The purpose of this paper is to analyze a complex negotiation between Pat Olafson (Viking Investments) and Sandy Wood (WoodCrafters), from the perspective of Sandy. More specifically, this paper is written from the perspective of Sandy’s legal counsel. It is intended to provide Sandy with support and guidance for his negotiations with Pat.
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This negotiation holds critical significance for Sandy’s future, as business owner, a homeowner, and an employer. As Pat Olafson’s business seems to be thriving, Sandy finds himself at a critical impasse in his professional career. His business relationship with Pat has become one of financial dependence. There are three major financial issues, which Sandy must resolve in a timely fashion in order to avoid having to file for bankruptcy. These three issues include a renegotiation of lease terms, agreement on who is responsible for a lumber change order, and agreement on terms for the payment of $200,000 worth of loan principle.
Sandy’s attorney will be addressing the following major topics: * Negotiation Preparation * Interest-Based Bargaining * Assessment of Opposing Party * Negotiating Goals/Strategy Interest-Based Bargaining Given the complex and potentially contentious nature of this negotiation, it seems to lend itself well to Interest-Based Bargaining. Given the harsh facts that Sandy is faced with regarding his company’s financial position, it is possible that Sandy and Pat’s reservation points lack positive overlap or that this negotiation will involve no more that a small amount of bargaining surplus..
Furthermore, although Sandy is facing some very contentious issues, there are obvious benefits to maintaining a positive long-term relationship with Pat and Viking Investments. Therefore, applying a traditional negotiating style or a distributive negotiating style to this negotiation would likely be an ineffective approach for Sandy to take. In other words, with such a small amount of pie on the table, attempting to slice the pie isn’t likely to go in Sandy’s favor. A better approach would be to focus on the underlying interests of both parties and attempt to expand the pie.
If understood and practiced by both parties, Interest-Based Bargaining seems to be an
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appropriate means to this end. In Interest-Based Bargaining, the following concepts are used to review and analyze each negotiation: * Interests * Options * Standards * People * Alternatives * Closure Interests- Sandy’s main underlying interest going into this negotiation is the financial health of both his company and his family. He is on the verge of bankruptcy, which would cause him to have to close his company’s doors and sells his house.
He has 25 employees, which he would like to keep employed. He has a home/investment property that he would like to hold onto until the housing market rebounds. Options- Sandy’s potential options are very limited at this point. Pat effectively holds the key to Sandy’s financial future. If Pat refuses to negotiate reasonable terms to any of the major issues in this negotiation, Sandy will have no choice but to file for bankruptcy. People- Pat Olafson is a local investor and real estate developer. In comparison to Sandy, Pat has been very financially successful.
Their relationship seems to be multi-layered. Pat plays the role of bank, landlord, and client to Sandy and WoodCrafters. While not illegal, or even immoral, allowing one person, or entity, to have so much control over your business life isn’t the wisest decision. In addition, the combination of Pat’s success and Sandy’s hardships seems to have caused Sandy to be jealous of Pat’s success. It would be in Sandy’s best interest to recognize that his perception of Pat bears no significance on this negotiation.
Sandy would be best served by leaving his perceptions behind and keeping his emotions in check. Alternatives- Sandy’s alternatives are have become extremely limited. Because of the $200,000 loan he took from Pat several years, his current credit status with other potential lenders, and the short time-frame in which he must pay for the lumber ($700,000), Sandy’s only real alternative to negotiating at this point would be to file for bankruptcy. One additional factor to this alternative is Sandy’s house.
Payment for the lumber change order is due within 15 days, and if payment to the lumber supplier is even 1 day late, all of WoodCrafter’s assets, plus Sandy’s personal residence (and associated equity), will be seized. Effectively, Sandy’s alternative to negotiating some reasonable settlement terms regarding the main three issues at stake (loan, lease, and change order) would be to file for bankruptcy and start over from scratch. His business would be dissolved, employees laid off (likely never to return), his investment property would be lost, and his family would be without a home.
In this instance, Sandy does not really have a reasonable BATNA (best alternative to negotiating). If Sandy were to walk away from the negotiating table without having secured an agreement with Pat, he would be committing to start his business and personal life over from scratch. Unfortunately, Pat holds the majority of the power in this negotiation. The contract language regarding the large change order is in Pat’s favor and Sandy legitimately owes Pat $200,000 worth of loan principle, which Pat has the right to demand at any time he sees fit.
The one saving grace regarding Sandy’s BATNA (or lack thereof) is the fact that Sandy’s BATNA (bankruptcy and loss of his home/equity) would also negatively impact Pat as well. If Pat and Sandy cannot reach an agreement, Pat would also suffer along with Sandy. Pat would not receive his loan principle, he would lose a tenant, and he would likely no longer have the option of hiring WoodCrafters for his future carpentry work. Closure This is a very precarious situation for Sandy.
