Two sides who disagree about a forecast agree on terms that depend on what actually happens, such as a bonus if volumes beat plan, so each bets on its own prediction.
An example
At a company selling scheduling software to clinics, the head of sales wanted twelve more account executives for a new module, and the chief financial officer would fund four. Sales forecast three million dollars in first-year bookings; finance believed one million. A month of argument went nowhere, because neither forecast could be proven. The head of sales proposed terms that depended on what happened: four hires now, four more released automatically if bookings passed seven hundred fifty thousand dollars by the end of the second quarter, and the last four if they passed one and a half million by the end of the third. If bookings missed the first mark, sales would give back two of the original four seats. The chief financial officer agreed in one meeting. Bookings passed the first mark in May, and the second wave of hiring started in June.
Why it works
Contingent terms make agreeing easier because neither side has to concede its forecast: each gets terms that pay off if its own prediction is right. The argument about who is right, which cannot be settled in advance, becomes an agreement to let the results settle it. It needs an outcome that can be measured cleanly, a measure neither side can move alone, and two sides who believe their own forecasts.
The thinking behind it
Max H. Bazerman Max Bazerman and J. J. Gillespie's Betting on the Future: The Virtues of Contingent Contracts (1999) argues that parties who share an interest in a deal can deadlock because they expect different futures, and that a contingent contract, with terms that depend on how an uncertain event turns out, makes the disagreement itself the basis for a deal while sharing risk between them. Hiring waves tied to bookings thresholds turned the sales and finance forecasts into exactly that kind of bet.
When it fits
Deals stuck on different predictions, such as volumes, savings, or timing, are the natural home for it, provided the outcome will be known within a reasonable period. You need a measure both sides trust and the authority to tie terms to it. It fits poorly when the outcome takes years to show or one side controls the measure.
How to use it well
Pin down the forecast you disagree about and ask the other side whether they would bet on theirs. If they believe it, they should welcome terms tied to it.
- Choose a measure neither side can move by itself, and agree how it will be counted.
- Set clear thresholds and dates, and what each side gets or gives up at each.
- Put the upside and the downside in writing.
- Name who reports the number and when.
Keep it simple. A contingency with too many conditions breeds new arguments about what was met.
What it costs and where it backfires
Losing the bet is a real possibility, and then you owe what you agreed to give up. Measures get disputed when results are close, so define them carefully. A contingent deal also tempts either side to steer the number. Measure honestly. Pulling bookings into the quarter, recording deals that will not close, or changing how the measure is counted turns a fair bet into falsified results.
When it is used on you
Make sure the measure in a contingent offer is one the other side cannot steer alone and that the thresholds are fair. Ask yourself whether they know something about the likely outcome that you do not. If both checks hold up, the offer is usually a sign that they believe their own forecast.