Consulting Tips

You know the adage: fool me once, shame on you; fool me twice, shame on me. Fraud frequently occurs right under our nose; we are too familiar with the situation that the oddity passes unnoticed. Even when an organization follows its fraud detection procedures, the coziness may permit the fraud to fester. Oftentimes, an organization needs an outsider to periodically examine its policies, procedures and, most important, its conduct to keep its guard up. Hopefully, this unbelievable example will exhibit the benefit of such an outside review.  

Our consultant, Steven Lippman, previously represented two large national leasing companies who were sued throughout the country in state and federal courts (which were consolidated under the rules of multidistrict litigation) and in a bankruptcy proceeding. These two leasing companies were among approximately 20 leasing companies who were similarly sued. It was big news in the equipment leasing industry; everybody knew about it and discussed how to prevent it from happening again.

The lawsuits arose out of leases generated by a company called Recomm. The principals of Recomm were Jean Vincens and Raymond Manklow. Recomm marketed its leases primarily to pharmacists, veterinarians and opticians. The leased equipment was a LED display board and a box that would receive and run advertising on the display board that would be of interest to waiting customers. Along with the lease, the lessee entered into a marketing agreement for the advertising. The lessee was told that the advertising revenue would cover their lease payments so with this package they would pay nothing. As you might suspect, there was no advertising, the revenues from the sales of new leases was used to pay the advertising for a while and when the sales couldn’t keep up with the payments due the gig was up. Since this occurrence was of such renown in the leasing industry, you would think it couldn’t happen again.

Yep, it did. About 10 years after Recomm collapsed the same Jean Vincens and Raymond Manklow started companies called Brican whose entire business was selling “Exhibiteo” systems to dentists and optometrists. The “Exhibito” was comprised of a plasma TV, computer, monitor and software that would display advertising on the television. Along with the lease of the “Exhibito”, the lessee entered into a marketing agreement for the advertising. The advertising payments were set to nearly match the lease obligations so Brican “marketed the Exhibito to customers as being ‘free.’”  How eerily similar is this. But wait, it gets even worse. The leasing company kept buying leases of Exhibitos even after it learned of the marketing agreements and after learning of Vincens’ and Manklow’s involvement with Recomm.

What can we learn from this episode? Sometimes the most well intentioned organization, even when on notice, is blinded by familiarity and fails to detect inappropriate actions in plain sight. Having an outsider, unconnected and without any preconceived notions, just might catch what the organization has missed..

Sometimes the obvious is missed because the team is so intent on accomplishing the task at hand that nobody keeps their eye on the ball.

Hewlett-Packard is embroiled in litigation regarding its $11 billion acquisition of Autonomy. The deal was a disaster; H-P's stock dropped 20% the day after the deal was announced and H-P ultimately took a $8.8 billion write-down. H-P claims that Autonomy defrauded it by improperly reporting its revenue.

H-P commissioned KPMG to analyze the deal. KPMG's report to H-P indicated that Autonomy didn't furnish half of the information KPMG sought, including details on Autonomy's revenue recognition, expenses and management forecasts.  You would think this red flag would cause H-P concern. It might have, but H-P's CEO says he never read it. Additionally, the Wall Street Journal had reported that Autonomy's outside auditors noted that an Autonomy executive had alleged improper accounting practices. This red flag was also missed because the H-P executive briefed on this matter didn't pass the information along to the decision makers.  

Perhaps this might have been avoided if someone had been assigned the task to make sure all due diligence investigations had been completed and had been provided to the decision makers. Typically, the environment in an organization is to get the deal done and nobody wants to be seen as the impediment. How many times have you heard "I don't like getting our attorneys/consultants/accountants aboard because all they do come up with reasons why the deal shouldn't occur." Bet H-P wishes it had someone filling that role. For this reason, it might be wise to engage an outsider without institutional preconceived notions or pressures and without any financial interest to keep an eye on the ball by making sure each step in the process is fully completed, reported to the appropriate personnel, and that negative information, in particular, is fully vetted. This suggestion is not limited to mega-deals; it is just as applicable to "run of the mill" transactions by small businesses.   

Many entrepreneurs thirst for guidance; a mentor or a sounding board. They have firm ideas about what their enterprise needs and the path it should take to achieve these goals; but are eager to have trusted resources that they can brainstorm with. An advisory board may be just what is needed.

