The recent financial crisis and the negotiations involving Wall Street, the Bush administration, the Federal Reserve and Congress have highlighted a number of critical negotiation lessons. Here are three:
- Recognize the power of precedent.
Bear Stearns’ demise and its government-facilitated sale to JPMorgan Chase sent the first major signal to the financial world that the U.S. government would not simply let the market take its course.
Instead, the government, by facilitating the sale and ponying up financial guarantees, created an important precedent for an interventionist role when investment banks find themselves in major trouble.
Precedent forms a critical element in many negotiations. How? Parties often use precedent to justify their preferred result as “fair and reasonable.”
“It was fair for you to give John a $10,000 raise when he met his annual goals” is a precedent you might tell your boss. “So you should give me the same because I also met my goals.”
Of course, Lehman Brothers made this move when it started going into the financial dumps.
“You bailed out Bear Stearns,” Lehman offered as initial precedent, and then the company pointed to the Fannie Mae and Freddie Mac bailout as additional ones.
Lehman said: “Now it’s our turn.”
- Leverage usually trumps precedent.
Treasury Secretary Henry Paulson said no to Lehman. Why?
While Lehman had powerful precedent based on the government’s prior actions, Paulson perceived the government’s Plan B to bailing out Lehman – its leverage – was better than rescuing Lehman and sending the same message (that the government will step in if you mess up) again.
From a negotiation standpoint, Paulson’s move reflects the strategic reality that leverage often trumps precedent.
You may have great precedent, but if the other side’s Plan B is better than following your precedent, it likely will walk or force you to concede.
Say I’m negotiating a five-year-renewal contract with a software vendor. The vendor requests an annual consumer-price-index increase, and our past two contracts included this provision (the precedent).
But I have another qualified vendor willing to do the same deal without an annual increase (Plan B), so I likely will be able to hold the line on it. My leverage trumps the vendor’s precedent.
- Evaluate deadline flexibility.
The Bush administration last week suggested that Congress needed to commit $700 billion and pass a bailout plan by Congress’ scheduled adjournment at week’s end – or else our financial system would melt down.
While experts disagreed on whether this was true, this deadline increased the pressure on Congress to pass a solution in a hugely accelerated time frame.
The response by many in Congress on both sides of the aisle? It’s a crisis and we will try, but it’s foolhardy to commit $700 billion on such short notice without an opportunity to more comprehensively explore the matter.
Lawmakers did not want to be railroaded by this supposedly rigid deadline. As long as we’re working and making good progress, they decided, the economy probably will not melt down.
Plus, they said, we can always pass a staged solution that immediately commits less than $700 billion and revisit it in a few months to evaluate how it’s working.
This move – to decide that the deadline is actually flexible and we’re not going to accept your timeframe – is an effective tactic in many negotiations.
Speaking of deadlines, I need to get this column to the paper. This deadline is inflexible.
Published October 3, 2008 The Arizona Republic