Dealmaking: Help Your Agreement Go the Distance

By — on / Dealmaking

Adapted from “Help Your Agreement Go the Distance,” first published in the June 2011 issue of Negotiation.

Help your agreement go the distance If your deal doesn’t work in the real world, it’s not worth the paper it’s printed on. Here’s expert advice on increasing the odds of successful implementation.

In February 2008, Richard M. Daley, then the mayor of Chicago, solicited bids to privatize the city’s 36,000 parking meters. Though the city had raked in $23 million in parking fees and fines in 2007, it was facing a budget shortfall of about $500 million. In a secretive process, the administration narrowed 10 bidders down to one.

In December, before the City Council had a chance to vote on the deal or even examine it, the mayor announced that his administration had agreed to lease city parking meters for 75 years to Chicago Parking Meters, an entity created by investment bank Morgan Stanley, for nearly $1.2 billion. The city council rubber-stamped the agreement—a common occurrence—despite members’ confusion about its terms.

In February 2009, Chicago Parking Meters took control. Parking rates rose across the city, doubling in some areas. Meters popped up in new locations, and the hours they needed to be fed were extended. Reports of broken meters and poor customer service were rampant.

The public backlash was swift and furious. Meters were vandalized, and Daley’s public approval rating dropped and never fully recovered. After an investigation, the city’s Office of Inspector General called the deal “dubious,” noting that the city’s chief financial officer, who had negotiated the agreement, did not calculate how much the parking-meter system would be worth over 75 years.

In August 2010, Chicago Parking Meters revealed in a private note sale that it expected to receive a net present value of $11.6 billion in Chicago parking revenues over the course of the lease, which extends until 2084—about 10 times the amount the city received from Morgan Stanley.

The figure could go higher because of rate increases tied to the consumer price index. And in 2011, as a new mayor takes office, the city is once again facing a significant budget shortfall.

As the notorious Chicago parking meter deal suggests, negotiation isn’t just about reaching agreement and calling it a day. The way your deal unfolds in the real world is the ultimate measure of its success or failure.

Yet too often, bargainers pay so much attention to the negotiation process that they fail to anticipate potential implementation pitfalls. In this article, we identify three guidelines for your next important negotiation to improve the odds of its long-term success.

1. Build the relationship.

Rather than focusing on negotiating a contract, your primary goal should be to build a strong working relationship, according to Tufts University professor Jeswald W. Salacuse. The quality of your relationship with the other party could be the difference between a successful deal and one that collapses during the implementation phase.

One common mistake organizations make is to have a separate negotiation division that is uninvolved in deal implementation. In their book The Point of the Deal: How to Negotiate When Yes Is Not Enough (Harvard Business School Press, 2007), Danny Ertel and Mark Gordon described how members of AOL’s Business Affairs team engaged in increasingly aggressive online advertising deals to try to one-up each other during the late 1990s and early 2000s.

Rather than following through with their new partners, team members moved on to the next deal. Some of the agreements drove companies that had signed into bankruptcy and attracted the attention of federal regulators.

Whenever possible, the parties who do the deal should stay actively involved in making sure it runs smoothly. Personnel with strong communication skills and sensitivity are the best candidates, advises Salacuse, as interpersonal qualities may be more valuable than technical expertise. In addition, you should work to keep leaders at both organizations engaged in building and maintaining the relationship.

You can also enhance your connection by agreeing to meet in person at regularly scheduled intervals during the implementation stage to communicate new developments, discuss areas of concern, and explore new business opportunities together.

2. Focus on the long haul.

Given a nationwide trend toward privatization of public assets, it wasn’t surprising that Chicago’s mayor leased the city’s parking meters to a private firm. Over the next three years, Daley used the quick cash garnered by the Morgan Stanley deal to cover budget shortfalls.

But filling budget holes “is probably not the best use of these revenues,” Richard Little, director of the Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California in Los Angeles, told Bloomberg News.

After all, when budget problems arise again (as they have in Chicago), “they won’t have the parking meters to sell,” Little says. All of us are susceptible to the tendency to focus on short-term concerns, such as quarterly earnings, at the expense of critical long-term goals, such as helping our organization or community thrive well into the future.

How can you overcome this common bias?

First, take your time. A budget crisis or other emergency warrants a careful, methodical negotiation process, not a rush job.

Moreover, the other party could try to take advantage of your haste.

It’s also important to manage the incentives of the negotiators at the table. In the late 1990s, negotiators with Enron International, the division charged with making Enron’s global energy deals, were awarded bonuses based on the net present value of a project’s future cash flow.

So if a deal developer estimated that a project would be worth $100 million, she could walk away with $9 million once the contract was signed.

This incentive structure contributed to Enron’s Dabhol power plant debacle.

Spearheaded by Enron International’s Rebecca Mark in 1993, the planned construction of a $2.8 billion plant in India faced cost overruns and other controversies. Enron lost about $900 million in the project, and the plant was eventually closed. In August 2000, Mark left the firm, cashing in her Enron stock for about $80 million.

The company collapsed soon after.

Rather than rewarding your negotiators based on a deal’s estimated future value, consider rewarding them on the thoroughness of their preparation process, the care with which they negotiate, and their balancing of caution and risk. Ertel and Gordon recommend linking bonuses to progress in the early years of a deal’s implementation, as IBM and Hewlett-Packard do.

3. Improve the odds of follow-through.

We’re all familiar with horror stories of complex projects that go way over budget—in fact, this is probably the norm. In the early 2000s, the U.S. government lost billions on a project to develop a new generation of spy satellites, a debacle we covered in our February 2008 issue.

On the basis of its presentation, the National Reconnaissance Office (NRO) tapped Boeing for the project rather than the more experienced Lockheed. Boeing spent billions of unbudgeted taxpayer dollars before the plug was finally pulled on the project.

As negotiators, we are easily swayed by glitzy presentations, rock-bottom bids, and optimistic timelines.
But don’t take the other side’s promises for granted. Instead, ask probing questions and investigate their ability to follow through on the deal. Do they have experience coming in on time and on budget? If not, you may need to find another partner. Of course, you’ll need to scrutinize your own side’s predictions as well.

There are other ways to manage risk during the negotiation process.

As we’ve discussed in past issues of Negotiation, parties that reach different risk estimates can “bet” on these differences in the form of a contingent contract. In the NRO’s case, that might have meant setting performance benchmarks that Boeing would need to meet before proceeding to the next phase.

In addition, discuss how you will handle problems that crop up.

Consider adding a clause that mandates renegotiation, mediation, or arbitration in the event of unforeseen circumstances or conflict. It also pays to simplify the scope of your contract when possible.

Rather than giving Morgan Stanley a 75-year parking meter lease, the city of Chicago could have insisted on a much shorter time frame that would have brought a temporary cash infusion without giving away decades of revenue. In addition, to enhance commitment, publicize the results of your deal.

Both sides may work harder if your reputations would be damaged by a failed partnership.

Finally, congratulate the other side on all they have achieved. Buyer’s (and seller’s)
remorse is a common emotion that can lead to sabotage, so it pays to reassure
them that they got a great deal.

Related Article: The Art of Deal Diplomacy

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