How good are you at predicting the future? Are you the person who can always guess who will win the Superbowl each year? Can you guess someone’s age when you meet them the first time? If you are like most of us, the future is a big mystery to you. That’s why a lot of negotiations grind to a halt – both sides think that the future is going to turn out differently and they are not willing to sign an agreement that doesn’t line up with what they think is going to happen. Is there any way around this problem?
The Power Of A Contingent Agreement
One way that negotiators try to overcome their differences of opinion about how future events will unfold is by using persuasion techniques – using their negotiation styles and negotiating techniques to convince the other side to see things their way. A better way might be to “bet” on your differing views with what is called a “contingent agreement”. The way that you can go about doing this is by adding incentives or penalties based on future performance to your contract. When you do this you protect both parties against risk.
A classic example of a contingent agreement has to do with building a house. Let’s say that a homeowner is skeptical of their contractor’s promise to complete a building project within six months. Differing forecasts by both sides can breed suspicion and stand in the way of agreement. This could lead to a deadlock in their negotiations. Instead of getting stuck, the homeowner could ask the contractor to agree to pay a penalty in the event of delays or offer a bonus if the contractor finishes early.
Having the ability to bring a contingent agreement to the table adds to the benefits of negotiation in business because a contingent agreement allows negotiators to capitalize on their differences, thereby avoiding the need to compromise or decide who is “right.” An added advantage of using a contingent agreement is that it also lowers the risk of noncompliance, decreases the odds of litigation, and reduces the need to renegotiate deal terms.
Hidden Hazards That Come With A Contingent Agreement
The value of a contingent agreement shows up when there are two parties that legitimately disagree about future outcomes that affect their deal. If you look around you, you can see contingent agreements being used in a number of different situation including professional athletics, M&A, and building projects. As negotiators we need to realize that there are many situations that require negotiation could be improved by structuring incentives and penalties rather than resorting to persuasion techniques that may have low odds of success. However, before we add a contingent agreement to our deal, we need to consider these four potential hazards:
- Unequal information. If it turns out that the other side has access to better information than you do, you might unwittingly agree to a deal that turns out badly for you. Always check the validity of your predictions before signing on the dotted line.
- Distorted incentives. If both parties enter into an unrealistic contingent agreement then this could create a conflict of interest. As an example of this, if your contractor rushes to meet an imposed deadline to avoid incurring penalties, you might not be pleased with the finished project that he delivers to you. Set terms that are reasonable for both sides.
- Ties that bind. As negotiators we need to understand the results of our actions. It turns out that a contingent agreement creates an ongoing relationship, because the two sides will need to assess the final terms of their agreement at a later date. If you’d rather not deal with someone again, a contingent contract may not be the best idea for you.
- We enter into contingent agreements because we want the other side to do something. To be enforceable, a contingent agreement must be clear and measurable. One thing that you don’t want to is to make a bet on an event that is ambiguous or otherwise difficult for both sides to measure.
What All Of This Means For You
If there is one thing that we all fear in a principled negotiation, it has to be running into a deadlock. All that time and effort that we have put into a negotiation will have gone nowhere. A deadlock is something that can occur if the two sides involved in a negotiation see the future differently. One way to bridge this gap is instead of trying to convince the other side that your vision of the future is correct, you enter into a contingent agreement that allows you to “bet” on which vision of the future is correct.
When you add a contingent agreement to a negotiation, what you are doing is adding incentives or penalties based on future performance to your contract. When you do this you protect both parties against risk. An advantage of using a contingent agreement is that it allows you to avoid the need to compromise or decide who is “right.” Additionally an advantage of using a contingent agreement is that it also lowers the risk of noncompliance. As powerful as a contingent agreement is, we also need to understand that there are hidden hazards that come along with them and that there are certain circumstances in which we should not use a contingent agreement.
Negotiations that encounter a deadlock are a waste for both sides. When we see this situation occurring, we need to take steps to see if there is any way around it. Using a contingent agreement is one way to allow both sides to continue to move forward. We both get to place a bet on how we think that the future is going to unfold. Although only one of us will end up being correct, we will both be happy with the deal that we are able to agree to.
– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Negotiating Skills™
Question For You: What do you think are the warning signs that this negotiation should not try to use a contingent agreement to solve its problems?
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