The art of the deal revisited: Part II
by John Schuster, with JLS Capital Strategies in Washington
Experience is the hardest teacher because it gives its tests first and its lessons afterwards. After the big test in late March on how to pass complicated health care reform, the lesson is clear: business promotion and poker playing techniques many associate with deal making are not useful in the legislative process. Instead, let us add legislation to the realms where project finance style negotiations would be more effective.
Project finance deals have much in common with the legislative process. Both require careful listening to all parties at the table and a thorough understanding of details necessary to put deals together — more like working together to solve a common problem than trying to score a win against the other. Deals cannot be forced on the other party. Rather, both sides have to feel satisfied with the outcome and the process, or there is no deal.
President Trump’s inability to persuade the Republican Congress to “repeal and replace” Obamacare took most observers by surprise. The press was replete with stories describing the hit the president’s reputation as a negotiator has taken. These negotiating failures should not have been surprising to readers who use negotiation principles used in project finance. (For a description of these principles, see Art of the Deal: An Alternative View in the February 2017 Project Finance NewsWire and Learning from Venus in the April 2016 Project Finance NewsWire.)
The negotiation challenges in Trump’s real estate world are different from the needs of Washington politics and negotiating challenges in most business settings. To be effective, the art of the deal must give way to a more rigorous and scientific approach. Charm and bluster are not tough but are actually soft, and the lack of rigor makes those who follow the Art of the Deal prone to bad outcomes.
Problem Solving, Not Winning
The Art of the Deal is full of catch phrases that describe an approach that may work well in deals that have a short-term character such as real estate and bond trading, where parties get in, make a deal, and move on.
In those realms — using the buzz words in the Art of the Deal — one can “think big” and make a lot of demands, toss out a “lot of options,” “use leverage” and “get the word out” to sell the deal, “fight back” as necessary, and look for a chance to “deliver the goods,” remembering to “have fun” and to maintain balance and perspective. The deal is the thing, but this deal world is the exception rather than the rule.
Project finance, international diplomacy, the legislative process, business mergers, and most other forms of negotiation involve interested parties who were there before negotiations started, are at the table, and with whom you will have to continue working for years after the deal is done. You, your counter-party and others not at the table have interests that merit consideration, problems that must be addressed, and alternatives that can be explored.
In project finance, we have all seen parties trying to bully their way into scoring the big win, bringing leverage to bear from all sides to achieve their ends. But this rarely works. Parties refuse to accept dictated terms, and even if one can pressure parties to agree, deals favoring only one side tend to fall apart, are renegotiated, or yield poor outcomes because the “loser” cannot perform over the long term. Most negotiations are like project finance deals –- there are few places where long-term interests and problems of all parties can be ignored.
Style and Substance
Proponents of Art of the Deal techniques perceive the negotiation approach of listening carefully to what each party needs and then working together to solve problems, which has a basis in Harvard Negotiation Project techniques, as overly intellectual and ponderous or even soft or weak. The Art of the Deal is for the practical, hard-headed deal doers who get things done.
The truth is entirely the opposite. Most successful negotiations require careful consideration and discussion of the facts, interests, problems, solutions and alternatives, and require discipline, resolve and effort, as do listening carefully for openings, and making sure that one’s own interests are heard. There are no short cuts. While distilling complicated policy options to Twitter length may be an art, there is no substitute for thorough command of the substance.
Lack of preparation can lead to wrong turns that waste time or even create new issues. Before Inauguration Day, the president-elect eschewed long-time convention on China by discussing with the Taiwanese president the close ties that exist between Taiwan and the United States. The telephone call was applauded by some as tough, but by February, the administration had walked back these remarks by reaffirming support a one China policy. Lingering tensions now limit our options for dealing with China.
The same can be said of the immigration executive orders. Again bold moves, but the lack of preparation led to a situation where the first order had to be withdrawn and a second one has become bogged down for now in the courts. Meanwhile, sectors relying on tourism are reporting a significant drop off in visits from parts of the world not covered by the travel ban because of adverse impressions given by a ham-fisted rollout.
On health care, Harvard negotiation techniques could have helped. The relevant negotiations were within the House Republican caucus where the divisions were complex. What other interests in the House Freedom Caucus other than standing in opposition merit discussion? What were the interests of Republican governors in 16 states who rely on expanded Medicaid coverage under the Affordable Care Act? What were the interests of Trump supporters who are concerned about rising premiums? Promising to address these disparate concerns later in health care phases two and three was a poor substitute for listening to parties, discerning their problems, and identifying potential solutions now – working together to solve common problems — even if procedural barriers in the Senate prevented voting on all three parts as a single bill.
Many in Congress and the administration had incorrect ideas about the provisions and issues of the Affordable Care Act. When inaccuracies came to light, parties realized the “repeal and replace” bill was not doing what parties thought and the bill lost support in the electorate.
Once things began to fall apart, the lack of preparation manifested itself by the administration making ultimatums and again backing away. To use a piece of useful jargon, parties had not researched and did not know what their Best Alternative To a Negotiated Arrangement — BATNA — was. They were not prepared with enough information and alternatives to solve problems. With a proper BATNA, the president would not have been left having to resort to threats or ultimatums. Members of the House Freedom Caucus reported their surprise upon coming to the White House to horse trade that the president and senior aides appeared unable or unwilling to engage on substance. Perhaps the administration thought style and tactics would produce a good outcome, but in legislation, as in project finance, they rarely do.
Looking ahead to tax policy and the budget, preparation will be even more important. These are complicated issues. Even a large project finance deal is simple compared to the disparate interests that will have to be understood and addressed. These challenges are infinitely better suited to a tough and rigorous approach that methodically addresses interests, problems and alternatives, compared to the soft and imprecise path recommended by the Art of the Deal.