This is a guest blog post by Jacopo Romei. Author of the Italian version of the book Extreme Contracts, and author of an upcoming book on the same topic in English.
Contracts are usually designed around a unique way to deliver some effort, assuming there will only be one solution to the problem at issue.
This is wrong.
Not only conceiving more than one solution will enhance the chances to create a better one, but if we take into account some basic risk management principles, we may even help to shape a prosperous collaboration between us and our customers. In Extreme Contracts, we call this principle Optionality, and this is a story about how to see options where none seem to exist.
One problem, many solutions
A few years ago, I shared a big apartment in Milan with two flatmates. In 2017 our rental contract was about to expire, the deadline set to August. In February, Fabio—one of the flatmates—told us he had found a new apartment available starting already in June.
I and Silvia, the third flatmate, were conflicted: on one hand, replacing Fabio and his share of the rent seemed a bit difficult considering the 2-month availability of his room from June to August. On the other hand, Fabio was giving us notice way ahead of the formal requirement to get all his deposit back: a notice three months ahead was enough and he was giving us notice four months ahead of his exit.
We were in a corner case. From a contract point of view — or rules, as we discussed in the last post—, it looked like Silvia and I had to pay 50% each of the full rental fees for two months when Fabio would already be in another apartment, during July and August. From an ethical point of view, it was clear to everybody that the three-months-notice rule had an intrinsic limit and it was not designed to properly manage scenarios featuring a perfectly compliant notice given too close to the rental contract’s expiry date when 3 people shared the same apartment.
Silvia and I had both a keen interest in staying in the apartment as long as possible, due to a few business events requiring our full commitment during the summer, hard to reconcile with a relocation. The conversation soon acquired positional traits, with a lose-lose outcome: “we could all go in July: Fabio will pay one month for nothing, and Jacopo and Silvia will accept to move by July.”
I was not satisfied. There had to be a better solution to make everybody happy in a win-win fashion. The a-ha moment came as soon as I started considering a fourth stakeholder ignored up to that point: the landlord.
I realized that the landlord might want to avoid seeing their regular income disappear in the middle of the summer if we all left in July. Realizing that, I concluded this could give us the chance to come up with a new proposal. First, we would have given the notice to exit all together by June, then Silvia and I would have signed another very short-term rental agreement for July and August only, for ⅔ of the original monthly fee. This way, I thought, Fabio could be free to move, Silvia and I would pay a fair rental fee, and the landlord would find a replacement tenant easily by September.
Look for several better alternatives, until you find your best alternative
In negotiation theory, we use a concept called BATNA (Best Alternative To a Negotiated Agreement) which is defined by the best options all parties have if they can’t get to a negotiated agreement with their counterparts. Long story short it means that we may severely affect the outcome of our next negotiation by scrupulously hiding—or revealing—how many viable options are available to us if we don’t get to a negotiated agreement. Do you want a bracelet? Do you need it for a birthday today and all other shops are closed? Do you want the seller to know it just before you ask for a discount? Or not? Do you like an open position in your favorite company? Do you want them to know you just received other four well-paid offers from their main competitors?
The offer I shaped for our landlord was my way to develop a negotiation based on revealing our BATNA—”if they don’t accept, we’ll have to move sooner anyway”—while placing a little unharmful bet on the landlord’s BATNA— “if I don’t rent two months for ⅔ of the fee, there is a concrete risk not to rent at all”. After this proposal was ready, we needed to validate our assumptions.
I scheduled an appointment with the landlord and told the landlord that we were prepared to move in June rather than paying the full rental fee for July and August, and I closed my plea explaining that it would probably be difficult find new tenants in the middle of summer.
The landlord didn’t blink an eye, thanked us for the candor and for preparing and presenting a concrete proposal. After a few days, the landlord called me to say they accepted our proposal. Fabio was free to exit by June without paying a cent—a win for him!—Silvia and I stayed in that apartment until September, one month longer than previously planned—win-win!—and the landlord had the time to look for a replacement with no need to rush while earning almost 70% of the whole fee instead of leaving the apartment empty—triple win!
