by Roger Martin. The big idea is that there exists a natural tension between the analytical and intuitive approaches to value-creation. As a leader - whether in the role of a CEO or as an individual - your job is to reconcile the two approaches. Simple, right!? Not so much, but Roger doesn't leave us hanging, he gives us some hope with the Knowledge Funnel tool (that is much more fully explained in the book than I will get into).

The Knowledge Funnel has 3 primary stages. At the beginning, we have the Mystery stage! This is the funnel at it's widest point - the Mystery can be anything from what do people in Minneapolis want to eat to what the next genre of book 13 year-olds will fall in love with this year. The next stage is the Heuristics stage - don't worry, I didn't know what a Heuristic was at first either.  A Heuristic is a rule of thumb (be it common sense, intuition or an educated guess) that helps provide a a simplified understanding of the Mystery.  As these Heuristics are put into practice, you meet up with the Algorithm stage - where you turn your understanding into processes that actually do something. 

I really recommend picking up the book. It's a little dense because it seems to be written by a left-brain dominant person who has realized the power of combining left-brain realism with right-brain intuition and creativity, but still describes the phenomenon in a left-brain manner. Just my two cents there. 

Finally, one of my "ah-ha" moments from the book: The book discusses how, for centuries, people have hoarded the Heuristics as personal value levers to drive their own compensation and power.  These days, more and more, people are coming to expect the Heuristics will be FREE. I don't know whether that should be the case or will be the case in the future, but it sure seems to be true now. Read it and let me know what you think!

The Scarcity Mindset

You have probably been introduced to the idea of Abundance v. Scarcity from Stephen Covey's The 7 Habits of Highly Effective People. In the book a Scarcity mindset is characterized as viewing the world through a lens of limitation. Opportunities are few, most options are impractical and it's a battle to see who can take the most from whom.

For example, I was speaking to a friend recently about the pervasive scarcity mindset that exists in her workplace - This Is Yours, This Is Mine, This Is Non-Negotiable. This mindset manifests itself in the daily office "turf wars" to see who will get their share of the budget. This has had a trickle-down effect to most departments which has led to a high degree of unhappiness and dissatisfaction among employees.

Entering into any negotiation situation, it can be easy to get into a mindset of Scarcity. There are a lot of "things" out that drive that thinking: limited resources, limited money, limited time. You can be pretty sure that not too many people are walking around these days saying "Gosh, if I only knew how to spend more of this surplus cash I have laying around..." 

On the other end of the spectrum is the Abundance Mindset. Abundance doesn't mean that you are irresponsible or careless with the resources and opportunities that exist, rather, it is a mindset that seeks to do more these resources and opportunities than "what we've always done." 

Often times, you'll hear negotiators talk about Expanding the Pie. This involves brainstorming ways to take "what we've always done" to "what we should be doing." In essence, we are talking about creating value in negotiation - not always an easy thing to do. It requires negotiation counterparts to work together, to communicate their wants, needs, and interests.  For some amazing ideas to help you develop a framework for creating value in your next negotiation, See Negotiation Genius, by Deepak Malhotra & Max H. Bazerman, Chapter 2 & The ICON Negotiation model (explanation here). The strategies discussed in these resources will help you begin to see value in negotiations that are marked by a Scarcity Mindset. 

When Better Becomes Perfect.

One of the thoughts we recently put up on our "Ideas" page (Better is Perfect) got me thinking about how to explain this succinct, yet possibly complex idea. When people are confronted with a new contract they are often a little apprehensive about what kind of work it is going to take to get a deal they can live with. You may be unsure what protections you need, how the ownership of the work product will affect your future business and what "gotchas" may exist to act as stumbling blocks in the future. Additionally, it may be difficult for people to feel like they can push back on their deals because they fear losing the business. 

So how do you get Better deals? Whenever we start working with a new client that will be executing multiple contracts which require the same basic format (e.g., master services agreements or independent contractor agreements), we forge a master template for doing those types of deals which takes into account your specific needs and problems. This has two primary benefits: (1) If you are able to get the deal signed as is, you can be sure you have a great deal in place; and (2) If you are in a situation where you have to negotiate a deal, you have a metric for measuring whatever deal is presented. Through use of your master template and negotiating from that template you'll have a concrete way of knowing when your deals get better.