The stakes are extremely high and nearly everyone who Sandy cares about in his private and professional life will be affected by the outcome of this negotiation. It is absolutely critical that Sandy puts himself in the appropriate mindset for this negotiation. Sandy needs to clear his mind of the details associated with how the events leading up to this negotiation transpired. He must be able to envision an amenable agreement settlement between Pat and himself prior to sitting down to the negotiating table. Pat may or may not want to quibble over the details regarding exactly what took place to get both parties to this point.
Sandy will need to be prepared to discuss those details in a respectful manner, but also redirect the conversation to the most important issue, which is that if an agreement cannot be met, Sandy will be forced to file for bankruptcy. Sandy’s bankruptcy would have a great deal of negative consequences for both individuals and their respective companies. Pat is a business man. He will likely understand the consequences of Sandy’s potential bankruptcy. Because of this, this is one of the very few situations where sharing your BATNA would be recommended. Pat holds the majority of the power over Sandy.
The only incentive that Pat will have to agree to the terms necessary to allow Sandy the time he needs to pay his outstanding bills is that the only other alternative is catastrophic for Pat as well. Therefore, in order to close a deal with Pat, it is recommended that Sandy lay his cards on the table. Assessment of the Opposing Party (Pat Olafson) As previously stated, Pat Olafson is a business man. He seems to have a diverse portfolio of investment and development projects. The most critical concept that Sandy must keep in mind is that Pat Olafson is motivated by profit.
Pat’s underlying interest, and his main decision making motivation, is driven by his desire to achieve financial success. Because of this fact, it is very likely that Pat will be able to recognize the pitfalls of not reaching reasonable terms for the three main issues at stake. Although Pat is likely not aware of it at this time, he too does not have a favorable BATNA. Because not being able to reach agreement with Sandy would mean that Sandy would file bankruptcy and Pat would likely not receive the $200,000 worth of loan principle that he is owed, Pat is unlikely to have a better alternative to negotiating some terms of payment for the outstanding balance. It is important that Sandy does not misconstrue the fact that Pat does not likely have a feasible BATNA for power. Pat will be learning for the first time that his $200,000 receivable is in jeopardy. Like most highly successful businessmen, Pat has the potential to allow his ego to guide his decisions. While Sandy’s bankruptcy would hurt Pat’s bottom line, the consequences would not be nearly as significant to Pat as they are to Sandy.
Therefore, it is important that Sandy keeps in mind who he is dealing with. If disrespected, Pat may be capable of allowing his narcicism to kick-in and opting to allow Sandy to experience failure out of an odd/twisted sense of moral principle. It is strongly advised that Sandy treads lightly when discussing the issue of bankruptcy, loss of his home/equity, etc. Rather than threatening Pat with the possibility of not being able to pay back the loan principle, it is advised that Sandy expresses his concerns for both parties in a sympathetic manner.
While Pat does not necessarily need Sandy to succeed, there are very few quality carpenters left in the area, as a result of the poor economy. Pat may be able to find another tenant for his building. He may even be able to find another contractor to provide his carpentry services, but he will not be able to recover his $200,000 in loan principle if he cuts ties with Sandy. In addition, given their history, Pat may care for Sandy as friend. He may think of Sandy as someone whom he’d like to continue to do business with if possible. Negotiation Preparation/Approach
In order to prepare for the negotiation with Pat Olafson, Sandy Wood must take the following steps: 1) Prepare a clear and concise spreadsheet explaining his financial situation, and 2) Adopt a respectful, non-jealous, and open-minded point of view. There are multiple issues to be discussed between Pat and Sandy. Each situation has its own set of circumstances and a significant amount of history. Sandy can expedite the negotiations by bringing a well-crafted spreadsheet to the conversation, which outlines the specific numbers involved with each of the three major issues at stake.
It is important that this spreadsheet is drafted in a manner that shows both Pat’s numbers as wells a Sandy’s numbers. Pat will not be receptive to any exhibits that seem to be biased towards Sandy’s position. Below is an example of a spreadsheet that, if prepared prior to negotiations, and shared with Pat, could help explain Sandy’s position: It is clear from Sandy Wood’s characterization of his relationship with Pat Olafson that there is a significant amount of history between the two parties.
They have been doing business with each other for a number of years, through good times and bad times. Both parties seem to have a mutual respect for one another, however, there also seems to be some resentment between the parties as a result of their business dealings. Certain disagreements exist between the parties due to unfortunate misunderstandings. It is absolutely critical for Sandy Wood to approach this negotiation as though those personal disagreements did not exist. Who is right or wrong, moral or immoral, is entirely irrelevant at this point.
The main factors for Sandy to keep in mind are 1) The contract says that change orders must be approved in writing, and 2) Both parties need to reach an agreement regarding the lease, the loan, and change order in order to avoid serious financial loss. Sandy can help his cause by treating Pat with respect and expressing appreciation for his generosity and continued business. Focusing on a desire to maintain a quality business relationship in the future is the best course of action. Negotiation Strategy