The Bernie Madoff scandal reminds me of the important role trust plays in negotiating. As I have written before, trust is hard to build and easy to destroy. Once lost, trust is extremely difficult to restore. Because of this, value and jealously protect your own reputation as a professional and trustworthy negotiator.
But what if you’re negotiating with someone you don’t know or who has an untrustworthy reputation?
Here are some suggestions:
1. Evaluate the risks of trust
Roger Fisher, co-author of Getting to Yes!, said “trust is a matter of risk analysis.” In other words, the more you blindly trust, the more you put yourself at risk. And the less you trust, the less you risk.
So in a tiny deal, it’s not that risky to trust. If your counterpart doesn’t fulfill its end of the bargain, no big deal. Little is lost. But in a huge deal, it’s may be extremely risky to simply trust that your counterpart will fulfill its commitments. If so, you will want to do more than simply trust in them.
The first step, then, is to evaluate the risk involved in your negotiation. The higher the risk, the more likely you will want to do more than just blindly trust your counterpart.
2. Do your due diligence
Second, research your counterpart’s reputation to better determine their trustworthiness. For example, are they licensed and bonded, registered with an oversight agency and/or a member of the Better Business Bureau?
Also seek out and verify recommendations and references. Find out others’ experiences with them.
Overall this will give you a clue as to whether they are likely to be untrustworthy and what risks might be involved in dealing with them.
3. Make it in your counterpart’s self-interest to be trustworthy
Finally, in big deals where the risk is substantial, lower the risk level by giving your counterpart a reason or incentive to fulfill their commitments. Reward them for fulfilling their commitments and penalize them if they don’t.
Build these elements into your agreements. Then it’s not a matter of trust. It’s a matter of their doing what it is in their self-interest to do.
One way we do this is with up-front payments, escrow agents, and with signed, enforceable contracts with liquidated damages clauses. By taking these steps, we take away the other party’s incentives to lie or breach agreements.
4. Don’t put all your eggs in one basket
Finally, even with all the ways you can try to protect yourself in any one deal, it’s still risky if you have everything riding on it. Then your Plan B – or leverage – is relatively weak.
That’s the beauty of diversification – in assets and in deals. Unfortunately, that’s what some of the Madoff victims have learned the hard way.