The Looming NFL Lockout & the Shrinking Pie

AP Photo/Haraz N. Ghanbari

Back on October 12, 2010, the owners of the 32 NFL franchises met behind closed doors in Chicago. Dominating the news with respect to this meeting is the looming 2011 work stoppage predicted by many NFL reporters and insiders. I'll leave it to them to keep breaking down the minutiae of the various back and forth barrages between the owners and the players' union (the "NFLPA"). Where I think this dispute gets really interesting is breaking down what is at stake and doing a little negotiation analysis.

The NFL is a money-making machine. It just prints money. It is estimated that the NFL revenue for the 2009 season is in the ballpark of $8 billion. One estimate from the Wall Street Journal (article here) is that even if a new deal is reached with the NFLPA in time to save the season, losses from merchandising licensees and sponsorships could total as much as $1 billion (OUCH!). If the lockout continues through regular season games, the NFL stands to lose as much as $8 million per game canceled.

The real down-side here for both players and owners is that for both players and owners, the negotiation situation gets worse - especially after March 1, 2011. As the revenue pie starts shrinking, the proposals will begin to shrink as well. Additionally, owners want to take a bigger piece of the NFL revenue set aside for player salaries and use that extra cash (roughly $1 billion) to reinvest in a host of projects aimed at long-term revenue growth for the teams and, ultimately, players as well.

Pushing the owners and the "NFL" is the large amount of debt carried by the league and its teams on which they have to make interest payments on whether games are played or not. In addition, costs are always increasing, new stadiums / box seats are being built each year, coach and staff salaries, etc.

On the other side of the coin is the NFLPA representing the players interests. According to the NFLPA the average length of an NFL career is about 3.5 seasons. A lockout is devastating to an NFL prospect trying to make an NFL roster in a lockout year. There will be a whole crop of younger NFL prospects in next year's college class for teams to choose from. Striking while the iron is hot can be key, especially for the "lesser-knowns" in the league. For every Randy Moss, Tom Brady or Chris Johnson in the league there are many others who's future is much less certain.

Still, the owners, and the NFL for that matter, don't have much of a product without the players and one of the primary issues players have with shrinking salaries is the feeling that while they define the NFL product, they are being treated more or less like interchangeable parts while the owners reap huge profits. Much of the early wrangling between the NFLPA and owners has been the NFLPA asking to see the books. Basically as "show us why we shouldn't be making more money" request. 

Taking into account the added wildcards of the Supreme Court American Needle Inc. v. NFL and the NFL's hiring of Robert Batterman - the NY Lawyer who led NHL owners through the season-long lockout of 2004-05, you have all the makings for an epic and acrimonious negotiation. Once again, the NFL lives up to its reputation for being the best soap opera on TV!

Using Visuals To Capture Important Contract Details

Let's face it, one of the more daunting tasks when trying to digest a new deal is discerning the relevant business/operational details and then capturing that information in a way that allows you easy access without going back to the contract itself.

In our Deal World Rule #4 (Use Maps to See the Deal Landscape) we discuss the utility of "deal maps" to help you better see the deal landscape. This is one of our favorite tools and we feel strongly that it is a great way to capture relevant information in an easy to digest format. There is an example of a deal map in the Deal World Rule link above to help spark some ideas.

Turning more directly to a contract, you can use a deal map to help capture the important deal terms so that a quick glance at your visual can replace hunting around in a contract. This can be extremely helpful when attempting to implement some contract management procedures. Generally, you'll want to capture several important terms:

1. Contract Length:
• If you know the end date well in advance, you have time to form a more intelligent plan for renewing or shopping around for a new deal.
• Renewal can often be tricky! Many contracts have an "evergreen" clause which allows the contract to renew automatically unless notice is given by a specific date. Knowing this date in advance can save a lot of headaches!
2. Payment Terms:
• When can you expect payment after you've submitted an invoice? or How long after you receive an invoice do you have until you must remit payment?
• What happens if there is a late payment?
• What are your options if you are not paid?
3. Ownership:
• Who owns the Work Product? Is it licensed out to a party or owned outright without restrictions?
• Who can use the Work Product and how can they use it?
4. Confidentiality:
• What information should be considered confidential and how should that information be handled?
• What happens to information shared between the parties after the contract concludes or is terminated?
5. Other:
• There are many times you may want to include other important deal terms in your deal map. These could include Warranties, Non-Compete clauses, "Most-Favored Nation" clauses, assignment (i.e., can you pass on your responsibilities under the contract to a third party?), publicity (i.e., what restrictions exist with regards to disclosing your relationship with the other party and/or the fact that you are partnering with them in some way?) among others.

Having all this information in an easily accessible and easy to understand format can be a great way to keep on top of your deals and help you get the most out of your future deals! 

Contracts & Behavioral Economics

I'm always interested in the way in which compromises are reached, especially in terms of doing deals and putting that language into the contract. If we could do whatever we wanted without consequences,  we'd all write contracts that pushed all burdens, obligations and risks to the other party while handing ourselves all the upside. Since that's not the way things work, we end up making compromises that end up shaping our behaviors with respect to the other party.

In the post, Contract Terms as a Driver of Behavior, Tim Cummins marvels over how little attention is paid by the legal community to the field of behavioral economics. This is primarily due to the way in which contract principles are presented in most law schools: You do something wrong, the contract has a way of punishing that behavior. The question posed by Tim is whether that's really all that helpful in terms of a real-world business contract. Do you want to punish failure or encourage full disclosure in order to attempt to mitigate the consequences of failure. Not an easy line to draw on the page.