Now the logical leap comes in: Better is Perfect. That might seem like a stretch, but if you are able to take a proposed deal that, in the past, you would have signed without any changes and compare it to a deal where you were able to get some of your Master Template changes incorporated, you have a deal that is not only better, it's perfect! Now, I'm sure it's not perfect in the sense that you got everything you could have ever wanted in any deal. But one of the key principles of doing any deal is that both sides should be able to walk away from the bargain ready and willing to do another deal together. If you are able to put all these steps together, you'll realize that Better is Perfect.

Contracts - Who needs 'em!?

I was reading a post over at AdamsDrafting's blog the other day called "Can Contracts Be Counterproductive?" which links out to an article in the UK's TimesOnline by Sathnam Sanghera entitled You can't write trust into a contract. I'm pretty sure most legally minded folks will probably cringe when they think about proceeding in any meaningful business relationship without some written understanding of the parties' think is supposed to happen. 

But to answer the question, can contracts be counterproductive? Sure. They tend to slow things down. I'm sure we've all heard at least anecdotal evidence of deals being closed on the golf course. But I'd be more than a little surprised if the salesperson whipped out a contract on the 18th hole after "closing" the deal. The fact is, coming up with a written memorial of an agreement can take some time. There are so many "what ifs" out there that failing to address them can be disastrous. It might be cheaper and easier on the front-end to simply shake hands and call it good, but that will only take you as far as the first problem you have.  At that point, it might be much more expensive to figure out the next step.

Deepak Malhotra of Harvard and Negotiation Genius fame aptly points out where contracts can go wrong in his article "When Contracts Destroy Trust."

1. Contracts that are too rigid can be problematic if they lock parties into arrangements that don't allow for adjustments as circumstances change.
2.  Contracts can erode trust and goodwill if the contract structure assigns roles and obligations without enough information to properly balance the parties obligations. 
3. Some contract terms can even signal mistrust: Performance based pay, earn-outs and vesting schedules may communicate to the other party that you believe they cannot deliver without some extra incentive.

Bear in mind these points when approaching your next deal and try to strike the balance between a handshake and an unreasonably rigid contract. 

Avoiding the Independent Contractor Misclassification Pitfall

Recently, it's been reported that federal and state officials are going to be taking a hard look at companies using Independent Contractors to ensure that employers aren't passing off employees as Independent Contractors.  Hopefully you're not in the position to question whether or not the tension to save money has led you down the path to misclassification of your employees, but it looks like now would be a good time for a refresher course on Independent Contractors.

The IRS website is a great place to start. The IRS outlines 3 major, common-law areas to focus on: 

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker's job controlled by the payer? 
3. Type of Relationship: Are there written contracts or employee-type benefits? Will the relationship continue and is the work performed a key aspect of the business?

In addition to these key areas, many courts have faced this question and come up with various factors to guide a factual inquiry into an Independent Contractor controversy. These include (among MANY others): 

1. Terms of the contract.
2. Level of skill or expertise needed to perform the work.
3. Which party bears the risk of profit / loss.
4. Where the work is performed.
5. Which party supplies the tools, equipment, work environment, etc.
6. Which party retains discretion about where, when and how to perform the work. 
7. Whether the contractor is paid on a per project or commission basis.
8. Whether business or travel expenses are reimbursed. 

None of these factors in and of themselves is determinative - rather the bottom line will always be the degree of control the employer has over the way the worker accomplishes relevant tasks or duties.  The greater the control over day-to-day activities, the more likely the individual will be characterized as an employee rather than as an independent contractor. 

We've developed a short list of Dos and Don'ts to give you a little help along the way (not to be confused with legal advice ;-):

DO: 

• Develop and maintain specific goals and schedules. Document clear and specific goals and provide timeframes for projects that include interim checkups. Give necessary direction without mandating how the work must be completed.
• Execute project plans that are results focused. 
• Execute a well-written independent contractor agreement (read: see a lawyer!)
• Carefully integrate your Independent Contractors into your business. Use caution when including contractors at company events.

DON'T:

• Include the contractor in office functions (onsite & offsite).
• Provide performance feedback and discipline.
• Provide business cards.
• Provide administrative support.
• Give monetary bonuses.

