Business Negotiation Simulation and Teaching Notes - Assignment Example

Business Negotiation Simulation and Teaching s General Simulation Information Alex, a New York resident, quit his headhunting job with a U.S. based international firm in 2010 and launched a business in the same city called Green World Agencies. The company deals with recruitment and placement of executives with experience in global climate transformation, sustainable advances in various fields, and corporate environmental responsibility. Green World is the sole recruitment firm of its kind in the U.S. The company currently has 30 staff members operating from the New York office, with prospects of future growth. With over 100 corporations as clients locally and internationally, Green World has a database of about 2000 people posted to work in this field. According to financial records, company’s turnover has been rising by an average of 10% per year, currently standing at $5m in terms of billings annually. Gross profit margin is 5% and Alex expects to collect $500,000 in this year’s dividend apportionment, much of which he intends to reinvest. Murphy, on the other hand, is a former insurance broker also based in New York. Murphy owns a general recruitment agency called Blue Skies Recruiters (BSR), which he launched in 2002. The company has been investing and growing its business by 20% annually (mostly through acquisitions) and has accrued assets that exceed $1billion. Having met Alex in one of the New York mayoral corporate dinners for investors and seen potential in his niche of environment-oriented executive recruitment, Murphy approached him with a proposal to fold Green World into Blue Skies. Alex was open to negotiations and after producing financial records, they showed earnings of 6 times the gross billings. That is $30 million. Since the market value did not appear lucrative after tax, Murphy accepted the sale value of $50m, hoping to recover the amount within a short time given the reported profitability of Green World. One year after closure of the acquisition deal, Murphy requested evaluations of Green World’s financial records. The yearly audit revealed discrepancies in Green World’s reported finances. Murphy now asserts that BSR acquired Green World for $50 million, which was almost ten times the yearly EBITDA (earnings before interest, taxes, depreciation and amortization) of $5 million; a value he accepted in good faith. Murphy is, however, of the opinion that Alex overstated Green World’s value by about $6 million owing to material financial misrepresentations entailing GAAP violations. He also indicates that the audit revealed undisclosed costs of about $2 million, with the annual revenue amounting to $4 million per year, as opposed to the reported $5 million, hence the overstatement of company value by $6 million. Alex, on the other hand, keeps insisting that there were no alterations to financial records and Murphy simply wants to go back on the agreement by claiming to have been shortchanged. Both parties agreed that they needed to carefully take their choice of dispute resolution into keen consideration. They decided to include lawyers in the mediation process, in recognition of the fact that they were in need of a resolution affording them contractual certainty and fairness. Alex’s Information Alex is a brilliant visionary, keenly focused on his professional aspirations. His brilliance is evident from the fact that he identified a gap in the executive recruitment business that no one had noticed previously. His focus, on the other hand, is apparent from his decision to quit his well-paying job as a recruitment officer at a top U.S. firm, in order to pursue his vision. Clearly, Alex is an environment conscious person since the company he launched, Green World Agencies, deals with recruitment and placement of executives with experience in global climate transformation, sustainable advances in various fields, and corporate environmental responsibility. Alex is happy with the company’s current growth and positive prospects. He is also proud of the fact that he was able to build a profitable firm from his home office, to the level of being recognized internationally. He is, however, aware of the extra hard work the company will require over time, in order to continue operating at its level of profitability. Alex is also aware that there is no guarantee that the company will continue to rake in large profits in the long term. Even though Alex has managed to keep his professional image clean in the eyes of clients and potential investors, he has a dark secret. Alex is a compulsive gambler and although he had managed to keep his act together, he relapsed two years after he launched Green World as a result of the immense job pressure. Unable to keep his finances separate from the company’s Alex had started to get money from the company, to cater for his gambling debts and he would alter the financial records. It began as small amounts, but by the last financial year, he noticed that the amount accrued to more than $2 million, which he covered up as company expenses hence the undisclosed costs, as well as, revenue overstatement. Alex, therefore, saw the acquisition as an opportunity to cash out, change for the better, and build an alternative life. This explains his compulsion to keep the irregularities undisclosed. He has, however, denied all the allegations and counterclaimed for $2 million for defamation. Alex’s Counsel Information Although Alex has had a clean reputation devoid of scandals and client complaints, his disclosure about the gambling addiction and subsequent alteration of financial records is shocking. As a result, the corporate lawyer he hired since launching Green World, Harvey Specter, is worried about the outcome of the mediation. Nevertheless, Specter has worked with Alex in prior cases, and is his official lawyer. As a result, he is obliged by law to represent his client in the best way possible. Specter is ready to work at the usual $40 dollars