 There are many formal roundtables that exist which an entrepreneur can join, often for a fee, where he can interact with others ideally facing the same challenges. Alternatively, the businessperson can set up their own kitchen cabinet of follow businesspeople, advisors or key employees. The key is picking people who bring skills and experience different from the entrepreneur, are unafraid to challenge what the business is doing, and express new ideas (even better are those who relish this process). Fresh, insightful and uninhibited ideas are the lifeblood of any organization. The board can meet informally over coffee or on a regular basis with a fixed agenda (meeting over dinner and treating your board members is a nice way of thanking them). Consider expanding your resources by establishing an advisory board.

An interesting article in the Wall Street Journal explored the role of the CFO following a merger. The focus was on the need to proactively address the complicated process of combining the two companies; not just senior level issues (name, location, who will run it) but also integrating customized systems that handle everything from sales, inventory and billing and getting the people who manage those systems and operate within them to work together. The article emphasized the full-time nature of the integration process and the necessity of patience as it typically takes longer than desired. The issues that must be addressed (including integrating divergent ideas/agendas, communicating clear goals, engaging participants to understand what role they play and how it can be made easier/more productive, linking roles together into a cohesive organization, and maintaining contact with key players) as well as the benefit of anticipating and collaboratively solving them apply to every enterprise. An open flow of information and an inclusive atmosphere makes everybody a stakeholder which increases the likelihood of success; whether implementing a mega-merger, operating a small business, or simply trying to complete a transaction.

Recent trend is for businesses to implement a program to evaluate its present practices and explore alternatives to create a better mouse-trap. Whether called “failing forward”, “thinking outside the box” or some other phrase of the day, the process seeks to create ideas (some radical, others incremental) and learn from mistakes made so the organization can apply those lessons to future efforts. The goal is to develop a culture that embraces challenges, experimentation and innovation. We can all agree that these are worthy objectives. How to accomplish this task is where the difficulties occur.

Corporate pride, fear of losing out on a promotion, or fear of looking uninformed often paralyze an enterprise. Experience tells us that innovation by nature involves tweaking; little by little improvements are made as deficiencies are noticed and addressed. Accepting the possibility of failure, actually embracing it, is vital. How do you accomplish this? An outsider’s fresh perspective may be just what you need. Frequently, a new employee taking a fresh approach to an old problem creates an innovative way to deal with it. Sometimes the new employee challenges your existing methodologies by asking the simple question “why are we doing this?” or “why do we do this that way?” which leads to improved alternatives. We are not suggesting you hire a new employee just to evaluate what you do, ask questions and offer alternatives; but you should consider hiring an outside consultant to do this. We can fill this role. We will meet with members of your team throughout your organization, formulate objectives and provide fresh uninhibited suggestions which you are free to accept/reject/modify without fear of corporate politics repercussions.

A recent article in the Wall Street Journal explored the malaise felt by small Italian businesses. These enterprises constitute the "bedrock of the economy"; similar to American small businesses. Also like their American brethren, they suffer from a "back-of-the-envelope way of running their business", "family ownership, little forward planning and low productivity", and operate in an economy that is "too rigid and incapable of responding." While the article identifies issues small businesses universally face, it doesn't suggest how to address them. A good place to start is with structure and planning; what do you want to accomplish (globally and at a macro-level, long and short term) and what steps will you take to achieve the goals (including identifying who will perform each task and a timetable for its completion).

As counsel, I frequently sat back and said to myself “I wish the mediator would do ____.” On those occasions when I was a party at mediation, I felt that the mediator walked in to the mediation uneducated, but with a preconceived answer all wrapped up with a bow on top just waiting to be accepted. Now that I am serving as the mediator, I have thought deeply about what made mediations successful or unsuccessful. For me, the bottom line came down to whether or not the mediator was prepared.

So how am I, as the mediator, going to prepare. The simple fact remains that you control to a great extent the mediator’s ability to prepare for the mediation. What then, can you do to help the mediator? How can you “Help Me, Help You”? Provide me with the information I need to assist you in reaching a resolution of your dispute.

Sometimes, all that is needed is a good mediation summary that, in a neutral fashion, describes the dispute, the history of settlement negotiations, and the outstanding issues for resolution. More frequently, the parties either can’t even agree on this or the matter requires deeper understanding to reach a successful conclusion. Often mediation centers on an issue, facts, a legal principle, or a tangential matter that nobody has brought to the mediator’s attention. Educate the mediator. If appropriate, provide the mediator with relevant court papers, discovery, correspondence or authorities; whatever you think the mediator should understand and consider in assisting the parties to appreciate the obstacles they must overcome to succeed. You are going to have to present a convincing argument at trial or even summary judgment; here is a chance to take a test run.

