Risk Based Analysis: How Do You Make Your Next Move?
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From John DeGroote's Settlement Perspectives June 2010 |
It’s no secret I have been on a bit of a Decision Tree kick lately — I just spent two days in one of Marc Victor’s (fantastic) training sessions, and Settlement Perspectives’ series on this important topic continues to grow. Today we’ll explore how one experienced mediator uses a similar approach to prepare mediator’s proposals, and how you can use the same process as you make your next settlement offer.
What Are the Chances Your Offer Will Be Accepted?
As I wrote my recent post on decision trees in mediation, accomplished mediator Jan Frankel Schau added her perspective on how she settles important cases on a related LinkedIn Commercial and Industry Arbitration and Mediation Group discussion. Jan, who publishes Schau’s Mediation Insights, told us she frequently uses decision trees, but adds that a similar tool can be used to help parties determine the likelihood a counteroffer will be accepted:
I draw a distinction between a Decision Tree — which I use routinely to highlight the expenses and risks of litigation, from a Risk Based Analysis — which I use more sparingly in coaching parties about making a counter-offer or demand and the likelihood that it will be accepted — or in my own analysis before preparing a mediator’s proposal.
As I followed up with Jan, she walked me through her style “Risk Based Analysis”:
Risk Based Analysis is a tool I use to help the parties evaluate the risk of losing or winning particular challenges. Usually, I use it when there is already a Motion for Summary Judgment pending. I ask the parties to analyze: what are the risks that the Defendant is going to win the pending motion and you don’t get to a jury? Usually that answer is no more than 20-25%. So if I’m considering a mediator’s proposal for $1 million, that would make the likely settlement value at $750K. Now I ask the parties what are the risks that even if the Plaintiff survives the MSJ, they win at trial? Let’s say that’s 50/50. Then the settlement value may be more like $375K. Now I ask the Plaintiff’s counsel, what’s the likelihood that the jury finds his client comparatively negligent and in what %? Usually, that’s also 50/50. That may mean the value is now $195K.
How Do You Form Your Next Settlement Offer?
So far I’m clear where Jan is going: a big headline number gets smaller as the likelihood of success diminishes at each turn. But Schau’s next move — predicting the likelihood a proposal will be taken — is where she sets herself apart:
After all of that, I make a chart, in which I make predictions as to what each side will accept in a mediator’s proposal. So, in my example, I’d suggest that there would be a 75-80% chance defendants would agree to pay $195K, but only a 20% chance they’d pay up to $750K. I use this to help evaluate what will work in the proposal — but of course I also consider what the parties have told me by that time in the process — so sometimes I have to adjust my percentages and evaluation a few times to make it work.
Schau’s approach adds adds a little science to the art of settlement. The next time you’re considering your next move, give Risk Based Analysis a try. You’ll be glad you did.
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