How loss aversion killed the turkey

Do you create new products and services under conditions of extreme uncertainty? Do you think any contract will make the project more likely to succeed? Are you even an employee? C’mon, don’t be a turkey! Yes, a turkey!

I had this blogpost in progress for a long time. A few weeks ago a tweet by Nassim Taleb – along with the essay attached – made me think of it and so… here it is.

You shouldn’t feel too safe

You know how turkeys’ life is in the USA: they get fed for months, they get every attention throughout the summer. They feel care, trust and don’t even suspect what is going to happen by the end of October! Their expectation about a life of luxury and obsequious homages gets ruined by an unexpected event: Thanksgiving Day. And the hand that fed them now kills them. That may sound sad for humans, especially for vegans, but sure that sounds tragic to the turkeys. What’s even worse is that they get no clue about their own destiny by the evidences that were available throughout their life: the story told by the past has nothing to do with how the story ends. Unknown unknowns kick in.

Would you really trust someone feeding you for free everyday of your life not killing you in the end? I wouldn’t! As humans, though, we don’t usually perform better than turkeys! Despite our intellectual advantage over turkeys, we still tend to overestimate losses while underestimating potential gains of the same value. That is called loss aversion bias. As a species, humans have developed this bias to better cope with an environment characterized by scarcity. It must have been very hard for our ancestors to get their goods, so preserving them must have been more valuable than the willingness of accepting the risk of getting new goods.

That loss aversion, sometimes, makes us stick to a warm safety feeling instead of exploring new chances for better gains.

Valueable value

Turkeys put aside for a moment, now please consider lean thinking and lean management and their very aggressive definition of value. According to those mindsets value is what is worth the customer’s money or the user’s time. All the rest is waste. If you start thinking out of the box, wondering what elements of your job truly add value, the least that you can find out is that many of them just don’t. Are you moving partial deliveries around? Are you reprocessing deliverables to correct defects? Are you waiting for a contract to be signed off? That’s waste, not value. Simple as that.

I decided to write this post when I asked this very easy question to the people I am in touch with on Twitter and Facebook:

Do you think a contract can raise your chances to succeed in a project?

For the sake of simplicity I just meant a project “successful” if all the stakeholders, the users, the sponsors and – last but not least – the suppliers are happy for what they get in exchange for they give. It doesn’t necessarily relate to deadlines, but it could. It doesn’t necessarily relates to clarity of requirements, but it could. It doesn’t necessarily relates to money, but well… usually it does! 🙂 All in all, I don’t even mind having a perfect definition of a “successful project” here. Whatever your definition, I was asking myself if a contract may add value to the development of a product or a service as much as the time we spend every time in thinking, writing, agreeing on, signing and sueing around it.

I received a lot of replies.

Don’t be a turkey!

Not surprisingly, most of the people blatantly ignored the true question, replying about the safety feeling provided by a contract.

It can raise my chance to get a meal.

was the first open-hearted and sincere reply. To tell the truth, though, my question was about how a contract may help making things go better and not how it may undoubtely help in case everything goes so wrong that we need to call the lawyer. Still the success of a start-up has nothing to do with how we’ll manage its final failure.

Back to the definition of value used in lean thinking, if we were in the F1 racing business, it’s as if we cared more about the pilot’s helmet than the engine’s power. The story of car racing shows that safety is a compliancy issue, not a performance one: no car racing team ever won a race because of the helmet. Also, and that is very important, when working for a start-up we aren’t likely risking our life but just a finite amount of time/money.

“That amount of time/money is what I live by!” I hear you say. Sure! You are right! But only a turkey would go on working until the day of its death with no real feedback about the true quality of its working relationship. And usual contracts provide no feedback at all! They just help you minimizing damage when you are already in a mess or at best when more or less expected problems start popping out of the horizon! A contract provides no defence against unknown unknows! As Francesco perfectly stated replying to my question:

A contract may save you […] if the projects fails the way you had planned.

Among the best replies, Memi’s one pointed out how safety creates room in his mind to focus on his customers and their projects, thus – in a sense – creating indirect value. I may agree with him, since knowledge work is a tricky one, depending on many soft variables. But still this is indirect value. We are still assuming here that the helmet will primarily make the racer win, by making him feel safe, while drivi… well… I’d invest more in the engine, you know?

There is more. If we accept that we need safety to create an environment in which we can foster value creation, then why don’t we find better ways to provide that safety both to ourselves and our customers instead of just a piece of paper?

How can a contract reduce the need for estimates?

You are going to meet a customer tomorrow. You will discuss about developing a new product. You know she will ask for a bunch of features, a deadline and a budget. She will ask for estimates.