Mediation and arbitration sound similar and are frequently confused as being one and the same. Actually, they are vastly different. An understanding of each of them and how they work will help you determine which you should pursue.

Mediation is a process where a neutral third person called a mediator acts to encourage and facilitate the resolution of a dispute between the parties. It is an informal and non-adversarial process with the objective of helping the parties reach a mutually acceptable and voluntary agreement. The role of the mediator is to reduce obstacles to communication, assist in the identification of issues and exploration of alternatives, and otherwise facilitate voluntary agreements resolving the dispute. Most important, the decision making authority rests with the parties. It is an assisted negotiation. Consequently, issues tangential to the dispute or unrelated business matters can be addresses at mediation and may serve as the basis of resolving the dispute. Mediation can be commenced quickly, as soon as the parties' and the mediator's schedule permits. It can take as long as the parties desire and can be broken into small parts; since the parties control the process it can be manipulated to meet their needs.

In stark contrast, arbitration is a process where a neutral third person or panel, called an arbitrator or arbitration panel, considers the facts and arguments presented by the parties and renders a decision for the parties. Arbitration, like court proceedings, involves the presentation of a particular issue or issues after which a decision is made on those specific issues based upon the evidence presented. The decision making authority, just like in court proceedings, is taken away from the parties and is limited to the issues framed by the parties. There is no wiggle room, negotiation, or ability to consider unrelated matters in reaching a decision.

As you can see, while they sound alike, mediation and arbitration are not similar at all.

It is quick. Mediation usually takes place within weeks and, in emergencies, can occur within hours or days. Not only does it start soon, but the process is relatively fast also. Typically, mediation is completed in a day, but on those occasions when more time is needed the follow up occurs soon thereafter.

It is inexpensive. The only monetary cost is the mediator's fee. More important, there is little non-monetary cost in the form of anxiety or distraction since the parties participate in establishing the process and control any settlement reached (as opposed to the anxiety and distraction inherent in litigation or arbitration which the parties do not control).

Everything is fair game. The parties can discuss whatever they want and utilize all means at their disposal to settle their dispute. Many times an unrelated issue or business opportunity is the avenue used to reach a settlement at mediation.

It is a chance to resurrect a relationship. After the adversarial process of litigation or arbitration, the parties' relationship is typically lost or, at best, critically damaged. Because mediation is non-adversarial, it presents an opportunity to sit across the table, work in a collaborative process and potentially repair (or commence repairing) the damaged relationship.

It is informal. Mediation is informal; the parties participate in establishing the ground-rules and how the process will play itself out. By contrast, litigation or arbitration are formal proceedings where somebody else (the judge or arbitrator) dictates the process.

You get to try things out. If mediation is unsuccessful, the parties will likely present the issues discussed at mediation before the court or arbitration panel either at summary judgment or trial. Mediation presents a chance for a test run. Parties are usually afraid to concede anything in their direct negotiations with their opposition for fear of appearing weak. Concessions can be made at mediation in an effort to move the process forward, sometimes without the other side even knowing.

You get to check people out. Mediation presents an opportunity to gauge your opposition: see how he dresses, how he comports himself, is he intelligent and articulate, how does he react when challenged. It is also a chance for your client to see your opposition's counsel in action. 

We are occasionally told about a case the parties would like me to mediate; "but we are not yet ready for mediation." Sometimes the explanation is that the parties need to obtain certain information in order to evaluate their position and potential settlement proposals. On those occasions, early mediation might be the solution.

The mediation spotlight is naturally on the end-goal; a negotiated resolution of the dispute. If, however, attention is diverted to the mediation process the utility of early mediation comes into focus.  Mediation can be conducted in stages. When faced with a roadblock because a party requires additional information to evaluate positions or proposals, we like to formulate a process where the mediation conference is adjourned, information is obtained and considered expeditiously, and the parties reconvene. We ask the simple question: "What do you need to see and why?" Through follow up questions the breadth of what is required to quench the party's doubt is frequently pared back to the bare necessity. We then ask "If I can get you X information, and if it shows Y, can we get to Z offer?" Once we have this commitment, we present it to the other side: "Will you provide X information, because if it shows Y (as you say it will) then the other side will offer Z." While the party seeking the information might not get as much as it would in discovery (then again, it might get more through this process than in discovery), it certainly will get it quicker and for substantially less money.

Rome wasn't built in a day; sometimes a case can't be settled in a day. However, each day something can be accomplished. Instead of focusing on the major impediments; by creating a process where some common ground can be found, breaking the dispute into segments and advancing one segment to the next, oftentimes progress can be made. Keep this in mind next time you think it is too early for mediation; with the right process it is never too early.  