an hour, an affordable rate he accorded Alex when he was starting out and decided to keep it that way, as their friendship grew over the years. Harvey intends to use several approaches to defend Alex. For instance, he hopes to convince Murphy that claims about the company’s working capital ought to be settled based on dollar-for-dollar valuation after comprehensive establishment of every claim. He also intends to argue that Alex did not warrant the EBIDTA forecasts and that Murphy got the best bargain since the company’s value remains significantly higher than the purchase price a year after closure of the deal. Finally, there was no significant downturn in BSR after the acquisition directly linked to the purported misrepresentations. Murphy’s Information Murphy is a ruthless business man. A former insurance broker, he has amassed his wealth by talking people into selling their ventures to him, with his principal focus being to expand already established enterprises. Although Murphy’s recruitment company, Blue Skies Recruiters is doing well, the sectors in which it operates are being saturated by other agencies internationally. As a result, Murphy needed to leverage his company’s position urgently fearing that if he did not, another company would be quick to fill that gap. Green World was a highly attractive venture, but it was still relatively young and required little investment to expand the sector globally. However, a year later, he did not regret the decision since Green World’s sector significantly boosted BSR’s annual revenues. Although charming and sociable when he was starting off as an investor, Murphy’s wealth has made him hardnosed, which means he hates feeling shortchanged in any deal he closes. His analysis of Green World a year after acquisition made him stumble upon disparities in financial reporting. Given his egotistical demeanor, Murphy feels that the discrepancy was a form of betrayal. It is for this reason that he has brought up the issue thus sparking the current dispute. Murphy now claims that he is entitled to $20 million in damages, comprising of $6 million in overstated value, and $14 million in lost company value, since he feels that he did not get the benefit of bargain in the Green World deal. These values are based on Murphy’s assertion that the misrepresentation will negatively affect future financial periods, his pricing was based mostly on projected company performance, and that the business considerably decreased value after acquisition. Murphy’s Counsel Information Murphy upholds the belief that to be successful in the cut throat business world, you need an equally hardnosed lawyer to navigate the murky waters of business law. This perhaps explains his choice of a corporate lawyer, infamous Manhattan attorney Daniel Hardman. Hardman, just like his boss, does not care about the legal lines he crosses, as long as he gets the job done and his client is satisfied. Hardman, however, recognizes the fact that Green World’s financial discrepancies barely have an effect on BSR’s performance. This is because a year after closure of the deal, the earnings had remained as projected, that is, 6 times of the $5 million gross billings, hence $30 million. This implies that the said disparities are not as material as Murphy exaggerates them to be. In addition, Murphy disclosed to his lawyer that he is simply offended that he did not discover the financial differences earlier, since he could have bought Green World for a considerably lower price. Hardman also knows that acquiring Green World was the appropriate move for BSR, since the company’s position needed to be reinforced with an innovative strategy. It is, therefore, in Murphy’s and BSR’s best interest to retain Green World, as opposed to claiming an irrational amount in damages. Hardman simply hopes to gain at least $5 million damages to appease his client, but is open to settling for mutually agreeable terms with the other party. Teaching Notes _Simulation 1. Positional Bargaining Concepts Zero- Sum or Fixed resource bargaining “Zero- Sum” is also known as distributive or win-lose bargaining. This type of bargaining is a negotiation strategy that is utilized in distributing fixed resources like money. It is apparent that in such a case, each side feels that their interests or objectives are at stake thus the main objective is to try and secure concession from the unwilling opponent. In many cases, the bargaining outcomes end up with one of the parties losing. The “Zero- Sum” bargaining is imperative because it assists in solving conflicts that cannot be solved using any other method. When the stakes are very high, the resistance to decree is usually elevated. It is extremely hard to make an official announcement as to how the issue at hand will be handles, as well as, who gets the upper hand. The critical procedure in “Zero- Sum” bargaining is explained by a “bargaining some model of negotiations” (textbook, page, 136). The model has three fundamental points of negotiation. There is an initial offer point where one party opens an offer to the other party. In this case, they layout their expectations as a starting point. However, they do this with the expectation of laying out the target point where they have their realistic and final agreement. It is obvious that the other party will resist in favor of their target. This is where the resistance pint is experienced and no further concessions are made and this becomes a one side gain with one party losing. In this form of bargaining, the strategies and tactics utilized in the negotiation process is what determines the outcome (Textbook, page 136). Some of the most common strategies utilized are discussed herein: Want it all- This is usually achieved when a party makes an extreme offer while presenting unrealistic concessions in the hope of discouraging the opponent. Time warp- Time is usually used as a powerful tool in this form of negotiation. It is in terms of arbitrary closing date or offering an applicable period of time. Good cop, bad cop- This is where the negotiator try to utilize different behavioral aspects like portraying irrationalism and then provide reasonable as well as sympathetic behavior. Ultimatums- The strategy is used to try and force the other party to agree with the other party in a forceful manner. 