You have developed products since many years ago, maybe 5, maybe 10, maybe even 15 or 20 years ago! Through all this time you have learned many things and one keeps on popping up into your mind every time you are preparing a meeting like this: estimates are a loss of time.

  • You know they won’t add any value up, because no product will ever generate value out of an estimation rather than out of the best set of features and an amazing user experience.
  • You know you will have to spend precious hours – usually days – to complete a full estimation round, because details will keep on emerging and it will be hard to know which ones are worth the attention they ask for and which are not.
  • You know you could generate more money if you could spend those days working on the product itself, to get to deep insights and learning as fast as you can.
  • You know you could spend those days working for other costumers, which are now foregone opportunities.
  • You know the request for estimates will lead to positional bargaining. Trust and chances of an healthy collaboration will fade away while the customer defends her capital of money – trying to depreciate the value of your effort – and you defend your capital of skills – trying to raise the estimate with a safety buffer.
  • Last but not least, reality will just… change, invalidating your estimation.

All in all, there is no other chance with fixed price or time & materials contracts: both parties have to agree on an estimate to fill in the gap of trust existing at the beginning of a collaboration. In the traditional context, contracts relying on estimates are a replacement for true trust.

It would be lovely if we could build a climate of collaboration and test it very fast. It would be even better to have some value – some real value – delivered to the customer in the same amount of time we would burn to estimate and quote the whole project. It would be perfect to have the customer say: “hey, you delivered more value than I expected and I can pay for it after this trial”.

Consider the typical conversation:

  • Customer: “Hello, I need this”.
  • Vendor: “What do you mean with ‘this’?”
  • C: “I mean this, this and that”.
  • V: “Uhm… we need to talk about the details for the next 5 days.”

Now imagine if we could turn that conversation into the following one:

  • Customer: “Hello, I need this”.
  • Vendor: “What do you mean with ‘this’?”
  • C: “I mean this, this and that”.
  • V: “Uhm… let’s talk one hour now. I will build something to start validating your needs and be back to you in 5 days.”

We could then start working for no money for a few days, deliver something and then check with the customer if our delivery is truly valuable. If it was, we could be paid and just… restart again: discuss needs, build something, validate the assumptions, get paid.

In high volatility scenarios this would allow for knowledge to build up, with a great momentum and minimum commitment for both customer and supplier. This would allow to allocate the budget

  • only on the next learning step
  • only a posteriori, having already learned something

The customer’s only rule would then be: if I only pay for the (n-1)th step, it is perfectly fine to wait for the n-th step to be completed for free!

Should we get rid of planning then? Well… maybe not, maybe yes. It depends on the value it delivers. As long as it helps the team anticipating known unknowns thus preparing the team to react to unknown unknowns, it may keep some value. Sure though we could ease the dependency of any collaboration from any upfront estimation. If we became able to release value frequently then we could experiment and learn with some tactic to get rid of the need for estimations.

Extreme Contracts were also meant for this. Check them out.

Agile Contracts workshop in Bologna on June 23 2015

After the rewarding premiere held in last March, on June 23rd I will be holding again a full-day session about agile contracts in collaboration with Alberto ‘Zio Brando’ Brandolini’s Avanscoperta.

It is going to be a very important day for me, considering the chance I am having to re-think the workshop based on the super precious feedback I got after the debut. On one hand I have a better feeling as the date approaches by, considering the positive feedback I received. I was pretty nervous that morning, I had waited that day for years. On the other hand I will strive to treasure the negative feedback I got, mainly about the expectation for even more games! 🙂

I will do my best. Good news already: I will introduce LEGO Serious Play in the workshop after having completed the facilitation training in Barcelona on May 11th!

I. Can’t. Wait.

People talking extreme contracts, people using extreme contracts

After the chat I recently had with Greger Wikstrand about Extreme Contracts, another nice video was made by Greger with Joakim Lindbom, both Enterprise Architects from Capgemini. In the video they discuss the nice behavioral and economical patterns emerging with the use of such contracts which I forged a few years ago when I was coaching e-xtrategy‘s team.

It is rewarding to see how e-xtrategy still keeps on using those contracts after years and, at the same time, seeing Greger, such an experienced person in enterprise software development, being so interested in them along the years.

e-xtrategy, Greger, thank you all: you are the best incentive to look for better solutions everyday.

I will also be talking of Extreme Contracts in Bologna next June, during the Agile Contracts workshop.

Now sit back, relax and enjoy the show! 🙂

Extreme contracts and immediate rewards – Architecture Corner, episode #13 from Casimir Artmann on Vimeo.

