Quick Tip: Leave a Negotiation on a Friendly and Open Note

This quick tip comes to you courtesy of a client’s recent negotiation that I had to step in to salvage.

My client and his partner (or I should say in this case, adversary) in negotiations could not come to an amicable arrangement. Neither’s request was that far from the others, but they wouldn’t split the difference and move forward.

Believing his own offer to be justified, my client got a bit nasty about the situation and left the negotiation in a hostile manner. What he had failed to consider were two factors:

1. He didn’t have a good BATNA, which means that he had no better alternative to a negotiated arrangement. He needed this deal to go through, and

2. Had he come to an amicable arrangement, his current adversary could have been a future partner to his extreme benefit.

In short, this move – this hostility – was short sighted. Had my client said that he was sorry that they couldn’t reach an arrangement and offered to work with his negotiation partner in the future could they come to more mutually agreeable terms, he would have left something on the table: friendliness. And in a negotiation, friendliness can be a huge ally.

Upon coming back to me, I showed him that he had been a little hasty, and we agreed to apologize for the hostility. Once he apologized, the other party said that he appreciated that gesture so much by comparison that he agreed to my client’s offer! He said that it was the hostility that he perceived during the process that prevented him from yielding to my client’s offer in the first place, and that this gesture of friendliness meant so much that he could make it work this time.

Look what a little friendliness does!

Always walk away from a failed negotiation with a friendly air. It can go miles in ensuring that you may get what you need in the future.

Do you have any negotiations strategies to share with us?

The Other Time I Got Shot At

A while ago I was the CRO of Gulf State Steel in Gadston, Alabama.

We were in a board meeting debating the effects of imported Asian steel on our cost structure – the effects were bad – and we decided that in order to remain competitive we needed to reduce our 2500 person workforce by at least 20% while also reducing certain employee benefits.

The day before we’d discussed this with the union representative, and though nothing was official, the news was out.

BAM!! BAM!! BAM!! BAM!! BAM!!

All of a sudden 4 shotgun blasts hit the windows. I hit the floor.

The other directors and board members started laughing at me.

Apparently, they’d installed bulletproof windows in the board room twenty years ago, because shotgun blasts from the union were not an uncommon event.

Now, why did we get shot at?

You may say, because the union was comprised of disgruntled psychos. I wouldn’t fight you on that conclusion, but if this had been happening for twenty years, then obviously there was something else wrong here.

This steel company was in a crunch. It had a huge cash crisis, and it was knee-jerking. There were no more options to contain costs at this stage than a 20% reduction in the work force.

If the CEO had been proactive in keeping costs down 6-12 months prior, though, these kinds of cost reduction processes could have been adjusted more gradually and reasonably – and in ways that didn’t affect the union so dramatically. Asian steel didn’t just show up right before I got there. This was ongoing activity in his market-place and competitive space.

There were options before the crisis, but no one calls me before a crisis. They call me after, and at that point, it’s my job to save a company – not make a series of strategic moves to oust a stronger competitor.

Be proactive. If you have cost problem, an earlier enacted austerity program could keep you from getting shot at. Avoid knee-jerking, and solve your crises before they happen.

And I don’t care if the glass is bulletproof. When I hear unexpected shotgun blasts, I hit the deck.

The First Time I Got Shot At

A few years ago I got a call at 2 a.m. and was told by my plant manager in Greensborough that there was a dangerous oil spill at our plant. Hoping to avoid a major catastrophe with the EPA, I jumped into my car and drove to Greensborough. I made it there in record time, hoping to contain the spill by 6 a.m.

As we got ready to enter the plant, two hundred rounds were fired at us from two different uzis.

After speaking with the police later, a member of the railroad crew that our company used came over, pulled his shades down to his nose and looked me in the eyes and said, “If my fellow union railroad members had meant to hurt you, you would be hurt. So, get back in your fancy car and get your ass back to Atlanta.”

So, why did I get shot at – but not killed? Let’s see if you can learn a lesson from my situation and avoid your own problems in the future.

This happened because the CEO of the oil company that I was turning around wasn’t watching its demurrage charges from the railroad. They got their oil off-loaded from the cars but the railroad workers who were supposed to move the cars weren’t moving them, and the charges kept adding up. The oil company had financial controls in place to be notified if certain expenses were growing at an unreasonable rate – and that’s great – but when they got the notices they ignored them for 18 months.

When I go there I started asking questions about hundreds of thousands of dollars of fees; the railroad investigated and found that the three employees who were supposed to be moving these cars out after we emptied them were actually goofing off, playing tennis, fishing and so forth. One was fired and two were suspended.