Any problem may have more than one positive and acceptable solution. If we consider an ongoing negotiation a problem to be solved with our counterparts and not an adversarial competition to win, hindering the chances for a good relationship with them, we better incorporate options thinking into our practice. This is an old engineering principle that lately seems to have been forgotten in knowledge work.
Developing multiple options may seem more expensive than developing a single approach, but for critical decisions, it is almost always cheaper and gives better results.
— from “Leading Lean Software Development”, Mary & Tom Poppendieck
The importance of being right (skewed)
However, optionality is more than this. Creating an abundance of options for your collaborations to find their way is mandatory if you want success, but the concept of ‘options’ can hide a deeper meaning on a higher level.
We all know how insurance works. We pay a fixed, supposedly small amount of money to get refunded in case of severe loss: an incident, a theft, a canceled flight, and other accidents. When we buy insurance coverage, we buy an option to get refunded in case something bad happens. We also know how venture capital works, especially in these roaring digital times. Investors put a relatively small amount of money on as many promising start-up businesses as possible, hoping at least one or a few of them explodes paying back for the entire aggregate investment (investment fund). In practice, this means that venture funds buy many options to get an open-ended benefit against the investment of a capped/limited amount of money.
These two examples, one of which is a daily life example, and the other more in the realm of investment newspapers, are based on the same mindset: we should create and seek to develop options, first, and whenever possible, we should develop options with an open-ended/unlimited upside.
AirBnB, Facebook, or WhatsApp are examples of how open-ended these options can be. In the case of WhatsApp, the company was sold to Facebook for USD 19 Billion, and at the time they only had 55 employees. From this asymmetry of investment/pay-off, we can extract some practical tip about negotiations.
In life, scenarios in which you have the same chance for things to go bad and good are rare. More often than not, in real life probabilities are skewed. In some cases, the worst possible outcome may have a much more significant negative impact than the best possible positive one. Whenever you sell software on a fixed price contract, the project either ends up as per planned or ends up being delivered later. The best case scenario is limited—we end on time—while the worst case scenario is not—we know that on average projects are delivered 60% later than planned (CHAOS report and others have confirmed this, year after year). This is a left-skewed scenario. In other words: you have a lot more to lose than to gain in fixed-price contracts.
In other cases, the best possible outcome may have a much bigger positive impact than the worst possible negative one. Developing software for a start-up, you may grant a discount on your fees and propose that instead, you will get a share of future revenue or equity. This way, you are preparing to face a limited and known downside—the discount you apply—along with unknown possible benefits long term, no matter how unlikely they will turn into reality. We call this a right-skewed scenario.
If limiting the loss is the key to being right-skewed, we can also bring this a bit further and closer to my rental contract story with the last hint.
In my experience, knowledge workers often become allergic to their relationship with their customers. Struggling with agreements that are not suitable to match the complexity and volatility of their work, they desperately try to avoid problems by planning, or by trying to describe fine-grained and immutable project requirements, or by overpricing (aka buffering) and a full plethora of dysfunctional remedies for the mother of all fears: getting stuck in a lousy project forever. The risk is so relevant that I see companies worried about getting new customers instead of happily welcoming a further opportunity for higher income and business development. They fear the growth of their business! Crazy!
It doesn’t have to be like this. Among all the options you may give to your customers and yourself, the simplest one is the option to get out of the agreement.
Our agreements should describe how we can get rid of the agreement itself.
Our agreements should describe how we can get rid of the agreement itself. Our contracts should be devices to describe the constraints of our collaboration—capping its costs—and let good collaboration thrive.
About Jacopo Romei
Jacopo is an independent strategy consultant, with a strong background in Agile product development.
Jacopo is also an entrepreneur & writer. After having founded a couple of IT companies and practiced agile software development, he started as a full-time freelance agile coach, coaching teams in Italy, Germany and UK.
He has worked with eBay Italia team to set their agile process up. Product ownership and agile UX are added skills acquired in the field.
As a writer, Jacopo published a couple of books on agile coding practices and the Italian version of “Extreme Contracts: knowledge work from negotiation to collaboration“.
Jacopo is a frequent public speaker in international conferences and events about how the way of working is changing in the software industry and organizations management.