Why I negotiate disputes

Mark Suster wrote a great post on management bandwidth being the scarcest resource for startups. It seems from the outside that he’s wrong, that only money stands between every team and their dream, but you have to go around the block a few times before you see the truth of his advice. You can take it in his words, or in Steve’s/Seth’s: “Real Artists Ship.” It’s all the same. If you have a company, your job is to execute one objective at a time. Not four, not six, and certainly not twelve (I’ve tried twelve: it ends badly). Those tactics violate Economy of Force, and you will pay; it’s inevitable.

Having been involved in litigation as a lawyer on both sides (suing and being sued) and as a party on both sides (suing and being sued), I’ve come to the uninspiring conclusion that litigation sucks as a method for resolving business disputes. The transaction costs are out of all proportion to the value of the dispute for most ¬†businesses. A $50,000 problem is not effectively resolvable in state court in New York. (And here, “effective” means more than just “you’ll eventually get a firm answer; courts do do that, which is their strongest benefit, maybe the only one — finality is not meaningless. Here, “effective” in the sense of using a $75k hammer to pound a $50k nail is a bad one.)

The side benefit of this is the counterparty to my client gets the bonus of not being sucked into litigation by either me or their lawyer. It’s easy as a litigator to make vague statements about the “strength” of a case or the “crappy” defenses of the other side. But litigators are loathe to give firm estimates on fees, including me. Most do it because they just don’t know what will happen and they tend not to benefit when businesses do the cost-benefit analysis. I do it because I can control the execution of my work, but I can’t control what the other side does in litigation. If they file large but still reasonable discovery requests, you and I have to respond. If they notice several depositions, you and I need to appear. We can decide that only one deposition is necessary to prove the case, but that’s like trying to balance a seesaw when you don’t know who’s sitting on the other side.

We’ve learned by now (90’s-era classified job ads notwithstanding) that multitasking is the devil. It’s like running a race and then taking random turns off the route.

What does the management distraction from litigation cost a business? The first step is to add up the external hard costs. That’s easy, and thus that’s where most companies stop the analysis — they look at legal fees and decide it’s still worthwhile. That’s the most basic step in figuring out opportunity cost.

The second step is to perform some basic analysis by figuring out what the fully loaded annual cost of each employee involved is, divided to arrive at an hourly rate. Essentially, every hour you have a manager working on the dispute, you’re paying them that amount of money to work on it. This is opportunity cost 201: better than most, but still not advanced.

The third step is to figure out what the value of that employee is to the business. The specifics matter, but you might start with revenue per employee, and then a gross income per employee number, and then end up (of course!) at a free cash flow for employee number. Now, to make that a bit more insightful, tack on a weighted average analysis — as in what’s the FCF per employee, weighted by fully loaded cost? That figure embeds some assumptions that higher pay is correlated with contribution to FCF. If it’s not, you have strategy mismatch and leadership problems that ThoughtStorm can fix for you.

Now compare that number to the value of the dispute. Figure out what you’re really spending to resolve the dispute. Now, and only now, can you make informed decisions about what course of action to take.

Does this capture every problem? No, of course not. Does it capture a whole lot more than you were thinking about before? Certainly.

Extra credit: what’s the right way to approach disputes and negotiation? Please share your advice in the comments.

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