How to Burn Money Negotiating
A quick word first1
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A big time, lose-lose negotiation
Years ago the Wall Street Journal published a front page story about how a negotiation went spectacularly off the rails. I’ve used the case in my courses ever since. There are clear lessons to be learned from what the parties did wrong. Here’s what went down (literally).
The board of a New York City co-op apartment building enacted a rule requiring everyone to install and pay for child safety bars in the windows. One particular owner refused to pay, insisting that the board pick up the cost: in that case, $902. The board, made up of his neighbors in the building, felt compelled to uphold its legal authority and filed suit, hoping the owner would relent.
Act One: The board’s demand letter
Co-op’s running cost: $315
Owner’s running cost: $0
Total running cost: $315
Rather than comply with the demand, the owner retained his own attorney, and the parties were off to the litigation races.
Act Two: The trial
The co-op board won before the trial judge here, but the bills were piling up.
Co-op’s running cost: $9,759
Owner’s running cost: $5,000
Total running cost: $14,759
Take a guess on how far down the rabbit hole this is going to go.
Act Three: The first appeal
The owner appealed that judgment and won a reversal (if you can call spending $10,000 to avoid paying $902 a win.)
Co-op’s running cost: $19,328
Owner’s running cost: $10,000
Total running cost: $29,328
Act Four: The second appeal
But then the board got the original judgment reinstated by a still higher court.
Co-op’s running cost: $43,099
Owner’s running cost: $20,000
Total running cost: $63,099
Act Five: Something else to fight about
The owner gave up challenging the board’s authority, but it went after him for reimbursement for their legal costs. A court appointed referee ultimately ruled it could recover $30,000 of the fees from the owner but would have to swallow the rest.
When they were finally done, the combined bills topped $100,000 (not counting the original $902 for the window bars).
Ignoring the obvious
This battle took five years. From the start, each side assumed that the other would come to its senses and abandon the fight. Instead, they both dug themselves ever deeper and kept on shoveling. Nobody planned on investing so much time, money, and emotion in a lose-lose proposition, yet that’s the outcome they got.
The apartment owner himself finally learned his lesson. “I’m a man converted,” he said afterward. “Anything you can possibly do to avoid a lawsuit, do it.”
The lawyer for the co-op’s board wasn’t chastened, though. “I think the expenditures here were appropriate and were pretty much kept to a minimum,” he told the Journal. He claimed that his clients “had an idea of what was going on” throughout the case. “There were no surprises.”
That attitude betrays a fatalistic commitment to a strategy even when there’s mounting evidence that it’s not working.
Beyond the money, think of all the time the co-op board, the apartment owner, and others in the building wasted over this matter. Think, too, of the emotional cost. I wouldn’t have wanted to be riding down the same elevator if the combatants were on board, too.
With the benefit of hindsight there were easy options that would have spared the parties all of that.
Maybe the owner could have “donated” $902 for some other common use without having to back down on the legal principle. Or another resident, caught in the crossfire, might have made the case go away by anonymously sending the board $902 in cash to cover the cost of the window bars—a bargain compared with being assessed for the mushrooming legal costs.
Why didn’t that happen?
My guess is that the parties were closed-minded. The board likely saw itself as standing up for principle and precedent. (“If we make an exception for you, others will demand the same thing.”) The owner, in turn, might felt that if he didn’t stand up for himself in this case, the board might throw its weight around and order him to spend money on other things he didn’t need or want.
Second, it didn’t help that there were many parties involved. Everyone was impacted. Opinion may have been sharply split among the all the owners. The board itself may have been divided. If this were simply a two-party dispute, somebody with no stake in the outcome might have been able to quietly broker a deal.
Third, likely there was a principal-agent problem. Many lawyers faithfully represent their clients’ interest and save them money by settling lawsuits. But here the taxi-meters kept on running. Here, the board’s attorney here claimed to have kept expenditures “to a minimum.” Yikes! Once that ball was rolling, both sides poured in good money after bad.
Finally, it seems that nobody challenged their own approach. Back in April, I posted PRE-mortems: Stress test your strategy. It’s about the importance of casting a critical eye at your plan both at the outset, and thereafter as the negotiation unfolds.
The whole fiasco also might have been averted if just one board member had asked the right question when they filed suit: namely, “What’s the worst thing that could happen here?” An obvious answer would be that the owner would be just as obstinate as they were.
The moral: If you’ve dug yourself into a hole, don’t go looking for a bigger shovel.
Housekeeping
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PS Don’t forget to submit your choice to the Walk Away or Counteroffer puzzle that I posted last week. Thanks! Mike
]] puzzle that I posted last week. Thanks! Mike
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