A few things for you to think about in advance of mediation:

Analyze positions. Consider both your and your adversary's positions; what are you seeking and what is important to your opponent. Consider alternatives including business opportunities (even if they have nothing to do with the dispute) and non-monetary items. Mediation is an "assisted negotiation"; have a plan in place for your negotiation.

Prepare a summary. Identify the significant issues (monetary and non-monetary), facts, legal principles and evidence. Get ready to address each of these items. Provide a summary and any supporting materials you think the mediator should review and consider in advance of the mediation (if you don't think the mediator you selected will review your summary and think about it in advance of the conference, perhaps you should get someone else who will).

Decide who should attend. If the client is not an individual, who should represent the entity? Should an expert/adjustor/consultant attend? Who will be the team leader; will the client actively participate or defer to counsel? Just as important as who should be there, think about those whose presence might pose an impediment. Consider the message each person attending sends and how that comports with the message you want to convey. Consider who you want to target your negotiations to; who on the other side makes the decision, who of the decision makers is listening to you or wants to resolve the dispute.

Consider what you want. Not just an amount of money, but how it is to be paid (lump sum or over time, cash or credit) and non-monetary terms (confidentiality, publicity, continuing obligations, supervision) as well. What is your bottom line; what are you prepared to do is you don't get it? What is the cost of litigation (monetary and non-monetary (stress, interruption/inattention to business, collectability, risk))? What business alternatives are available? What is your BATNA (best alternative to a negotiated agreement)?

Would a pre-session conference be beneficial? Are there concerns about where the mediation will occur, whether a particular person needs to be or should not be in attendance, do people need to appear in person, are there obstacles or special problems that will arise at the conference? If so, a call among the mediator and counsel might resolve these matters in advance and result in a smoother and more effective conference.

Think about the image you want to project. Will you be passive or aggressive? Do you want to skip opening statements or defer them until a later time? Will you be firm or negotiable?

Explain the process to your client. Let the client know how mediation works, the format that is typically followed, to expect the unexpected and that it will likely take longer than anticipated. Warn your client that you may say things/take positions that are inconsistent with the advice provided(for example, you may argue that you are solid on a legal principle which you would acknowledge to the client is not as strong as projected). Explain that the bottom line target will probably change throughout the mediation; as you learn things and receive new offer you will undergo a new analysis of your stance. Make sure the client knows that he will sign a binding agreement resolving the dispute and it may take some time to negotiate and draft that agreement.

Here are some things you should consider doing at mediation:

Reach across the table. Take advantage of the opportunity to talk to your adversary, he probably shares many of the same concerns you do: expense, risk, distraction.

Take advantage of the opportunity to try things out. You are going to have to present your case at some time: trial or perhaps summary judgment. Here is an opportunity for a dry run, especially if you have a jury trial. Observe how the mediator responds to your positions, testing your assumptions regarding the strengths and weaknesses of your case.

Present the appropriate attitude. It is ok to project strength, which shows you have mastered the issues and are prepared, but do so in a professional manner and show a willingness to make peace. Lay a framework with the right tone. Avoid heavy handed emotional positions (especially openings); they create chasms. Engineer goodwill by giving away intangibles that cost little to nothing and have minimal impact, but project a desire to work toward a resolution. Recognize the power of positive reciprocity.

Be patient. Mediation is a process; do you really care if it takes longer than you desire/expect if you achieve a satisfactory result. Frequently, the most patient party wins; don't give away negotiable items in frustration. Consider what your adversary needs/wants and try to structure your offers to address them. Settlement terms are limited only by the imagination of the participants; embrace this and be creative in developing efficient solutions (to the issues in the case as well as other issues that can be solved). Realistically evaluate the probability of obtaining a better result at trial compared to the offer you are evaluating (while conducting this evaluation factor in the cost of proceeding to trial, not just attorneys' fees and court costs, but also the emotional capital required of the client). Don't be frustrated with "insulting" offers; everybody is posturing, especially at the beginning (which is why it sometimes takes a little longer). Be careful of "take it or leave it" or "best" offers; nobody believe it. Don't go backwards; nothing created greater ill-will.

Use the mediator. Have him help the parties communicate with and understand each other. Use him as a buffer between warring clients or a difficult opposing counsel. Let him float trial balloons without committing to them. Work with him in the creative process; let him help establish ground rules, define issues, clarify objectives. Have him help you understand and challenge you adversary's positions.