2 PerspectivesSeptember 3, 2008

The Sid Hill Rule

“What’s the most important rule in negotiation?” Young lawyers have asked me that question after CLE presentations, clients have asked it at mediations, and relatives have posed it at the dinner table. While others may disagree with my answer, it hasn’t changed since Sid Hill taught it to me almost 25 years ago.

As a college sophomore formally studying negotiation for the first time, I dove into each problem immediately – focusing on tactics like when my partner and I should try the “good cop/bad cop” routine and when I might walk out of the negotiations to see if my opponent would beg me to come back to the table.  While my efforts paid off, I eventually pushed too hard in one of my exercises, leaving me with no deal at all.  Sure, I had understood conceptually that I needed to close my deal, but I had not focused on what the world would look like if everyone else got their deal done and I didn’t.  While I had been on the cusp of closing a better agreement than anyone else, I closed nothing.

Sid Hill, then my professor and later a mentor for many years, articulated the rule I had just stumbled upon.  “The power to negotiate is the power to walk away.”

Learning the Sid Hill Rule the Hard Way

The Sid Hill Rule seems simple, but it drives so much of what we do.  And it should drive more.  No one knows this better than a technology entrepreneur who led a small company one of my clients wanted to buy in the mid-1990s.  Wanting this new technology, my client approached the entrepreneur with a generous offer for his company.  The entrepreneur declined.  My client sweetened the offer, with no success.  My client changed several of the terms of the offer and made one final push to buy the company.  The entrepreneur held out for more. If this ended the story, it wouldn’t be in this post.

Soon after the final rejection, my client revealed that it had bought several bank loans to the entrepreneur’s company.  The entrepreneur was soon able to put 4 facts together:

• the entrepreneur’s loans were in default;
• the technology my client needed from the entrepreneur had been used to collateralize the loans;
• my client had a way to get the technology unrelated to any negotiated transaction; and
• the entrepreneur should have closed the deal when he had the chance.

I assume I don’t need to tell you how this story ended.

The Sid Hill Rule Works Both Ways

Contrary to what you may think, The Sid Hill Rule doesn’t mean you can’t walk away from negotiations.  It actually means you can walk out of the negotiations – if you have the power to do so.  Take a dispute one of my clients recently had over an invoice.  My client had served as a subcontractor on a project where the prime contractor had some difficulties unrelated to my client’s work.  My client finished the work, got the signoffs it needed, and anticipated a payment that never came.  Two letters, a phone call and other efforts to collect the invoice went unreturned.  With its documents, facts and position in order, my client had to decide whether no business with this “partner” would be better than a relationship that didn’t pay in the end.

Once my client served its lawsuit on the prime contractor, the phone rang immediately.  The prime contractor was ready to negotiate.  At this point my client had thoroughly investigated its position and decided to pay as much as the invoice to litigate the matter.  Now that my client had been required to publicly air its differences with its “partner,” a message to the marketplace that good work requires prompt payment was as valuable as the invoice itself.  Negotiations (if you could call them that) began, and my client hardly moved from its invoice.  Outrage, threats and intimidation came from the other side – but the prime contractor’s threatening rhetoric was soon followed by a very large check.

My client had had the power to negotiate, because it had had the power to walk away.

So Why Is this Rule So Important?

The rule is important because most people ignore it. They ignore it in several ways.  In litigation it’s often ignored by clients and lawyers who start to negotiate without knowing what their case is worth.  Who among us has had a client or a colleague push for a negotiated result without really understanding what the case is worth to begin with?  Most of us; all of us if we’re honest.

The rule is important because people forget it. In the heat of negotiation even experienced negotiators who know they don’t really have the power to walk away forget that fact.  Whether they become too focused on the next offer, the next tactic or the next deposition, they make the sophomore mistake of forgetting about what the world looks like for their client if no deal happens.

The rule is important because your opponent may know they have the power to walk away. It’s a fact that most cases settle, but some don’t.  I am lucky to have practiced with real trial lawyers, and I have litigated against people who assumed their case would settle on the courthouse steps.  I have seen opponents let their guard down in the final weeks before trial as the settlement gap narrows, I have seen them panic when their case is next on the docket, and I have seen the dramatic results of these mistakes.

The power to negotiate really is the power to walk away.  Thank you, Sid.

Categories: Fundamentals,Negotiation,Settlement,Theory,Walk Away

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