Extreme Contracts

The goal

As I wrote some time ago, we want our deals to be compliant with three main criteria:

  • We want to reach a wise agreement, in order to generate value for all the parties involved.
  • We want the deal to be efficient, because time spent searching for a good deal is not generating value: it is pure waste. This implies simplicity. We want the rules to be simple.
  • We want to keep a good relationship with our counterpart over time. Exploiting agreements are fragile, with those people continuously trying to escape towards better conditions if not trying to cheat in first place.

The rules

Extreme contracts are meant to be simple and address all the criteria we want to use to define a good deal among all the parties involved.

Just three rules, everything follows as a side effect:

  • Very short iterations, usually one week.
  • A flat fee for every iteration.
  • Money back guarantee.

That’s all.

The (short) story.

The customer express her needs. A team is set up to address those needs. The team starts working on analysing those needs and one week after delivers anything they think worth the fee. The customer evaluates the deliverable and has two options: accept the delivery and pay the flat fee; reject the delivery and keep the money.

If the customer accepts we repeat this short story one more time. If the customer rejects we can either stop the collaboration or try to run another iteration, maybe – but rarely – after having agreed on a different deal about iteration length or price.

The chat with Greger Wikstrand

On Apr 07 2015 I had a Google Hangout with Greger about this kind of contracts, willing to get his raw feedback. Enjoy our video!

Contracts are lifeboats

A little more than one year ago I got my boat licence. I was very happy to start my life as a commander, after years of sailing with no chance to set up my own boat. Now after 14 months my head is filled with plans about sailing trips in many seas around the globe.

One of the key safety devices on board of a sailing boat is the lifeboat. When everything is lost – maybe even the boat! – the lifeboat lets the sailors keep their life, as precious as it is and may suddenly be perceived when you are shipwrecked in a storm.

S.O.S – Save Our Stakeholders

Portland Pudgy proactive lifeboatTwo sailors in a lifeboat may view each other as a hindrance, one consuming and subtracting useful resources and supplies from the other. Instead they’d better cooperate and identify the needs of each, be it for shade, drinkable water, medicine or food. They will want to go a step further and start considering those needs as shared problem, like other shared ones like trying to spot a ship, collecting rainwater and getting the lifeboat to a friendly shore. Engaged in a side-by-side effort to solve a mutual problem, the two sailors will become able to reconcile their conflicting interests as well as to pursue their shared interests.

Now, I don’t know what your experience of contracts is, but mine is that they come into play when things go wrong, really wrong. As long as the relationship among the parties goes fine, there’s no need for contracts. When people start seeing their interest disregarded in some way and no reconciliation seems to loom on the horizon, clauses and lawyers come front center.

Usual alignment. Or not?

As lifeboats don’t add anything up to a nice sunny sailing day, contracts don’t add any direct value to your products or services success. At the same time they are both meant to save your life when shipwrecked. And like two shipwrecked sailors in a lifeboat at sea fighting for limited rations and supplies, parties may start seeing each other as opponents.

If a contract must be a lifeboat, then it would be better for it to ease the sailors’ alignment. Standard fixed price or time&material contracts are focused on opposed positions of the parties instead of being focused on naturally shared interests and on reconciling conflicting ones.

If you ever found yourself on a lifeboat with another sailor, would you prefer to be aligned to him or not? When you sign a contract, do you prefer to be well aligned or not?

Photo credits:

Three key criteria you are likely going to violate next time you negotiate a contract.

Contract negotiation

Whether a contract is about developing some new software or about designing a loft in Berlin, it all starts with a negotiation. If you are setting up a fixed-price contract you will be negotiating deadlines and price. If you’re working on a time & materials deal, you will be negotiating the fee, be it on a hourly, daily or weekly basis. Each side takes a position, argues for it, and makes concessions to reach a compromise. This is an example:

Customer: “I need some software to invoice my users”
Consultant: “It depends on requirements”
Customer makes requirements as explicit as she can/wants.
Customer: “I want features A, B, C and D. They are all important!”
Consultant: “I need 4 months and €16,000”
Customer: “What? No way. My maximum budget is €7,500!”
Consultant: “Well I could go to €14,000 if you pay €5,000 upfront”
Customer: “Mh, I might consider a serious offer, but…”
Consultant: “I can deliver A, B and C in 4 months for €12,000.”
Customer: “Features A, B, C in three months for €9,000”

And so on…

In software development this minuet is about how many features the team will be able to pack into a finite amount of time, the customer pushing for more features, the developer holding her position to get buffer enough to manage any sudden unplanned problem. The parties start from setting up an exploratory position and then gradually give up. It goes on until they reach an agreement – or not – and then they freeze the deal in a contract hoping the following reality check won’t spoil the party.

