Negotiating in the heat of the moment

Keep your wits about you when negotiating under pressure.

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At the time, it seemed to be an example of coolheaded dealmaking in the midst of disaster. In 2009, hit hard by the 2008 financial crisis and changes in consumer preferences, U.S. automaker Chrysler was on the brink of collapse, and the Treasury Department stepped in to do a deal. In exchange for about $12 billion in federal loans, Chrysler entered bankruptcy and allowed its ownership to be divided.

A health care trust for Chrysler union workers known as VEBA gained 68% ownership in the company and a $4.59 billion note that eliminated the company’s obligation to provide further health benefits to retirees. The Treasury Department took 10%; the Canadian government, 2%.

In a hasty negotiation, Italian automaker Fiat was given 20% ownership and a stake in Chrysler’s board and management in exchange for contributing small cars, engines, and technology to the U.S. automaker. Fiat also negotiated an option to eventually acquire the U.S. and Canadian governments’ stakes and up to 40% of the health care trust’s stake in Chrysler. Overall, the deal was believed to offer Chrysler a slim hope of recovery, and Fiat was portrayed as a white knight.
Fast-forward a few years, and the two companies’ fortunes had reversed: Chrysler was now turning a profit, and Fiat was struggling in the midst of the European financial crisis. In an effort to prop itself up with a Chrysler acquisition, Fiat bought out the U.S. and Canadian governments’ stakes in Chrysler for $640 million in 2011.

In 2012, Fiat exercised an option to buy 3.3% of Chrysler from VEBA. Based on its $10 billion valuation of Chrysler, which included the $4.59 billion note that Chrysler granted VEBA when the original bailout deal was struck, Fiat calculated this option to be worth $342 million. But VEBA argued that Chrysler’s value should be calculated without counting the note.
As a result, the two sides were about $202 million apart on price. They took their dispute to court and were working on a settlement at this writing.

The dispute can be chalked up to “a big hole in the language” specifying how the option price should be determined, writes Steven M. Davidoff in the New York Times. The failure of Treasury Department lawyers to address in the original 2009 bailout deal how the value of Chrysler should be determined can be considered a “$4.5 billion drafting error,” according to Davidoff.

As time has passed, several deals negotiated hastily at the height of the financial crisis have been revealed to be highly problematic. When a disaster looms, negotiators typically feel pressured to wrap up a deal as quickly as possible. Speed is often the enemy of a sound, lasting deal, but several safeguards can protect you in your next crisis negotiation.

1. Think multiple steps ahead.
It’s common for negotiators to be so focused on signing a deal that they overlook the long-term challenges of implementation, write Danny Ertel and Mark Gordon in their book The Point of the Deal: How to Negotiate When Yes Is Not Enough (Harvard Business School Press, 2007). This pitfall is all the more dangerous in crisis negotiations, where parties often feel desperate to reach a deal at any cost, and quickly.

This type of short-term thinking often limits us from considering the various eventualities that could unfold down the line. In the Chrysler negotiations, the Treasury Department and other negotiators involved were so intent on saving the automaker that they had failed to anticipate what might happen if they actually met their goal. What if Chrysler thrived once again? What if Fiat began to struggle? How would this scenario affect VEBA?

If the negotiators involved had thought several steps ahead in this manner, they might have anticipated the possibility that their draft agreement could result in Chrysler retirees getting a raw deal from Fiat down the road.

The story points to the importance of thinking multiple steps ahead in negotiation. Diagramming potential outcomes with a decision tree is one way to bring long-range outcomes into focus. Ertel and Gordon also note that managers can encourage farsighted thinking in others by (1) having negotiators articulate how their proposed contracts advance the organization’s long-term interests and (2) linking financial bonuses to progress during the early years of deal implementation (rather than offering rewards for closing).

Finally, by adding “if, then” contingencies to a deal, parties can agree to disagree by building incentives and penalties into the contract based on their differing predictions.

2. Take a slower pace.
In the midst of a crisis, you may feel you have a duty to work at lightning speed in an effort to contain the situation. Yet even as you approach the problem with intensity and a sense of urgency, there is value in working methodically.

To see why, let’s look at an extreme form of crisis negotiation: hostage standoffs. Consider that the perpetrators in these situations tend to be people who have “snapped” because of a personal crisis and taken hostages on impulse. They are likely to be in a volatile emotional state when the crisis begins, but their rage tends to subside as time passes, writes Gary Noesner, the former head of the FBI’s Crisis Negotiation Unit, in his book Stalling for Time: My Life as an FBI Hostage Negotiator (Random House, 2010).

