Sports Contract Negotiations: A Holdout that Worked
With global sports industry revenues over $145Bn and growing at a rate of 3.7% over the past 4 years, it is evident now more than ever, that behind the tackles and buzzer beaters, sports remains a business. Negotiations in business are usually governed by several tangible measurable data points that are indicative of future performance. Given below are a few aspects that are unique to negotiations in the sports industry:
No defined "pie" – Duration, guarantees, team objectives lead to a constantly changing and fluid negotiating environment
Unpredictability – A player's performance on one team may not necessarily translate to similar performances in a changed setting
Public Nature of Negotiations – Every move is scrutinized, dissected and analyzed and public image can make or break a sports franchise and player
Multiple parties – Teams, agents, and players all play a role in the outcome of a negotiation. The passive role played by fan bases and the media can be just as vital and is often overlooked
These factors manifest themselves in very different ways resulting in new clauses, levers, and bargaining chips being used with every passing season. There exist several parallels that can be drawn between sports negotiations and negotiations conducted by supply chain professions on a fairly regular basis demonstrated by the example given below: Scenario: The Cleveland Cavaliers were 2 wins away from winning their first NBA championship in 2015. Tristan Thompson, a huge contributor, elevated his game in the absence of several key players. That said, he would never be more than a supporting player in a team with 3 perennial all stars. Thompson’s contract was now up for renewal. Free Agency: At the end of the 2015 season, Tristan Thompson entered restricted free agency which meant that the Cleveland Cavaliers were allowed to match an offer from any other team to sign Thompson. It was unlikely that another team would be willing to extend a large offer given NBA cap restrictions and Thompson's limited on court value. The Cavaliers were seemingly negotiating from a position of strength.
Meanwhile, Thompson was seeking the max: Subsequent negotiations took an interesting turn when it was publicly reported that Thompson had rejected several proposals from the Cavs while conveying he was seeking a max contract (a five year guaranteed contract worth $94M). This was an extremely well thought out move on Thompson's part because (a) prior to this declaration, there was no objective baseline to establish his value; and (b) several public comments from Lebron James mentioned his close relationship with Thompson. This showed his sports agent, Rich Paul that Thompson was worth more than his on court presence, since he was also valued highly by the team superstar, whom the Cavs could not afford to displease.
Rich Paul suggested that Thompson would accept a qualifying offer: If no deal was reached, the Cavaliers would give Thompson a 1 year qualifying offer of $6.8M after which Thompson would become an unrestricted free agent in 2016. Thompson's agent, Rich Paul, publicly announced that Thompson would take the qualifying offer. With this step, Paul declared his BATNA (Best Alternative to a Negotiated Agreement) to all parties while effectively providing a threat and ultimatum to the Cleveland Cavaliers. But Thompson did not accept the qualifying offer: The deadline for Thompson to accept the qualifying offer passed with neither party reaching an agreement. By not extending the deadline, the Cavs called Thompson's bluff, thus strengthening their position further.
A few days later, the Cavs and Thompson shockingly agreed to 5 year $82 M deal, in essence a $12 million/year raise, making him the highest paid bench player in the NBA. So how did Tristan Thompson manage to pull off a seemingly impossible deal? At no point during the negotiation, did Thompson have a strong BATNA. Additionally, his options decreased substantially with every passing week. On multiple occasions, procurement professions face a very similar situation in a negotiation where they are seemingly out-leveraged with minimal negotiating power. Using strategies from this example, one can often turn these positions of weakness into positions of strength. The key throughout this negotiation, was identifying the tradeoffs that each party was willing to make, and understanding that this was a classic case of interest based bargaining. For Thompson, the interests were purely financial. For the Cavs, their primary interest was winning a championship. Given the financial investments that they had already made, an additional expense was secondary if it resulted in a championship team. Rich Paul perfectly understood the Cavs' interests, knowing that it was only a matter of time before the franchise put a favorable deal on the table so that the focus could shift back to their primary interest of winning a title. When reexamining this deal from the perspective of interests, it seems more like a win-win situation with both parties satisfying their needs. To that end, the holdout paid dividends and Thompson walked away with a deal well above his market value.
This scenario provides a great example of how creative methods can be used to gain a position of strength by focusing on interests rather than positions – a key lesson that can be incorporated into large vendor negotiations. For more interesting thinking on procurement, visit the GEP Knowledge Bank.
