CREDITORS' RIGHTS NEWS

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Five Steps to a Successful Workout

By Len Spagnolo*

Mistakes don't age very well. And when mistakes are embedded in a business or commercial transaction, the transaction doesn't age well either.

Any number of mistakes can make a transaction gray: failure to include critical terms and conditions in the transaction documents; poorly-worded provisions; unclear expectations; overestimation of abilities; underestimation of responsibilities; misplaced trust; and failure to anticipate and provide for changed circumstances, to name just a few. The weight of these mistakes can cause a seemingly robust transaction to wobble and fall. If not fixed, they can cause the transaction to die.

This is where a workout comes into play. In simple terms, a workout is a process for fixing a broken transaction. At bottom, it's a negotiation.

Every workout has, or should have, three overarching objectives: (1) it should produce a wise agreement, if agreement is possible; (2) it should be efficient; and (3) it should improve, or at least not worsen, the relationship between the parties. A workout that achieves all three objectives generally leads to success. A workout that doesn't often leads to a bad-debt deduction. The following are five steps to a successful workout:**

1. Don't Bargain Over Positions.

How many times have you heard this exchange:

Party A: “It's my company's policy to do X.”

Party B: “Well, it's my company's policy to not do X..”

This is an example of “positional bargaining.” Each side locks itself into a position and defends itself against an attack from the other side. As more attention is paid to positions, less attention is paid to meeting the underlying concerns of the parties.

Positional bargaining has three infirmities: (1) it generally does not produce a wise agreement because it focuses on positions instead of the parties' underlying concerns; (2) it is not efficient; it encourages each side to start with an extreme position, stubbornly hold to it, deceive the other side about one's true views, and make small concessions, as necessary, to keep the negotiations going; and (3) it tends to damage rather than preserve or improve the parties' relationship.

In positional bargaining, decision making is often a zero-sum game (You can't have policy X and not have policy X at the same time). Each decision requires one side to yield something to the other. This, in turn, encourages foot dragging, threats to walk out and stonewalling. Positional bargaining is hard on the parties, soft on the problem-- just the opposite of what an effective workout should be.

When in a workout, resist the temptation to engage in positional bargaining. Focus instead on the merits of the parties' underlying concerns.

2. Separate the People From the Problem.

Human beings are not computers. We are creatures of emotion. All too frequently, our emotions become entangled with the merits of our problems. Strong emotions can radically affect our perceptions and make it difficult for us to communicate our interests and concerns. So before we can work out underlying substantive problems, we must first separate, and deal with, the “people problem.” People problems fall into three general categories: perception, emotion and communication.

A. Perception.

Ultimately, conflict lies not in objective reality, but in people's heads. Truth is simply one more argument (perhaps a good one; perhaps not). Fears, even ill-founded, are real fears that need to be dealt with. Deal with perception problems by:

• Putting yourself in the other side's shoes. Empathize!
• Withholding judgment while you “try on” their views.
• Putting the best interpretation on what they say or do.
• Not blaming them for your problem.
• Discussing your perceptions and theirs.
• Acting inconsistently with their perceptions (If they perceive you as inflexible, make a meaningful concession).
• Giving the other side a stake in the outcome by making sure they participate in the process of reaching a solution.
• Affording the other side opportunities to “save face.”

B. Emotion.

In a workout, particularly one that is bitter, feelings may be more important than talk. Deal with emotion problems by:

• Understanding the emotions being expressed, yours and theirs.
• Asking yourself what is producing the emotions.
• Making emotions explicit, and acknowledging them as legitimate.
• Allowing the other side to let off steam (stay quiet for a bit).
• Not reacting to the other side's emotional outbursts (arguments usually begin with the second emotional outburst, not the first).
• Using symbolic gestures (such as bringing coffee and doughnuts to the meeting).

C. Communication.

A successful workout is impossible without effective communication. That said, expect that whatever you say, the other side will almost always hear something different. Deal with communication problems by:

• Listening actively and acknowledging what is being said
  (“Did I understand you correctly that . . . .”).
• Phrasing what the other side says positively from their point of view, making the strength of their case clear (“You have a strong point. Let me see if I can explain it”). Note: this is not the same as agreeing with the point!
• Speaking to be understood by the person with whom you're talking. (A workout is not a trial, debate or other appeal to some third party. It's a communication between two interested parties).
• Speaking about yourself, not the other side (say “I feel let down” rather than “You broke your word.”).
• Speaking with a purpose. Some thoughts are better left unsaid.

When in a workout, separate people problems from the merits of the underlying problem. The participants should view themselves as working side by side to attack a common problem, not each other.