They retaliated against the oil company by breaking an external oil valve and releasing thousands of gallons of oil, which was heading towards a nearby stream – hello, EPA! – and that brought me there in the middle of the night.

And then the shooting began.

The lesson learned goes back to being proactive and having proper financial controls, but what good are financial controls if you ignore them. Put your policies in place and follow them.

Have you ever experienced extreme employee retaliation?

The Key to Surviving Hard Times

Chainsaw Dunlap was a workout guy twenty years ago, who would go into companies, slicing and dicing, laying people off, cutting product lines, and selling off assets as fast as he could. As his name suggests, he took the chainsaw approach.

Chainsaw was a pro at Turnaround 101, but he did it with no finesse. After the slash and burn lay-offs and asset sales, there’s still a company at which you don’t want everyone to be demoralized and miserable.

Not So Chainsaw

I do it slower – more sensually, shall we say, because I like to talk during.

I always make an effort to educate a company’s personnel throughout the process and solicit their buy-in for what I’m doing. This kind of interaction and buy-in doesn’t just need to happen during a turnaround – it should happen all the time.

I suggest that you regularly sit down with your team(s) and have them understand your solutions and decisions – something Chainsaw never did. I’m hardly suggesting that your team gets to vote – a business is not a democracy – but you do need to get buy-in for big ideas and especially to get through hard times or a turnaround.

Buy-in is Key

The reason you need this kind of buy-in is because, as president of a company, it’s unlikely that you’re out there day to day screwing on the wheels of a car, fixing machinery, bolting your widget together, etc. You can’t assuage the negative feelings running through a company when you don’t have access to everyone in the day to day. When you get the buy-in of your team and allow them to understand what you’re doing and why, they will help educate the survivors of the turnaround process to know that they’re going to be better off after the turnaround.

I was taking my son to school years ago, and he asked me, “What are you doing today?” I told him that I had a rough day in store because I was going to Philadelphia to layoff 200 people and close a division of the company I was turning around.

He looked at me like I was on ogre, and asked how the kids of those laid off would be able to afford camp, get baseball gloves and enjoy candy. I told him that I understood his questions and concerns, but by laying off 200 people and closing one plant, I was saving 600 jobs and keeping the company alive. It’s not that what I had to do didn’t stink for some, but it was for the greater good.

The challenge at that moment is to ensure that the 600 employees remaining are reenergized, reengaged and brought into the process of what comes next. That is, you’ve got to communicate and get buy-in.

Communicate Fully

If you go through a rough patch at your business and the people there really hate you then they will cease to fully contribute, leave, cripple your company and make you conclude that you shouldn’t have spent money on a turnaround in the first place. You should have resigned to call it a day and get on with your life because everyone else will have, too.

Companies – like militaries, countries, families and people – face hard times. As your company’s leader, it’s your job to get everybody through the hard times and make sure that they are prepared to see the good ones again.

Only the best innovators, products, companies and employees will survive a turnaround. If you insist on every social program that keeps everyone around, no one will have enough. It’s better that some do, and it’s best that they understand what’s happening and why. Open communication and buy-in will steer your company through hard times.

Is Your Ego Still in the Way of Your Success?

One of my secrets to success is my ability to set aside my ego when I go into a new company. It’s true that I do have an ego. I couldn’t be the Turnaround Authority without one. But it’s my ability to check that ego at the door when I start a new job that lends to my success.

The first thing I do when I get into a new company is sit down and talk to my team. I tell them that I’m not going to come into their company and pretend like I understand what they do better than they do. I tell them that I’m going to need their help. I have no pride of authorship.

The overall message is that we need to be a team, and that I need them to question me and talk to me about everything they do and know. I have an open door policy, and my team gets full access.

If they don’t tell me what they know when I take a particular direction with the business, then we could lose the company. I need to know everything that they know.

There are a lot of CEOs who can’t just set their egos aside to successfully run their businesses. Half the time that’s why I end up running their businesses in place of them (read #3 on my list of 5 Foolish Faux Pas CEOs Make in Crisis).

The Lake at Rotama Park

For example, at Rotama Park, a horse-racing track that I turned around, there was a big lake in the middle of the track. When I got there the lake was empty.

As it happens, they’d already spent a quarter million dollars filling it up with millions of gallons of water – but it all leaked out. The problem was that during simulcast racing, when our track was being broadcast into every betting parlor in the country, our track looked terrible. There was a big, empty hole in the middle of it!

I needed to fill up the lake.