It's fairly obvious that negative consequences do not always deter bad behavior. According to the prevalent work in economic theories most parties will breach a contract when it's possible to pay the appropriate damages and still make a profit. So, the question in my mind is how to reward or at least encourage "good" behavior between two contracting parties. For some interesting reading on the subject, check out this interview with Harvard Business School associate professor Nava Ashraf. One of the issues raised in the interview discusses the issue:

"... we trust managers to carry out the interests of shareholders: We can build contracts to align manager incentives with those of shareholders, but we are never able to completely contract on all the things we care about and want to enforce. Implicitly, then, we hold a belief that managers have internalized the values we care about, and trust them to act on those, particularly when they might come in conflict with their own interests."

Without getting into the nitty gritty of Behavioral Economic Theory (which I am woefully unqualified to do), what many researchers are looking at now is what a breach of contract costs outside of the four corners of the contract. That is, what is your reputation, brand, trust, etc., worth in economic terms.

Term and Termination - A Translation

Term.

One of the more clear-cut, "no-duh" contract clauses is the Term of the Agreement clause. Simply put the "Term" of the contract spells out how long the parties intend their agreement to last and should be included in every agreement. 

Being able to clearly identify the duration of a given agreement is essential information to properly managing your deal portfolio. Once the deal is inked ensure that you note the date the agreement ends with some appropriate appropriate reminders that the end is near. This helps you to begin the process of evaluating the deal with enough lead time to make decisions about renewal, renegotiation or shopping around for a new business partner. 

In addition, many Term clauses include "auto-renew" or "evergreen" clauses which allow for the contract to keep renewing unless terminated by one of the parties. The deadlines for terminating auto-renewals is often 60-90 days prior to the actual date the contract renews. If you have the appropriate reminders in place, you greatly reduce the risk of unwittingly continuing an unwanted partnership.

Termination.

This is your exit strategy, that is, how the parties can end their contractual relationship. Generally, you can boil down most types of termination to "for-cause" and "not-for-cause" clauses. 

In the case of "for-cause" termination clauses there can be a wide variety of reasons for ending the agreement. What happens if one of the parties is acquired by a third party? What if one of the parties enters bankruptcy? What if one of the parties breaches a material term of the agreement (such as failing to pay!)? "For-Cause" termination clauses allow you to exit a partnership that isn't working as planned and accounts for some foreseeable events that would make a continued partnership unfavorable.

"Not-for-cause" clauses allow one or both of the parties to wind up the agreement for any reason or no reason at all. Needless to say, that gives the party with the right to terminate without cause some serious power over the relationship. If you are in the position of having a partner with this power, be sure to negotiate a transition period into that decision so that you have enough time to change gears in case your partner decides to terminate early. 

Many business and strategic decisions drive the length of the term and the exit strategies available to either party when entering into an agreement. Just remember - The value of your business (and your life) is the sum total of its deals!

Negotiation Stress

I was talking to a friend recently that is leaving their job for a new one. The hunt for her replacement is ongoing and in a surprisingly logical move the company asked her to describe some traits that would help them find a successful candidate. One of her suggestions that stuck out in my mind was to ask how the candidate deals with stress and to have them cite some specific examples. In her particular field there is a definite busy season requiring long hours and great attention to detail which all adds up to some serious stress. The first candidate they talked to said that they never really have to deal with stress and that in the event that they were stressed out they would most likely try an ignore the problem.  Needless to say, they weren't exactly impressed with that answer.

Similarly, negotiations can often be stressful and having a grasp on what areas drive stress as well as strategies for coping with stress are necessary skills for negotiators. Negotiation has its share of conflict scenarios. Generally speaking you are trying to get the most you can from someone else while giving up the least to get it (a VERY generic definition). These kinds of interpersonal conflicts can be one source of stress. 

Another area of stress is "the unknown." It's really never the things you already know that cause you problems in negotiation. The more information you can gather about an upcoming negotiation, the better you'll be able to cope. If you know what to expect from your counterpart and can nail down a workable schedule in advance, this can go a long way to easing the tension (or at least give you a light at the end of the tunnel). In my experience, a lot of this type of stress is anticipatory in nature. That is, once you jump in and learn what you couldn't know beforehand, things tend to look up.

For some interesting reading on the effects of anticipatory stress on negotiators, check out Kathleen O'Connor & Josh Arnold's SSRN article Fear & Loathing in Negotiation: How Anticipatory Stress Affects Bargainers

Coping with stress is different for everyone and some are much better at it than others. My advice comes down to my experience and generally speaking my coping strategies boil down to three primary outlets: Exercise, Discussion and Brainstorming. 

Exercise: I find that the endorphins from at least 20 minutes of physical exertion don't hurt anything (except maybe my atrophied muscles) when things are not going according to plan. At the very least, you can turn some of that pent up negative energy to good use. This may not be an option for everyone - the key is to find a way to channel pent up negative energy towards a positive, reinforcing activity.

Discussion: Sometimes just talking out the problem helps you get some perspective. I try to stay away from solutions at first since the primary focus for me is exploration. Why did this upset me? Is it the message or the delivery? Are there other outside stressors contributing to the situation? Stepping back from the situation has often allowed me to consider options that never occurred to me in the heat of the moment. 

Brainstorming: Once you've identified problem areas and taken some time to burn off some of that excess energy, it's helpful to start taking concrete steps to solve your dilemma. Brainstorming is a great first step. This doesn't have to be a formalized process (most of my best ideas come while relaxing in a hot shower), but the key is to let your brain tackle the problem without constraints. Not every solution will be feasible, but the whole point of brainstorming is to attack a problem with creative ideas. 

For some further suggestions and reading, check out MindTools Stress Management Techniques page. Lots of great ideas!

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.