Negotiation and the Short Term Performance Trap
Economists and psychologists love intellectual puzzles like The Prisoner’s Dilemma, a game that posits a 2-person bargaining or competition situation.
In The Prisoner’s Dilemma, one person goes free if he “rats out” the other prisoner and the other prisoner stays mum. Unfortunately, if both rat out each other, they each get life in prison. If both stay mum, they each get off with just a year.
When the game is played with strangers—one time only—the most common result is the double-rat-out. Oops.
The challenge to economists is to explain why people so frequently do not act “rationally.”
The answer shows up when you play it ten times in a row. With a friend. With eye contact.
But—especially—from playing it ten times in a row.
Then the players quickly learn to cooperate. (Though sometimes they’ll turn vicious again the last round. Or maybe not. Think reality TV shows.)
The point is: it’s smart to think collaboration, cooperation, medium to long term focus. Not a one-time, zero-sum, confrontational me-vs.-you outcome.
The learning for managers, sales managers, brokers, etc. is clear: if you think you’ll never see this customer again, nor have to deal with this customer’s spouse, friend, or cousin, and you think no one will ever hear what you’re about to do, and you’ll gladly trade a good reputation for money—then go ahead, squeeze the customer, try to win the negotiation—treat it like a transaction.
All others: operate on the assumption of multiple transactions—which, for lack of a better term, let’s call relationships.
Assume you will have repeat customers; that your reputation matters, even in terms of simple self-interest; that what goes around comes around; that six degrees of separation in today’s world is a vast overstatement, and it’ll bite you if you don’t believe it.
It’s a simple enough answer. People in social situations routinely act as if they’re a member of an ongoing social group, even if they’re not. (See for example similar results regarding The Ultimatum Game).
That, however, is in social situations. At the business level, particularly with customers, another belief system often gets in the way. I hear it frequently. It sounds like this:
You don’t understand, Charlie; around here, you get measured on short-term results. So there’s a lot of pressure. You have to be a lot tougher on customers—terms, pricing. Trust is nice and all that; but I’ve got a job and a bonus structure and I’ve got to make a living. Go tell it to my boss.
OK, let’s tell it to”your boss.”
Every time you treat a customer from a transactional point of view, you are hurting your long-term profitability. And the short term has a way of turning long-term very quickly. You run out of new customers to squeeze to get all you can in one deal. And if you rat-out your customer, and your customer rats you out in return, you just bought yourself long-term low profit prison terms.
Put another way:
The best short-term performance does not come from short-term management—it comes from medium- and long-term management done well.
Management, that is, based on the presumption of a relationship, not a series of oppositional transactions. Management based on principles, not self-interest. If you want to be in charge of your own long-term career, don’t let “your boss” ruin it with short-term management. Your customers will remember your behavior, not your boss’s words.
Trust makes money. Prisoners who rat each other out lose money.
Please tell “your boss.”
The Prisoner’s Dilemma has evolved from Hobbesian-Leviathan philosophical and social theory called the Hobbesian Trap, an escalating spiral of fear and distrust which often leads to preemptive strike, either personal, as with prisoners ratting each other out, or in the case of national defense, war. The Cuan Missile Crisis was an example of this Trap, but Kennedy and Khrushchev saw they were snared, compromised and staved off war. An unusual occurrance.
Charlie, negotiate as if customer impact matters, while taking care of yourself. When we get customers pointed at the purpose and outcome of the business relationship, and realize that it has to work for both sides, the discussion takes a dramatic positive turn. Most customers respect some level of balance between supplier and customer objectives.
I remember well a particular consulting company that seemed to be doing fabulously well and hit a wall, perhaps a "rock" would be a better term and almost sank. They had pursued mega projects, had created what seemed like a great way to market the company, had key consultants write books (and, maybe, this was a true indicator of the direction in which the company was heading, when they carefully and deliberately manipulated the New York Times Best Seller List to get their book to the top of the list — is that a trusting thing to do?), and everyone was out on the speaking trail. Then the rock arrived and sales went from booming to bust — no business on the horizon; dozens, if not hundreds of the company’s highly paid consultants "on the beach" with no work to do, and a major concern was "what will our image be if we don’t hire our usual 20 – 30 bright new MBA’s from the new graduating class — what will the world think of us if we don’t show up for all the interviews at the campuses?" Seems to me that whole process was trust in reverse — the company had screwed so many customers out of so much money that it finally caught up with them. Trust issues sometimes take a long time to surface, but when they do, watch out.
Charlie, I’m guessing you are familiar with Joe Girard’s sales books.
When I was growing up my father worked in tv sales (i.e., not retail electronics but rather selling advertising for a television station), He was strongly influenced by Girard’s Law of 250, the gist of which is that most people know 250 people, so one customer’s good (or bad) experience with your business will multiply your good (or bad) reputation 250-fold.
When my father was promoted into sales management, he found it really helpful to use Girard’s Law of 250 as a touchstone for his sales reps, because it helped quantify and concretize that the cost of one short-term bad transaction could be 250 lost deals; it made the idea graspable for people who were new (or rusty) at thinking about relationships vs transactions, or long-term vs short-term thinking.
(My father led an incredible sales team, and was promoted from sales manager to general manager and later to president and CEO, building what was then the most profitable tv station in the history of Canadian broadcasting. I’m incredibly proud of him and just about everything I know about business I learned from talking shop with him over the dinner table. I’d never be able to pay back the MBA- or consulting bill for what he’s taught me and all the help he’s given me with my own career(s) over the years.)
With the advent of the Internet, blogging, and email supersenders, 250 is probably now a very conservative number to use, but the concept remains true, and Girard’s Law of 250 may be a useful illustration to get the sales power of long-term relationship thinking across to members (employees and managers) of sales departments.
Shaula, that’s completely on-point. The 250 number almost certainly has gotten bigger, as you point out, which means that the network effect, or the reputation or relationship effect, is actually bigger in some ways than it used to be–despite our so-called impersonal world.
This is a very thought-provoking post. It underlines the fact that a true leader is characterized by his or her ability to maintain a long-term point of view, as well as a short-term point of view. Leaders keep in mind the large-scale picture, which is what differentiates them from any other administrator.
Ivan thanks for the comment, but one question: you suggest that the long-term view is one thing that differentiates leaders from administrators.
Must this be true? Do we really want administrators running around with their noses buried in the short-term? Shouldn’t the longer-term perspective be an organizational issue, rather than just a leadership issue?
(By the way, Ivan has some good things to say about negotiation and leadership on his own blog–check it out).
Charlie, your question to Ivan is right on. It’s not a matter of short term vs. long term or win vs. lose or some other black vs. white choice. Great organizations – and great managers, leaders, employees and partners – figure out how to balance competing tensions. So for example, an issue might not come down to company vs. customer. It might be, "How do I satisfy this customer today, while positioning the company for success in a long term relationship?"
Resolving those kinds of tensions is not always easy, but often extremely valuable.
Perhaps I expressed myself in too "black and white" terms. Definitely, an ideal ‘administrator’ should also be a leader. I referred to both terms (administrator and leader) as mutually exclusive, when in fact they don’t need to be. A great organization blends long-term and short-term, large-scope and small-scope, administration and leadership. Thanks for the observations, since I agree. The important thing, I think, is for "administrators" not to stay stuck on the day-to-day details only, and think about how those details will impact future relationships.
And Charlie, thanks for the kind comments.