Usually it does. But that’s a topic for another post.

Three criteria to judge a contract negotiation

Any method to prepare a contract may be fairly judged by three criteria:

  1. it should lead to a valuable and sustainable agreement, if any is possible
  2. it should be efficient, with no waste of time or money
  3. it should not damage – if not improve – the relationship between the parties

The negotiation approach shown in the little dialogue above is known as positional bargaining and it is the most common way to reach a deal about a contract. It serves some useful purpose because it tells the other side what we want, it helps protecting our interest under pressure and it can sometimes eventually lead to a good deal. But still positional bargaining fails to comply with the basic requirements of producing a valuable agreement, efficiently and amicably.

Negotiating over positions leads to unwise contracts

When parties bargain over positions, they tend to lock themselves into those positions. This ignites a chain of events, because the more the parties make their position clear and defend it against attacks, the more committed they become to it. The more you try to convince the other side of how right your position is, the harder it gets for you to change it. Ego becomes the position and the true value of the agreement starts losing actual priority.

Any agreement reached this way usually reflects a point between starting positions and not a solution carefully crafted to meet the legitimate interests of both sides. The result usually is a contract less satisfactory to each side than it could have been.

Negotiating over positions is inefficient

Positional bargaining takes a lot of time. It creates incentives for a stall to establish. It’s a game based on starting with an extreme position, stubbornly holding it and making small concessions only to keep the negotiation going and so it is for both sides. Each of these factors interfere with finding an agreement quickly.

The more you drag your feet, the more you threaten to walk out of the negotiation, the more you make the other side tired the more likely you are going to win. But all these tactics are also going to increase the time needed to reach an agreement and the chance you don’t even reach it at all!

Negotiating over positions makes an ongoing relationship uncomfortable

In positional bargaining each side asserts what she will and won’t do. Since a party’s success is the measure of the other party’s defeat and viceversa, reaching a deal this way very soon becomes a contest of will. Since the people you are negotiating with try to reduce your reach, it becomes very hard to keep them apart from bitter feelings.

To make this sad scenario even worse, this all usually happens the very first time you meet a new business opportunity, represented by a new customer or a new consultant, conditioning the very moment in which your relationship is established.

What to do then?

Many people think being nice is enough to solve the problem. They hope that following a more gentle style of negotiation will make things easier. The other side is not an adversary, but a friend and they try to focus on reaching agreement instead of their goal, making offers, concessions and giving up as necessary to avoid confrontation.
Such a soft negotiation style leads to two possible outcomes:

  • In case two soft parties meet, the agreement will be highly likely reached and even very soon but it will usually be suboptimal. Both parties will have given up something too soon.
  • In case a soft negotiator faces an hard one, the game will be biased in favour of the hard player, no need to explain.

We play two games: a game and a meta-game.

The point is that every contract we are about to sign brings another negotiation in. It is a sort of meta-contract. The first contract is about the price and terms of the service you are going to buy or sell. The second one, on a higher level, helps structure the rules of the game you are playing and you are going to play in the future. This second invisible contract escapes notice because it is usually negotiated unconsciously. But you know it or not, every move you make trying reaching an agreement will forge the rules of the agreement itself.

Principled negotiation

Instead of accepting a positional negotiation, try changing the game next time you discuss a contract. Try adopting these four principles:

  1. Separate the people from the problem of reaching your goal. People are not computers but still every negotiation passes through people. Figuratively, if not literally, both sides should come to see themselves as working side-by-side, attacking the problem, not each other.
  2. Focus on value delivered, not positions held. Both parties’ constraints are legitimate. Business constraints and technical ones as well are legitimate. Just compromising between positions is not likely to produce an agreement which will effectively take care of the human needs that led people to adopt their positions.
  3. Generate many options before deciding what agreement to sign. Designing optimal solutions while under pressure is very hard. Deciding in the presence of an adversary narrows your vision. Having a lot at stake inhibits creativity. We should learn by lessons learned by designers and generate many options before going on with the selected one enhancing the chance to reconcile differing interests.
  4. Define some criteria to judge the quality of the agreement for both parties. Raw stubbornness may prove valuable while negotiating a contract. However you can counter such an approach by insisting that a single say-so is not enough and that the agreement must reflect some fair standard, independent of the naked will of either side.

To sum up, try negotiating your next contract on these four principles. It will result in a wise agreement, reached efficiently without all the costs of digging into each other positions and keeping people away from the problem, thus making an amicable agreement possible.

Have you ever experienced such a negotiation? What contract you ended up with that time? Tell me more about your past negotiation experience!

Photo by wiertz: