Technology Buyers and “Advance Fee Fraud”

Posted on September 29, 2008 | Filed Under LeverageMotivations, Objectives, Requirements | Leave a Comment

First – we’re not really writing that technology buyers are defrauding sellers – so don’t send nasty letters.  But there is a common technique that buyers use that has a parallel to the infamous Advance Fee Fraud, and which provides a negotiation lesson for sellers.

An Advance Fee Fraud, also known as a “Nigerian letter” scam, or a 419 scam (named after the part of the Nigerian criminal code that deals with fraud), or a bunch of other names, is not unique to Nigeria.  Perhaps you have received the email…

DEAR SIR,

CONFIDENTIAL BUSINESS PROPOSAL

HAVING CONSULTED WITH MY COLLEAGUES AND BASED ON THE INFORMATION GATHERED FROM THE NIGERIAN CHAMBERS OF COMMERCE AND INDUSTRY, I HAVE THE PRIVILEGE TO REQUEST FOR YOUR ASSISTANCE TO TRANSFER THE SUM OF $47,500,000.00…

In case you have received a version of this, take our advice – throw it away.

The fraud plays out as follows: in order to release and share in a large sum of money, you have to send either “good faith” payments or payments which allow the processing of the funds.  As you might expect, the flow of money is one-way:  from you to the scammer. The victims’ losses for the 419 scam in 2005 were estimated to be over $3 Billion worldwide.

How does this relate to technology buyers?

Example #1: The buyer says, “In order for me to be confident in your product, we need you to do a proof of concept (POC) at my location.  That will help me understand if the benefits that you projected are real.”  Many times, the seller confidently proceeds down the POC path, spending money and proving that what they said would happen does, in fact, happen.  What next?  The buyer decides there are other issues, and still doesn’t sign. The seller has laid out money in anticipation of a future benefit, which does not accrue.  It’s an Advance Fee Fraud.

Example #2: Seller and buyer are in heavy negotiations for a product or solution.  Near the end of the negotiation, the seller says, “Look, I have a lot of future business coming.  If you give me a great price on this agreement, you’ll be the front-runner for the big one coming up.” If the seller believes it, most times conditions will change by the time the “future business” comes up, and the negotiation will start from scratch. An Advance Fee Fraud.

We are willing to concede that this is not always a scam.  Sometimes “good faith” means “good faith”, not a guarantee.  But the error the seller might make in each of these cases is the same, and it parallels the Advance Fee Fraud.  The seller advances something, for the future promise of a big return.  As experienced negotiators, we know that the big return often fades away instead of getting delivered.

What to do?  As a seller, make sure that your return is assured before you advance that “first payment”.

In the case of a POC, agree on two things with the buyer up front:

1.    Successful results from the POC will result in a signed order.

2.    The terms of that order.

In the case of “big future business”, consider responding like this, “We are interested in the future business.  If you would like to agree to do all of that business with me now, your terms will reflect the size of the agreement.  If you choose to do a smaller agreement now, your terms will also reflect the size of the (smaller) agreement.”

Don’t fall for “Advance Fee Fraud” from your buyer.  Make sure that there is a real future return before you make an investment. (td)

The Qualcomm and Nokia Patent Agreement

Posted on September 3, 2008 | Filed Under Terms Cost Money | Leave a Comment

In a previous article we discussed Negotiation Leverage in the long-running, but recently settled Qualcomm/Nokia patent dispute.  Setting leverage aside, let’s look at just one of the reported terms of that agreement as an illustration of one of K&R’s Six Principles of Negotiation.

The principle is this: “Terms Cost Money, Someone Pays the Tab (expense).”

What the principle means is that as you negotiate, you should consider that every term in the final agreement will cost one side or the other money.  You should therefore be careful when altering your terms.  Mistakes can be expensive.

This does not mean, however, that the cost to each party is the same.

First example: in the Qualcomm/Nokia case, the agreement included an up-front payment and then per-unit royalties from Nokia to Qualcomm.  The payments will be a total of “up-font” + “per/unit” x “units”.  The two companies made estimates of what volume would be in private, and separately.  Versus a straight per-unit royalty, if Nokia ships more product than Qualcomm had estimated, this could result in lower total revenue to Qualcomm than a strict per unit contract term.  If Nokia ships less, the total could be higher. This is an example of the K&R Principle – Terms cost money.

In addition, Qualcomm probably determined an amount that they desired up-front as a flat fee (which becomes mostly risk-free), and what amount they would allow to be variable.  Among other things, this expresses a degree of Qualcomm’s tolerance for risk. Nokia made the same calculation, but from their own perspective.  As a negotiator, you should try to determine what is important to the other side.  A desire for lower risk from Qualcomm, or a desire for the patent expense to be a fixed fee and known per-unit cost for Nokia will affect the way they negotiate the terms of the agreement.

This principle does not mean that the value, or cost, to each party is the same. For example, if you imagined that Nokia was going to have a bad quarter, and they chose to follow the principle of clumping all the bad news together, they could consolidate their costs into a bad quarter via the lump sum.  If Qualcomm had been about to negotiate loan financing, which they no longer had to do because of the lump sum payment, it could be more valuable to them.  Your knowledge of the interests of the other side will affect your negotiation.

The values are different, the costs are different.  To be a good negotiator, you should be aware of 4 things:

1.    The cost to your side of the term

2.    The value to your side of the term

3.    The (estimated) cost to their side of the term

4.    The (estimated) value to their side of the term

When you negotiate, remember: Terms Cost Money, Someone Pays the Tab (Expense).  (td)

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