2. Principled bargaining/interest based bargaining concepts Principled negotiation is a model focusing solely on the interests of the parties, as well as, putting an emphasis on management and resolution of the conflict. Since the main aspect in bargaining is to come up with a mutual agreement, this approach utilizes a very different aspect of negotiation. In this case, a win-win option is the one that is utilized especially when the agreement made cannot be improved in any way. This means that there is little or no value left to warrant creation of any mode of resistance. In this mode of negotiation, there are four guidelines that can be utilized. Separating the main parties from the issue being negotiated This is where the problem at hand is decided by considering the advantages of the problem at hand. People are therefore, advised to refrain from any form of influence by their emotions or by the people involved in the deal. Focusing on the Parties rather than their positions It is important to always note that the motivations or interests driving individuals to have a negotiation are somewhat alike. Therefore, it is always important to focus more on the underlying reason for the negotiation. This will in most cases, show the people involved that they don’t have such varying thoughts. It is therefore, imperative to show that any form of discussion offer specific, as well as, concrete details making the issues at hand more credible. Generation of diverse options to have a common gain People who have a certain focus towards achievement of a particular goal are always blinded by their objectives. This means that there is a very narrow focus on the main problem. Therefore, it is extremely imperative to make sure that even when people are brainstorming; they focus on the main issue and avoid focusing on their immediate interests. This suppresses options with an appeal to all involved negotiations. Base the results negotiation from an objective Criteria It is imperative to always get different opinions before settling for one. This means that people who are faced in such issues should make sure that they have all their thought analysed. BATNA This means ‘Best alternative to a Negotiated Agreement’. It is therefore, crucial for any form of negotiation to know their options and if the approach used will result to an outcome. Therefore, all considerations should be laid down for the people involved making sure that they have the necessary information on advantages and disadvantages of the same. This will ensure that they are not vulnerable and will have the best alternative thus, the BANTA. In the case, the acquisition is supposed to raise the company’s profile and increase productivity thus increasing profitability. This does not mean that one of them should make a sacrifice for the merger but should make sure that each party is satisfied with what the other is offering. Numerous mediators like to use the principled negotiation model. However, the principled negotiation is usually not the best for business especially when there is a case of merging. This is because both parties are making sacrifices and need to find equilibrium. In this model, no sacrifices are done but people usually get their desired results. 3. What barriers to settlement does each side have? Settlement is usually faced by different types of barriers but the most common ones are two. Strategic Barriers The fundamental aspect and reason for negotiation can become a major barrier to settlement. This is because, in most cases, the parties involved must not always agree and one of them might become more aggressive than the other. This means that if there is a dispute, the percentages or divisions will be affected. For instance, in the case of Alex and Murphy, Murphy the one that is interested in buying Green World. By providing false financial statements, Alex bridged their agreement. This approach will further drive a wedge between the two parties. Principal-Agent Issue In such cases, the lawyers are usually the people involved in the process of negotiation. Lawyers usually use different approaches to make sure that they have the most favorable outcomes. This means that these approaches might fail terribly affect the deal at hand. 4. What are ways the mediator and others can challenge or help eliminate the barriers? The principal aspect that a mediator can use in eliminating the barriers to settlement is making sure that one understands the issues at hand, as well as, the individuals involved. By clearly understanding the needs of both parties, one will eliminate any form of barrier that might be faced during settlement. It is also extremely imperative to avoid any form of biasness. These means that all the needs of the respective parties should be laid down and focus on making the most favorable outcome. Therefore, a mediator should take into consideration the negotiation style that will deliver a fair outcome. 5. What types of mediation styles would be suited to this simulation and why? The best mediation style is chosen depending on the conflict as well as the types of individuals taking part in the negotiation. Therefore, the mediator should make sure that they understand the kind of issues they are being faced with. Therefore, as a mediator one should make sure that they provide directions laying grounds towards an amicable settlement. This means that the mediator should be competent on the laws in the industry, as well as, other aspects that will ensure smooth running during the negotiation process. The mediator should also make sure that he encourages the parties to come up with more and better options that can make the negotiation and settlement processes simple for everyone. By enhancing communication and understanding the two parties, the mediator makes it possible for the involved parties to get better options. In this case of Alex and Murphy, the facilitative mediation style is the most appropriate. This is because; both parties are intelligent and understand the need for their merger. Both of them have attended different organizations of higher learning and are experts in their fields. Secondly, regardless of the takeover threats made, the two parties understand the need of merging and becoming a reckoning force in their industry. 