One guy said that there was an aquifer nearby, and we could fill the lake up and it would all be good. I couldn’t see a reason not to, so I got ready to do just that.

Boy was it a good thing I had my open door policy in place.

Someone else came sheepishly into my office and, scared of my reaction, said if I filled the lake up, all the water would leak out again. He said the wrong type of clay had been used on the base of the lake. Because I had two people with a difference of opinion, I brought in an engineering firm to assess the situation. They confirmed that the base had been laid incorrectly, and that I’d need to redo it for a half million dollars.

If the second guy hadn’t told me that I was wrong to fill the lake up, I would have wasted another $250,000. My team had to know that I had an open door policy and to challenge me at all times if they thought I was wrong. You have to set your ego aside to do that successfully.

The Gyroscopes in South GA

Another time I had a manufacturing company in south Georgia that made gyroscopes for missiles and rocket ships. The company was running three shifts, yet the cost of goods was going up, prices were staying steady, and we couldn’t figure out why. Where was the profit going?

Somebody came to me, again because of my open door policy, and shared with me that there was a new competitor that had bid on a government contract, and the government had awarded that company 25% of its gyroscope needs. Apparently, the nightshift manager on the third shift was a silent partner in this other company, and as it happens he was stealing from us and giving the “scraps” to his other company.

He could compete because his stuff was free and our costs were going up because a higher percentage of our supplies was scrap. I would never have known this without an open door policy.

Make sure to set aside your ego and let people know that you want to know what they know – even if that information is bad news. I say it’s a secret to success, but on some level it’s also just common sense.

Is your ego still holding you up? Why or why not?

Be Fair But Beware: The Spectre of Self-Dealing & In/Solvency

In some cases that I’ve worked, the officers or owners are working against me – and their creditors – by self-dealing.

What is Self-Dealing?

For the record, self-dealing is not necessarily stealing but it is fraudulent. For example, self-dealing can be when an officer of a company tries to gain an unfair tactical advantage on the creditors or bank, so that he can do something like buy the assets at a reduced cost or own the company some other way.

When trying to understand self-dealing, it is important to know that when a company is in “the zone” of insolvency the fiduciary responsibilities of the officers and directors of that company shift from a duty to the shareholders to a duty to the creditors. Though “the zone” of insolvency can be  difficult to prove, presumably when I’m brought in to a company, insolvency is already roosting or on the horizon. Thus, if any officer is creating value for himself or the shareholders instead of the creditors, he is automatically self-dealing even though it might not have been considered thus had the company been solvent at the time of his actions.

I could devise a strategy for a client because I believe he is in the “zone of” insolvency, but he could say that his definition of insolvency is different and that he is going to continue acting in the interest of himself and his shareholders. Obviously, there are a lot of interpretations of insolvency which makes this legal concept very difficult to understand or litigate.

Self-Dealing or Not

In one huge turnaround case, I was blind-sided by an officer of the company who was trying to buy the assets of the business through a shell company. He obviously wasn’t acting in the best interests of the creditors because he was trying to drive down the price of assets to purchase them himself.

With proper disclosure to the creditors and without other credible purchasers in the game, self-dealing could possibly be approved by the creditors, but it’s a very fine line that requires a lot of honesty. By creating a process that inserts a turnaround person in the company, self-dealing will not occur.

Though I’d had an early gut-feeling that someone was self-dealing, I wasn’t able to uncover what was happening before I had to speak with the creditors. Therefore, despite my promising the creditors that there was no self-dealing, as I’ve already said, this officer was doing exactly that.

This undermined my credibility with the creditors and created a conflict between me and the officer, which delayed the resolution of the case. Though I regained my credibility, these actions behind my back created unnecessary hurdles for the company and case.

Trust Your Gut

When I have to give expert testimony, like in this case, I have to know the truth, and I pride myself on my ability to find the truth when I’m working a case.

I had a valuable lesson emphasized for me during this case: trust my gut.

If you don’t trust someone, keep an eye on him. Ask lots of questions. Don’t feel bad about mistrust; if that person does nothing wrong then you will find nothing wrong and be pleasantly surprised.

Have you ever seen a case of self-dealing? Tell us about it.

5 Big Blunders CEO’s Make That Lead to Crises

My last white paper was about the faux pas of CEOs in crisis, but in writing that paper I started thinking about some of the biggest mistakes CEOs, presidents and business owners make that result in crises. Since you may not be facing a crisis right now – and I hope you never are – I wanted to share these blunders with you so that you could either avoid them or start rectifying them.