3. Focus on Interests, Not Positions.

The object of a successful workout is to satisfy the underlying interests and concerns of both parties, insofar as possible. This is best accomplished by focusing on the parties' interests rather than their stated “positions.” When you look behind opposed positions for motivating interests, you can often find an alternate position that meets not only your interests but theirs as well.

Consider two people arguing in a library. The one's “position” is that the window should be open. The other's “position” is that it should be closed. They bicker back and forth about how much to leave it open: a crack? halfway? three quarters of the way? No solution satisfies them both.

Enter the librarian. She asks the one why he wants the window open: “To get some fresh air,” he says. She asks the other why he wants it closed: “To avoid the draft.” After thinking a minute, the librarian opens a window in another room, allowing fresh air in without a draft.

The library scenario is typical of many workout situations. The librarian could not have invented her solution if she had focused only on the men's stated positions. Instead, she looked to their underlying interests of fresh air and no draft. Having understood the underlying concerns, she was able to fashion a solution that satisfied both. This difference between positions and interests is critical. Never forget it.

Here's how you can identify interests:

• Ask the other side why it's taking the position it's taking.
• Ask yourself what interests are standing in the way of the other side doing what you want to do.
• Realize that each side has multiple interests; try to reconcile them.
• Understand that the most powerful interests are basic human needs (security; economic well being; a sense of belonging, recognition and control over one's life) and that in most workouts there's more involved than just money.
• List the various interests on each side and look for mutual interests.
• Talk about your respective interests.
• Focus on where you want to go instead of where you've come from. Attempting to untangle history is rarely productive.
• Convert your interests into concrete options (Ask yourself, “If tomorrow the other side agrees to go along with me, what exactly do I want them to go along with?”).
• Be hard on the problem and soft on the people. Avoid the “blame game.”

4. Invent Options for Mutual Gain.

Consider the proverbial sisters who quarreled over how to divide an orange. After they finally agreed to divide the orange in half, the one sister took her half, ate the fruit and threw away the peel. The other sister threw away the fruit and used the peel for baking. You get the idea.

Here's how to invent options for mutual gain:

• Brainstorm possible solutions.
• Separate the process of thinking up possible solutions from the process of selecting among them. Invent first, decide later.
• Once you've identified possible solutions, broaden them by examining the problem from the perspective of various people from different disciplines (for example, if you are working out a failed business transaction, invent options that might occur to a labor leader, physician, salesperson or economist).
• Identify shared interests.
• Don't assume a “fixed pie” (“More for you, less for me”). Chess looks like a zero-sum game until a dog knocks over all the pieces. Be mindful that in addition to a “win-lose” outcome, there are also “win-win” and “lose-lose” outcomes.
• Look for solutions that will leave the other side satisfied as well.
• Ask the other side for their preferences.
• Make their choice as painless as possible.
• Few things facilitate a decision as much as precedent. Look for it, particularly if the other side was involved in it.

Consider again the two sisters quarreling over the orange. In that case, as in most workouts, a satisfactory agreement was made possible because each side wanted different things. This is genuinely startling when you think about it. People generally assume that differences create the problem. Yet differences can also lead to a solution.

5. Insist on Using Objective Criteria .

Despite all your best efforts, you will encounter certain differences and conflicting motives that simply cannot be reconciled. Blithely talking about a win-win solution won't change that. The workout will not be successful if you pit your naked will against theirs. You need to negotiate on some basis that is independent of the naked will of either party—that is, on the basis of objective criteria. You must commit yourselves to reaching a solution based on principle, not pressure. Here's how:

• Agree on a fair procedure to resolve the conflict (consider, for example, the age-old way to divide a piece of cake: one person cuts and the other person chooses). Neither can complain about an unfair division.
• Consider allowing a disinterested third party to play a key role in the workout.
• If there are two standards (such as market value and depreciated cost) that produce different results, but which both sides agree are equally legitimate, split the difference. The outcome is still independent of the will of either side.
• Never yield to pressure, only principle. A refusal to yield except in response to sound reasons is easier to defend—publicly and privately—than is a refusal to yield combined with a refusal to offer sound reasons.

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Conclusion

*Partner, Bentz Law Firm, P.C. Len has practiced bankruptcy and creditors rights exclusively for 20 years, including a two-year clerkship with a United States Bankruptcy Judge. He has handled over 3,500 such cases in virtually every bankruptcy court in the country.

**The principles, examples and, in many instances, language used in this article are based substantially on those appearing in the book “Getting to Yes,” by Roger Fisher and William Ury, of the Harvard Negotiation Project. For brevity and ease of reading, page references to principles and examples, and identification of verbatim quotes, are omitted. Any shortcomings in this article are my own. For a fuller appreciation of this topic I heartily recommend the book in its entirety.

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 © 2004, Bentz Law Firm, P.C.

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