Consequently, Noesner and other hostage negotiators view time as their most valuable tool—and they try to stall for as long as they can. Freed from deadlines, the authorities try to gradually earn the hostage taker’s trust and encourage him to surrender.

3 keys to calmer crisis negotiations

  1. Draft a contract that can adapt to changing relationships and fortunes rather than one that assumes conditions will remain static.
  2. Even when marathon negotiating sessions seem necessary, a slower pace and plenty of breaks will help you avoid costly mistakes.
  3. Further reduce errors by staying engaged with your lawyers to ensure that they understand your intentions and motivations.

Similarly, when business negotiators are coping with a crisis, they are likely to be in a highly charged emotional state that can lead to irrational thinking. Though it can be difficult to justify slowing down, you should at least be sure to take frequent breaks to give everyone time to cool down and get a good night’s sleep. A more measured pace not only calms tempers but also reduces careless errors.

3. Monitor the deal-drafting process.
After engaging in a complex negotiation process, business negotiators are often happy to pass off the technicalities of deal drafting to their attorneys. Unfortunately, this handoff is prone to errors. Vague, contradictory, and missing deal terms are not uncommon, and they can lead to serious problems during the implementation stage, according to Harvard Business School and Harvard Law School professor Guhan Subramanian. (See the sidebar below for an example.)

Such mistakes and oversights often arise when rushed or inexperienced lawyers start working from a prior contract from their files and fail to make sufficient changes to boilerplate language. In addition, negotiators often fail to adequately communicate the motivations and intentions of their deal to their lawyers, resulting in misunderstandings. These errors are all the more common when negotiators and their attorneys are under pressure to wrap up a deal quickly.

Fortunately, there are at least three ways to avoid such mistakes, according to Subramanian. First, be sure to communicate the motivations behind your deal to your legal team. This step keeps your lawyers from having to guess your intentions and thus could save you time and money in the long run.

Second, resist the common tendency to merely glance over deal documents and file them away. Instead, read them through carefully—including drafts and memos—to determine whether they accurately reflect the negotiated terms as you understand them.

Third, set up a time for your lawyers to read the deal back to you in plain English, free of legal jargon. Ask questions about any potential ambiguities, and “stress test” hypothetical scenarios that could arise. If the parties involved in the Chrysler negotiation had taken this step, they may have noticed that they had failed to clearly specify how the automaker should be valued in the future.

When contracts complicate matters

Some years back, the managers of a Boston-area daycare center negotiated with their board of directors for a change in the center’s policy. The center was experiencing high midcontract turnover, which caused classroom disruptions and significant costs. The center’s policy held parents liable for monthly tuition only until a replacement child was found. Specifically, the contract read, “Deposit: This amount will be held until the end of the contract period, and may be used toward the final month’s tuition if the child’s enrollment is to be terminated.” Because a replacement was usually found quickly, parents received their deposit ($1,500–$2,000) and exited the contract at no cost.

To compensate for the center’s replacement costs, management and the board agreed to require parents to forfeit their deposit if they left the center midcontract, even if a replacement child was found immediately. The center’s managers asked their lawyers, members of a respected Boston-area law firm, to implement this policy for the next year’s contract. The lawyers drafted the following, changing only the final words of the clause: “Deposit: This amount will be held until the end of the contract period, and may be used toward the final month’s tuition if the child completes the contract.”

Sure enough, in the next school year, a child left midcontract, triggering the revised clause. The parents pointed out that the new language said nothing about whether they should get their deposit back. The center’s managers were puzzled. Had they not been clear enough with their lawyers? Their intended interpretation required reading the “if” in the new clause as “only if.” But this reading couldn’t be correct, either, as it would imply, for example, that parents wouldn’t get their deposit back if the center closed midyear.

The center’s managers returned to the drawing board. With help from students at Harvard Law School, they came up with the following: “Deposit: If the family decides to terminate the contract before the end of the contract period, the deposit will not be refunded. If the family successfully completes the contract, the deposit may be used toward the final month’s tuition.” A year after the policy change, the center finally got contractual language that reflected its intention. Poor communication between the daycare center and its lawyers kept the terms from accurately reflecting the understanding the center had reached with its board.

By Guhan Subramanian, reprinted from the article “From Handshake to Contract: Draft the Right Agreement,” first published in the October 2006 issue of Negotiation.