This will give you a place to start and, most importantly, a reminder to re-evaluate your current Independent Contractor practices in light of heightened scrutiny. Good luck!

The Copyright Funkiness of the Google Book Settlement

Well, Google's Book Settlement website is up and running, the Fairness Hearing is scheduled for February 18, 2010, before the Court in the Southern District of New York and the reaction and speculation is really all over the board. I mean, if this settlement is only for the millions of out-of-print books that are making zero dollars for their authors and publishers, what's the big deal?

Despite the amended settlement agreement, the U.S. Dept. of Justice ("DoJ") still has concerns about what, in its view could be a far-reaching settlement. The DoJ's concerns boil down to three primary areas of interest: Copyright, Anti-trust and Class Action issues.  My primary focus is going to be the Copyright issue since I don't really follow Anti-Trust of Class Action and there are plenty of other more competent people out there to tell you about those things.  So here goes...

According to the DoJ's Statement of Interest, "[u]nder existing law, copyrighted works typically cannot be exploited in all the ways the [Amended Settlement Agreement] contemplates without the prior permission of the rightsholders." The problem that the settlement agreement brings to light something like the Y2K of publishing agreements: Many to most of the out-of-print books were written and published before the digital age and / or the contract just doesn't address who owns the digital rights to such a book. The Amended Settlement Agreement attempts to get around this thorny little issue by creating an "opt-out" mechanism whereby rightsholders could prevent their copyrighted material from appearing. 

This presents a couple of interesting things to think about. First, this would seem to give Google a license to books without permission from the rightsholder and shifting the burden to the rightsholder to say no way Jose! Not too many copyright holders are going to be in love with that idea. Second, from an academic standpoint, if no rightsholder can be found for a given book, isn't it better to throw it into the database rather than let it sit on obscure bookshelves of a handful of libraries?

Go Big or Go Home - BSkyB v. HP-EDS

If you work in the IT outsourcing industry or  follow legal headlines in any way, you've probably seen some press related to this issue - and honestly the numbers are a bit staggering: BSkyB initially claimed £700m in damages (roughly $1.098 BILLION) on a £48m contract ($75.25m). The legal fees are estimated at £70m ($110m) and the initial award - which HP-EDS is seeking to appeal - sits at £200m ($314m). 

At its heart, this is a fraudulent misrepresentation case - no new law was created to reach the decision. The sticker shock of this case grabs headlines because there was a limited liability clause in the contract that limited liability to £30m ($47m).  However, that clause could only come into play in the event of negligence (that is, negligent misrepresentation). The court found that HP-EDS' representations with respect to the time required to complete the project - made during the bidding process for the project - were made fraudulently, opening the door to unlimited liability for HP-EDS to BSkyB.

So why does this case matter? Companies embarking on similar IT or outsourcing services contracts should be concerned whether this case will affect service providers' view of risk (and, consequently, price) and whether their projects will feel the impact of more constrained service provider behavior - especially in the bidding process. This case could affect the way in which service providers can be called to account for its pre-contract sales pitches and the degree to which either party can rely on contractual limitation of liability clauses. 

Many times, the sales team comes in and makes promises about their company's capabilities thinking that they'll worry about those issues later or let the lawyers hammer it out later. This case could serve to change this process significantly by inserting a new tension: greater risk leading to greater cost. Service Providers will argue that this case increases their risk of exposure and justifies a higher contract price. Customers will counter that they don't want to bear the cost of the risk (which is going to be difficult to accurately measure in the first place, especially in the bidding stage where the project may not be fully scoped) and that such costs should be absorbed by the Service Provider anyway. 

Overall, this case is a milestone - but perhaps not in the way it has been hyped.  BSkyB was able to catch a key HP-EDS witness perjuring himself and that, but for HP-EDS' deceit, BSkyB would have selected a different service provider to perform the project. Not everyone is going to be able to gamble the kind of money that BSkyB did in this case. Combine that with the fact that BSkyB was able to prove fraud rather than mere negligence - kicking open the door to unlimited liability - you have a truly unique case on your hands. Many dissatisfied customers may try to go down this path, but far fewer will succeed. However, the fact that a precedent exists should be enough to cause many sales departments to evaluate their current bidding process with an eye to reducing their exposure to these types of claims.