For Better Business Negotiations, Take the Long View

Prevent

By on / Business Negotiations

In August 2012, Michael Dell, the founder and CEO of computer company Dell, embarked on the long, winding odyssey of taking the company private. At the time, Dell was struggling to maintain a foothold in the market for personal computers amid the rise of tablets and other handheld devices. Michael Dell maintained that to ensure a strong future for his company, he needed to remove it from the pressures of generating short-term earnings for public investors.

Dell’s 25-year run as a publicly traded company ended on October 30, 2013. Speaking at the University of Texas in March 2014, Michael Dell said that taking his company private has allowed it to make the significant investments needed to meet clients’ demand for new software and data services while also dramatically simplifying decision making within the company.

The fact that companies such as Dell believe they have to go private to innovate for the long term is symptomatic of a larger trend toward short-term thinking, or “short-termism,” in the corporate world. Fearful that failing to meet earnings expectations could trigger a decline in their company’s stock price that would lead to lawsuits and management upheaval by activist hedge funds, executives end up making myopic decisions.

It’s not just public corporations that are affected by short-termism. Because of common cognitive biases and organizational pressures, all of us who negotiate on behalf of our organizations are susceptible to focusing so narrowly on immediate concerns that we create larger problems to be dealt with in the future.

The widespread tendency to discount the future—to give more weight to our immediate desires than to future gains when making decisions—can contribute to destructive short-term thinking. The 2008 crash of the U.S. housing market, for example, came about when lenders and borrowers became so focused on immediate benefits—low-interest, adjustable-rate mortgages that could be bundled and sold—that they failed to consider what would happen when temporarily low interest rates rose and homeowners could no longer make their mortgage payments.

Three strategies can help us think and act more broadly in our negotiations.

1. Make long-term concerns more salient.

Negotiators may recognize in theory that they are the stewards of their organization’s future, but pressures to maximize short-term earnings can cause long-term concerns to fall by the wayside. The fact that we tend to be overconfident about how the future will unfold also stands in the way of bold action to head off potential crises.

When preparing for negotiation, it’s important to take time to analyze how the issues at stake could play out over time, advises Duke University professor Kimberly A. Wade-Benzoni. We need to remember to think not only about how we ourselves will be affected by a deal but also about the social, environmental, and financial implications for our company and society at large over time.

Here’s a list of questions that Harvard Business School professor Max H. Bazerman advises you to ask yourself to bring these long-term issues to mind on the brink of important talks:

  • Other than the parties at the table, who would be affected by any agreement we reach?
  • How will these parties likely be affected and to what degree?
  • Are there any steps we can take now to remedy any potential negative impact of our agreement?

Once you’re seated at the negotiating table, be sure to discuss the likely long-term impact of the proposals you’re considering. Because the future can be hard to predict, you may need to consult experts to help you reach educated estimates. It can also be useful to make a decision tree to graph the possible results of various options.

2. Create structural solutions.

Organizations may be able to “nudge” employees toward more farsighted decisions in their negotiations and other realms. In their book Nudge: Improving Decisions about Health, Wealth, and Happiness (Yale University Press, 2008), Richard Thaler and Cass Sunstein describe how, through a concept called choice architecture, organizations can steer people toward better decisions by making subtle adjustments in how information and choices are presented to them. To take one example, Thaler and University of California, Los Angeles professor Shlomo Benartzi created a retirement program called “Save More Tomorrow” that capitalizes on the human tendency to be more open to making responsible long-term choices when the changes will be enacted at a later date rather than in the present. Under the program, workers can commit in advance to increase their contributions to their retirement funds whenever they receive a raise. Save More Tomorrow greatly increases the savings rates of those who sign up. The time lag promotes more rational decision making, and employee inertia keeps them from canceling their higher contributions after they begin.

Through choice architecture, organizations can steer people toward better decisions.

Individuals can also make structural changes to nudge themselves toward more future-focused decisions. Consider that investors often focus so closely on the short-term performance of the stocks they hold that they trade far too actively. “The high rate of trading in the stock market has long been a mystery for economists,” write Max H. Bazerman and Don Moore in their book Judgment in Managerial Decision Making (Wiley, 2013). Short-term trades are typically irrational: Professor Terrance Odean of the University of California, Berkeley has found that, because of investors’ tendency to sell “winning” stocks (those that are selling above the price at which they were purchased) and hold “losing” stocks (those that are selling below the price at which they were purchased), the so-called winning stocks that investors sell end up outperforming the losers that they keep. Because investors would be better off following a buy-and-hold strategy, a simple structural change could be an important step toward better long-term financial decision making: removing their stock portfolios from their smartphones so they won’t be tempted to make frequent trades.

3. Promote long-term negotiating.

The way negotiations in particular are structured within many organizations can create perverse incentives and foster short-term decision making, write Danny Ertel and Mark Gordon in their book The Point of the Deal: How to Negotiate When Yes Is Not Enough (Harvard Business Review Press, 2007). In many companies, salespeople are financially rewarded based on booked sales, an incentive that leads them to view the deal closing as their ultimate goal—and not to give the implementation stage a second thought. Energy-trading company Enron, which went bankrupt in 2001, had a practice of giving its salespeople huge bonuses for closing deals. Rebecca Mark, the CEO of Enron International at the time, earned millions in bonuses upon closing a troubled and ill-conceived deal to build the Dabhol Power Station in India, a project that collapsed as Enron’s financial mismanagement and fraud was exposed.

When those who negotiate aren’t invested in a deal’s long-term success, they are unlikely to prepare for problems that could arise in the future. This helps to explain why so many agreements between companies, including strategic alliances, fail during the implementation stage.

To address this disconnect between deal making and implementation, organizations should involve those who will be implementing the agreement in the initial negotiation. In addition, instead of rewarding negotiators for closing a deal, managers should tie negotiators’ bonuses to progress in the early years of implementation. Finally, negotiators should be held accountable for explaining how their proposed contracts advance the organization’s long-term goals.

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