A Whole New Game

When partners are confronted with decisions worth millions of dollars, it might seem easy and reasonable to assume that each organization will make the choice that yields the best return for itself in terms of dollar value. However, decisions aren’t made in a vacuum, particularly in difficult situations. Many variables affect the decisions companies make and the outcomes of those choices. Add partner organizations, which are likely simultaneously contemplating what course of action might be in their own best interests, to the mix and negotiations can get pretty complicated. 

Complex circumstances where it’s not clear whether partners’ interests are in alignment necessitate tough choices. And with so many X factors in play between the different decision makers and their unconscious biases, as well as the industry landscape and where each organization fits into it, it’s not always easy to gauge which option is the best when there are many choices and even more possible outcomes associated with each of them. 

When organizations are at loggerheads, it is often necessary to apply sophisticated political, economic, and philosophical science to separate the signal from the noise and illuminate the pathway that represents the best big-picture short- and long-term value for each company. 

Late last month, ASAP’s latest webinar, “Friction? Game On!: Applying Game Theory to Resolve Alliance Conflict,” provided a glimpse of what this looks like. 

“Game theory gives you certain structure and also incentivizes you to think about the motives of your partner,” said Stefanie Schubert, CSAP, PhD, professor of economics at SRH University Heidelberg. 

Keep to the Contract or Cave with Concessions 

For the better part of the event, Schubert used a hypothetical example of a fictitious US-based pharmaceutical company (US Pharm) that partnered with a fictional Japanese pharmaceutical (J Pharm) outfit to sell a tablet product in the Land of the Rising Sun. Already enjoying commercial success, the two organizations are hit with a splash of cold water by Japanese regulators, who have found nitrosamine levels to be exceedingly high in the tablets. J Pharm wants its American partner to reduce the amount of nitrosamine in the product. However, the latter is already making tidy profits on this drug in the rest of the world, and no other countries have raised any red flags about it.

“It’s just Japan, so we don’t care about that,” said Schubert, summarizing the feeling of the US-based company’s leadership. 

There are essentially four possible outcomes in this situation: 1) US Pharm insists on sticking to the contract, which doesn’t say anything about nitrosamine levels, while J Pharm makes concessions and rectifies the situation; 2) US Pharm makes the concessions, while J Pharm sticks to the contract; 3) both make concessions; and 4) both insist on the contract.  

In this example, the most valuable outcome for both companies is to stick with the contract, while the partner makes concessions—i.e., 1) represents the best outcome for US Pharm, while 2) is J Pharm’s most lucrative course of action. The third option forces both companies to give up more revenue, while the last combination would do the most damage to both companies’ balance sheets because both parties would incur heavy litigation costs suing each other—in other words, if one side prefers the original agreement, it is more profitable for the other to make concessions than battle in court over the true meaning of the contract’s wording. 

Share and Share Alike or Make the First Move?

Obviously, decisions of this nature are never so black-and-white. Schubert gave a few examples of different scenarios that each yielded different results. First, there might be a world in which the two companies can even out their gains by sharing the costs of reducing nitrosamine in the manufacturing operations. Or, one party could also take a less collaborative approach and make a public statement to press and analysts that they will unbendingly adhere to the contract as written, thereby forcing the partner’s hand; in essence, by exercising “first-mover advantage,” the organization making the public statement leaves the other side no other option than to make concessions since going to court to argue over contract language is so pricey. 

Deeper Concerns: Alliance Manager Counterparts Help Uncover Partner Priorities

Of course, various external factors could also shift one party’s thinking. 

“It could be that J Pharm is in negotiations with another big pharma company, and it’s so important for them to build a good reputation, which means that if they make concessions in this case, maybe their payoff is higher [when the company factors in additional gains from signing a new partner],” said Schubert. 

Then again, it is not always safe to assume that an organization will be privy to the partner’s deeper concerns and priorities beyond a single issue such as this nitrosamine situation. David Thompson, CSAP, ASAP board chair and vice president and global head of alliance management at BeiGene, stressed the importance of leveraging that relationship with the alliance manager counterpart to get the inside scoop on what is going on inside the partner company. 

By “sitting down and talking to them about what’s important, you can get a lot of insight into the company,” he said, before adding that his company’s alliance contracts now explicitly mandate that partners appoint a dedicated alliance manager, even if that individual is not an alliance manager by trade. “They’re going to be aligned with wanting to do what’s right for the alliance.”

Cognitive Distortion: Too Much Confidence, Certainty, and Loss

In addition to company dynamics, individuals have unconscious biases, as well. Schubert detailed a few examples: 

• Optimistic overconfidence – “People overestimate their ability to account for or control future events,” she explained.
• The certainty effect – “Events that are certain are usually overweighted, which means that if something is not so sure, then it will not enter [into] the decision,” she said. 
• Loss aversion – “The impact of the loss is much higher than the impact of the gain. So be aware that if you negotiate and try to solve conflict, if the other party has to make a concession, that hurts them a lot,” she said.

Thompson added that it’s critical to identify and overcome “cognitive distortions” of all kinds. 

“How do you identify them in yourself, and how do you identify them in others? And then more importantly, once you’ve identified them, how do you address them in a way that’s going to lead to better decision making?” he said. 

More great insights emerged in “Friction? Game On!: Applying Game Theory to Resolve Alliance Conflict.” ASAP members, log into the ASAP Content Hub to hear Thompson’s keys for taking detailed meeting minutes—in particular, why meeting minutes should paint a picture more like Da Vinci than Monet, Picasso, or Pollock.