Ajay Perumal, Senior Associate, GEP
Ajay Perumal is a procurement and supply chain management consultant at GEP, based in New Jersey. He is involved in procurement transformation initiatives at various industries with a sharp focus on delivering bottom line value. Ajay holds a Master’s degree from Columbia University in Management Science and Engineering.
With global sports industry revenues over $145Bn and growing at a rate of 3.7% over the past 4 years, it is evident now more than ever, that behind the tackles and buzzer beaters, sports remains a business. Negotiations in business are usually governed by several tangible measurable data points that are indicative of future performance. Given below are a few aspects that are unique to negotiations in the sports industry:
These factors manifest themselves in very different ways resulting in new clauses, levers, and bargaining chips being used with every passing season. There exist several parallels that can be drawn between sports negotiations and negotiations conducted by supply chain professions on a fairly regular basis demonstrated by the example given below: Scenario: The Cleveland Cavaliers were 2 wins away from winning their first NBA championship in 2015. Tristan Thompson, a huge contributor, elevated his game in the absence of several key players. That said, he would never be more than a supporting player in a team with 3 perennial all stars. Thompson’s contract was now up for renewal. Free Agency: At the end of the 2015 season, Tristan Thompson entered restricted free agency which meant that the Cleveland Cavaliers were allowed to match an offer from any other team to sign Thompson. It was unlikely that another team would be willing to extend a large offer given NBA cap restrictions and Thompson's limited on court value. The Cavaliers were seemingly negotiating from a position of strength.
Meanwhile, Thompson was seeking the max: Subsequent negotiations took an interesting turn when it was publicly reported that Thompson had rejected several proposals from the Cavs while conveying he was seeking a max contract (a five year guaranteed contract worth $94M). This was an extremely well thought out move on Thompson's part because (a) prior to this declaration, there was no objective baseline to establish his value; and (b) several public comments from Lebron James mentioned his close relationship with Thompson. This showed his sports agent, Rich Paul that Thompson was worth more than his on court presence, since he was also valued highly by the team superstar, whom the Cavs could not afford to displease.
Rich Paul suggested that Thompson would accept a qualifying offer: If no deal was reached, the Cavaliers would give Thompson a 1 year qualifying offer of $6.8M after which Thompson would become an unrestricted free agent in 2016. Thompson's agent, Rich Paul, publicly announced that Thompson would take the qualifying offer. With this step, Paul declared his BATNA (Best Alternative to a Negotiated Agreement) to all parties while effectively providing a threat and ultimatum to the Cleveland Cavaliers. But Thompson did not accept the qualifying offer: The deadline for Thompson to accept the qualifying offer passed with neither party reaching an agreement. By not extending the deadline, the Cavs called Thompson's bluff, thus strengthening their position further.
A few days later, the Cavs and Thompson shockingly agreed to 5 year $82 M deal, in essence a $12 million/year raise, making him the highest paid bench player in the NBA. So how did Tristan Thompson manage to pull off a seemingly impossible deal? At no point during the negotiation, did Thompson have a strong BATNA. Additionally, his options decreased substantially with every passing week. On multiple occasions, procurement professions face a very similar situation in a negotiation where they are seemingly out-leveraged with minimal negotiating power. Using strategies from this example, one can often turn these positions of weakness into positions of strength. The key throughout this negotiation, was identifying the tradeoffs that each party was willing to make, and understanding that this was a classic case of interest based bargaining. For Thompson, the interests were purely financial. For the Cavs, their primary interest was winning a championship. Given the financial investments that they had already made, an additional expense was secondary if it resulted in a championship team. Rich Paul perfectly understood the Cavs' interests, knowing that it was only a matter of time before the franchise put a favorable deal on the table so that the focus could shift back to their primary interest of winning a title. When reexamining this deal from the perspective of interests, it seems more like a win-win situation with both parties satisfying their needs. To that end, the holdout paid dividends and Thompson walked away with a deal well above his market value.
This scenario provides a great example of how creative methods can be used to gain a position of strength by focusing on interests rather than positions – a key lesson that can be incorporated into large vendor negotiations. For more interesting thinking on procurement, visit the GEP Knowledge Bank.
Ajay Perumal is a procurement and supply chain management consultant at GEP, based in New Jersey. He is involved in procurement transformation initiatives at various industries with a sharp focus on delivering bottom line value. Ajay holds a Master’s degree from Columbia University in Management Science and Engineering.