I’ve worked with hundreds of organizations to help them form partnerships— both internally and with other organizations. The two case studies I offer here reflect normal behavior and the common reactions I get from the people I work with. These partnerships were successful, but not perfect—which makes them especially valuable as case studies.We see real people in real situations acting and reacting the way we ourselves might.

Eric, the general manager of an eight-hundred-room convention hotel in Minneapolis (part of an international chain), asked me to help solve problems that two departments at the hotel were experiencing with one another. He wanted to know if the two departments couldn’t somehow start to work together and form a partnership to better serve the guests and each other. He invited me to a meeting along with the two heads of the departments, Marty and Jean. Marty was the supervisor of Maintenance and Jean headed Housekeeping.Marty had about forty house maintenance engineers on his staff, and they were responsible for all building maintenance. Their duties varied from changing lightbulbs to fixing the hotel’s heating and cooling systems. Jean managed a staff of about one hundred housekeepers, groomers, and laundry personnel. Marty and Jean were constantly at each other’s throats. More than once they’d had separate meetings with Eric, each complaining about the other. It seems that Housekeeping was constantly complaining about having to redo the room when Maintenance failed to clean up after themselves once they finished repairing something in the room.While this may sound like a minor dispute, it was the source of years of anger between the two departments and these two employees. To make matters worse, Marty and Jean did not like each other personally. Marty complained that Jean was overly sensitive and that her staff was lazy and whined constantly. Jean told me she thought Marty was a bigot and a bully.

It is also sensible to be aware of and take into account the human dimension. People behave differently and inconsistently when making decisions involving risk. They may be exuberant or diffident, overconfident or overly concerned. Or they may simply overlook the issue of risk.

One important priority is to identify significant risks within and outside the organisation and allow these to inform decisions. This makes it easier to avoid unnecessary surprises. Examples of significant risks might be the loss of a major customer, the failure of a principal supplier or the appearance of a significant competitor.

Risk surrounds us all the time. As Harold Macmillan, a former British prime minister, once said: “To be alive at all involves some risk.” Some of the most common areas of risk affecting business are summarised in Table 11.1. It is valuable when attempting to identify risks to define the categories into which they fall. This allows for a more structured analysis and reduces the chances of risks being overlooked.

To this list should be added another, intangible category: the opportunity cost associated with risk. In other words, avoiding a risk may mean avoiding a potentially huge opportunity. There is a tendency for people to be too cautious and risk averse, even though they are often at their best when facing the pressure of risk or deciding to take a more audacious approach. It is also worth considering that sometimes the greatest risk of all is to do nothing.

Decide the discount factor: the percentage that will be deducted from each year’s cash flow. Determining this is central to the whole exercise. A higher discount factor will generate a lower overall valuation. Typically, two things influence the level of the discount factor. The first is the level of business risk. If the risk is high (and the investment is unlikely to meet its projections), the discount factor should also be high. Second, there is often a compromise between the cost of borrowed money (such as 5% interest) and the return expected by the investors (for example, 15%); in this case, the discount factor would be 10%. It may be desirable to select a range of discount factors, providing optimistic, realistic and worst-case scenarios.

Apply the discount factor to the net cash flow for each year of the projection and to the terminal value. The figures resulting from these calculations are the present value contribution of each year’s future cash flow; adding these values provides a total estimate for the value of the investment.