Two of my favourite business stories, one from the mid 1950s, the other from around 1980, provide a telling reminder of both the importance and danger of assumptions. I have no idea how true they are, but it doesn’t stop me loving them and learning from them.
The first one, from the mid fifties, concerns a telephone conversation between two Hollywood movie producers and Colonel Tom Parker, Elvis Presley’s manager. The producers were trying to persuade the Colonel to let Elvis do a Hollywood movie. A no-brainer you would have thought. But the Colonel made them put their most persuasive case; after all Elvis was a rock n’ roll performer, not an actor.
Eventually the conversation came round to money.
“So, what kind of fee did you have in mind?” asked the Colonel.
The producers, as I recall from the story, mentioned a figure of around $50,000, a lot of money for an actor in their first film in those days.
The phone remained silent for a while. Eventually the Colonel said “OK, and how much for Elvis?”
The story goes that a proportionately higher fee was eventually negotiated for Elvis. Which then set a precedent, which made both Elvis and the Colonel rich.
Of course the fatal mistake was that as the producers were talking about Elvis, and about Elvis’ film, they naturally assumed that they were talking about Elvis’ fee. But they forgot they weren’t talking TO Elvis, so failing to qualify their question proved expensive.
The second story concerns a young Bill Gates and his mates working in a garage, and trying to sort out a price to charge for developing some software for some new computers IBM were making. IBM told them that they reckoned they’d sell “about 100” units. The question was, what do you charge for a contract like that?
The consensus was to quote a fixed fee of, as I remember the story, five thousand dollars, still a reasonable sum for the work involved.
Until young Bill piped up and said “Why don’t we charge them $50 per unit instead?” The logic being that if IBM sell two hundred units instead of a hundred, then Bill and his mates would make twice as much money from the same amount of work.
So, just for the hell of it, they asked, and IBM said yes. Presumably because for 100 units that was a fair price, and if they sold only 50 units they would have “saved some money”. And decades later in IBM they still refer to it as a “billion dollar mistake”. The rest, as they say, is Microsoft history.
Looking back now, it doesn’t seem too much to ask that someone at IBM should have asked the related questions “Why do they want a price per unit? And if we pay it, shouldn’t we cap it?” Ultimately, IBM’s core error was to assume that their unit forecast was a maximum, rather than a wild, crazy, unbelievable underestimate.
We all make assumptions in business all the time. When we are negotiating, managing, communicating, in meetings, reading reports, business plans, forecasts, even when we read the newspaper, books and articles. Giving yourself just a few seconds to challenge one or two of the most obvious assumptions you are making can produce significant insight into the situation/material you are being faced with, and therefore what you can do about it.
Here are a few straightforward suggestions which might help you to avoid hearing the “How much for Elvis?” question at the worst possible time;
- Consider the scope before the detail
Give yourself time beforehand to consider the spectrum of possible outcomes. That doesn’t mean every single eventuality, it means the two extremes; the absolute best and worst that can happen. It wouldn’t have taken long for an IBM exec to ask what the implications of the deal would be if they sold 1,000 or 10,000 units, let alone millions.
- Give things a purpose in order to remove ambiguity
Be clear about defining your terms. If the Hollywood producers had quoted their $50,000 fee “for Elvis” they could potentially have saved a rather large amount of money.
- A small concession now could pay back big time later
Where relevant, try and build in an “anti-embarrassment” clause. Ask yourself the question, “If by some dim chance this thing does become the next Facebook, how can I make sure that I have a small, but face-saving, stake in the long term?” Long shots do sometimes pay off. It may cost practically nothing now to buy into that possibility later. And as both these stories show, there’s no way you’ll be able to renegotiate after the event.
In business, as in life, there’s no sure-fire way to remove the risk of an expensive mistake, or to prevent a lost opportunity. But you can stack the odds in your favour if you are diligent about getting the scope and purpose right, and most importantly, if you have covered off that delightful and infernal “How much for Elvis?” question.