6. What stages of mediation will be most critical in resolving this dispute and why? The most critical model of resolving the dispute is an understanding-based model. This is because by understanding each other, the parties will ensure that their objectives are put into consideration. By enhancing this model, the parties will be able to understand each other’s way of thinking and make better decisions. This will also make sure that the problem at hand will be solved without the parties having to go to court or venturing into other unconventional methods. By having willingness to come together, the people will have a better option of finalizing their problems. The individuals in this case will therefore resolve the issue at hand since they are knowledgeable and are motivated towards making the world a better place. 7. What types of process skills will be needed by both the mediator and the parties? In this case, the mediator may apply such skills as: a) Pre-mediation contact by making sure that all the parties are aware of the issue at hand. This can only be achieved by ensuring that all the necessary parties are approached separately. In this case, the mediator should approach Alex and inform him about Murphy’s intentions. b) During the process, the mediator should make sure that all parties listen to each other and understand the issue at hand. Additionally, the mediator is responsible for interpretation, as well as, reframing misunderstood phrases. c) The mediator can assist the interested parties by making sure that specific questions are asked as well as suggestions are listened to. Persistence in this case is extremely crucial which is extremely imperative. 8. What emotional issues are likely to be a factor in mediating this simulation? How can the mediator and other parties/attorneys respond In such a case, lawyers and mediators contribute a lot when dealing with emotional forces. Therefore, the mediator should make sure that he listens to all parties and consider their different feelings. In the case of Alex and Murphy emotional aspects, he should consider identifying the trigger, allow them to give their different strategies, listen and arrange their responses accordingly. If there is any misunderstanding, the mediator should make sure that he apologizes on behalf of each other. 9. What cognitive effects may be a factor for each party? How can the mediator and other parties/attorneys respond? In the current dispute, the following cognitive aspects might affect the dispute: Selective cognitive perception is one of the major factors that can affect the involved parties. This is because each of them has their own goals and objectives and thinks that it should be tackled in a particular way. Therefore, the mediators and attorneys should encourage them to speak and air their different issues. It is also evident that both of these people posses’ things they value thus might have an Endowment Effect. Alex in this case feels that he was right to have taken advantage of the situation and salvage his company. This can only be solved by making sure that each party understands that to arm strong each other no amicable agreement will be reached. Each of them should understand what the other is offering and sacrificing. 10. What merits-based barriers are likely to surface during the mediation and how can the mediator and the other parties handle them? In such situations, there are legal disputes and disagreements that will arise. Therefore, mediators and lawyers should make sure these challenges are brought together in order to have a settlement that is fair and less expensive. Lack of information is one of the major issues that bring obstacle to settlements. Therefore, the mediator should make sure that each party makes their information available without hiding aspects that can lead to unsettlement. In the case on Alex and Murphy, the mediator should make sure that the organizations provide the correct analysis and financial statements. This will ensure that all the information is available and one can manage to deal with the issues at hand. 11. Reaching Agreement Explain how the parties can integrate interest based bargaining with positional bargaining to achieve an agreement? Facilitative mediation style is the most appropriate in this case. Therefore, the respective parties will make sure that all their demands and expectations are laid on the table. Then they should make sure that they have room for brainstorming and making it possible to have an unconditional resolution. The mediator should also make sure that all the necessary requirements and information is made available. This way the signing process will be made easier and less expensive. And since the two parties are intelligent and want the same thing, they will agree easily. 12. Attorney-Client Relationship Explain how your simulation can be used to teach the management of conflicts between lawyers and clients. The attorney should make sure that they first understand the client’s needs and interests. The main focus of the attorney should be solving the client’s problem and guiding them towards making the right decision. Therefore, the attorney should make sure that they encourage their client to research more on ways of dealing with their issue. For instance, Murphy should make sure that he does extensive research on issues regarding such falsifications. This way he will manage to make the best decision after their counsel has advised him. Read More