R2. Creating value in negotiation - Chapter 2.pdf

# If the ratings next year are greater than 5 wch i

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'" If the ratings next year are greater than 5, WCH I pays a \$1 million surcharge to Hollyville.

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68 .. ~ NEGOTIATlON GENIUS In other words, if the show does very well (as you suspect it will), WCHI will owe Hollyville an additional ~um of money. But ifWCHI's projecrions are correct, Hollyville will refund sorne of the money paid in the licensing fee. Would both parries agree to such a clause? If they truly believe their own projections, they should! Table 2.6 Likelihood Based Likelihood on Hollyvil/e's Based on Ratings Projection WCHI's Projection 2-3 10% 20% 3-4 10% 50% 4-5 10% 10% 5-6 50% 10% 6-7 20% 10% Let's examine this issue in more detail. Table 2.6 displays rating projecrions for each party. (Going into the negotiation, you only knew Hollyville's projecrions.) As the tabIe reveals, the buyer and seller had a genuine difference of opinion regarding the show's likeIy' success. Given these different beliefs, how would each party have evaluated the conringency clause described aboye? Hollyville believes it has a 70 per- cent chance ofbeing correct and "winning the bet" because ratings will be greater than 5, a 20 percent chance ofbe~ng wrong and "Iosing the bet" because ratings will be less than 4, and a 10 percent chance that no money will change hands because rarings will be 4. Meanwhile, WCHI also believes that it has a 70 percent chance of winning the bet, a 20 per'- cent chance of losing the bet, and a 10 percent chance of being unaf- fected. Based on these projections, the expected value of ·the conringency clause to each party can be calcuIated as follows: Rating> 5 Rating = 4 Rating < 4 Hollyville (.70 x \$lM) + (.10 x \$0) ..: (.20 x -\$lM) = \$500,000 WCHI (.20 x -\$1M) + (.10 x \$0) + (.70 x \$lM) = \$500,000 CREATlNG VALUE IN NEGOTlATlON ,,,,;> 69 In other words, both parties expect to receive an additional \$500,000 as a result of this clause, and both should be willing to agree to it. Table 2.7 compares the value created by Agreement Z (which includes the conringency clause) with the value created in the other agreements we have considered. Table 2.7 Value to Total Value Agreement . Value to You WCHI Created Original (O) \$2,000,000 \$1,000,000 \$3,000,000 Revised (X) \$2,500,000 \$1,600,000 \$4,100,000 Agreement Y , \$3,000,000 \$2,100,000 \$5,100,000 Agreement Z \$3,500,000 \$2,600,000 \$6,100,000 In Chapter 1, we showed you how conringency contracts can pro- tect you from dishonest negotiators. That same benefit exists here as well. IfKim was being dishonest about WCHI's projections and knew that the show would receive higher ratings, he would never accept the contingency contracto His unwillingness to "put his money where his mouth is" couldalert you to possible deception. The Moms.com contingency contract reveall' another benefit of such contracts: they can create value by allowing negotiators to stop arguing about their different beliefs and instead Ieverage their differ- ences through bets that both sides expect to win. In this case, both par- ries are better off (in terms of expected revenue) when the contingency contract is signed because both are confident in their projections.
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