1. Growing a Business Without Proper Equity or the Right Financial Structure

It’s never wise to try to grow your business without enough money. I once carved an injected molding company in Toledo, OH like a Thanksgiving turkey because the president sunk $2.5 million into his pet project: making the perfect bottle-cap. He effectively leveraged the entire company by borrowing against it to pursue this dream. Not only did he bet the ranch, but he tried to grow and evolve his business without sufficient funding to keep it running. Let that be the first lesson: make sure you have enough capital before making any big moves.

2. Growing a Business Without a Sufficient or Competent Management Team

The corollary to having enough capital to grow your business is having the right management team to do so as well. I’ve run Ocean Pacific twice. The first time was because they were expanding overseas without the proper personnel who understood sourcing and distribution in international markets. Though they lost a ton of money before we arrived, we were able to scale back to domestic manufacturing and refocus the company on design and licensing.

Many years later we were brought back in for a similar reason. Not only had the company lost control of its brand, entered into poor licensing arrangements and become embroiled in trademark issues, but they had accumulated a ton of debt. Once again, the management team couldn’t handle its responsibilities. The company was restructured through bankruptcy, selling its licenses to a private equity firm. Learn from Ocean Pacific and don’t embark on new strategies for growth without acquiring the right management team first.

3. They Allow Idiot Family Members to Run Key Divisions of the Business

Putting family members in key positions of your business can be dangerous without written expectations and a timeline for control, advancement and responsibilities. It takes a unique father and CEO to balance the intersection of a family and a business. Problems arise in many places, but particularly as it comes to entitlements, compensation and selling the business.

I had a mechanical engineering company in New York that was in the middle of a restructure that included a large union shop. The father had died and put his wife in charge as CEO. The son, resentful of his diminutive role due to a lack of delineated expectations and a board-approved succession plan, and, in his eyes, inadequate compensation, was stealing a lot of money. When we confronted good ol’ Charlie, he took a kitchen knife to his mother. Fortunately, she lived, got a restraining order, and kicked him out of the company.

Mixing business and family is not easy. Be careful and have the sense to know when someone is incapable of doing the job he feels entitled to do, family or not. Always manage expectations by putting everything in writing.

4. They Skew the Facts to Boards, Creditors and Constituents to “Sell the Deal”

As I’ve discussed before, honesty really is the best policy. The CEO of a hard drive manufacturer in California desperately wanted a line of credit from his bank for $60 million, so he stuffed the channel in order to make his company appear worthy.

Stuffing the channel is when a manufacturer oversells product to put sales on the books, despite knowing that much of the merchandise will come back unsold; this inflates the books by overstating the top line, thereby improving the bottom line. This strategy led to the loan, but when the company repurchased the inventory on the channel within 60 days, it became out of compliance on the line of credit. Once the bank defaulted the company I was brought in to salvage what I could and to hopefully restructure the company. The company survived thanks to some hedge fund loans, but the CEO lost his job because he skewed the facts.

Not bending the facts is so important that it deserves a second story. Before the technology was so ubiquitous, lazer-tag equipment had a very high value, and a Texas-based company seeking a large loan claimed it had more inventory on its books than it did; the company added the inventory in its Ireland-based location to the US books. The US auditors never verified the inventory and granted the company a far larger loan than it could handle. When the company filed for Chapter 11, I was brought in as CEO; within weeks of my new position I discovered we were $75 million short in inventory. I immediately went to the judge to convert the case to a Chapter 7 rather than try to bring the company through the bankruptcy and be embarrassed by the fraud. The creditors ultimately sued the accounting firm and made millions of dollars from faulty accounting, once again highlighting the blunder of skewing facts.

5. The President/CEO/Owner Can’t Keep It in His Pants

I have more examples for this one than any other lesson I know, but I’ll highlight this case with two basic stories to indicate how easy it is to get caught and how ruinous it always is. The president of an apparel manufacturer had other interests: he wanted to design the perfect yacht. He certainly succeeded in making a great one, such that he ended up in a prestigious yachting magazine. However, when he and his innovative yacht were photographed for the cover shoot, he failed to ask his girlfriend to get off the yacht or at least cover up her delightfully revealing bikini. When his wife saw the cover of the magazine, she filed for divorce and he lost control of the company.

In another case I was brought in to resolve as president, the CEO and Chairman of the Board of a retail establishment was caught with his kids’ babysitter while his company was going through a Chapter 11 restructuring. Once the matter became public, he lost focus on the business and the employees and the creditors lost faith in him. Ultimately, the business was sold off in pieces.

Gentlemen: keep it in your pants. Not doing so can be very expensive. For the record, I have similar stories about the other gender, but I’ll save them for another time.