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.

Continue reading “How loss aversion killed the turkey”

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?

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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: