Prepare to create value. When preparing to negotiate, always take time to consider two important questions from your perspective, as well as that of the other side: What is your walk-away option, and what, in rank order, are your interests? While most negotiators think about them, they do so only from their own perspective. Careful analysis and estimation, as well as conversations with others, can help you answer these questions.
It is important to spend as much time contemplating the other side’s walk-away options and interests as you spend thinking about your own. After all, you probably won’t be able to propose a package that the other side will accept if you haven’t thought through their away-from-the-table options and their most important needs and wants. In addition, be sure you have a mandate from your superiors or partners to explore options for mutual gain. Finally, get ready to propose packages that exceed the other side’s walk-away (if only slightly), meet their interests (reasonably well), greatly exceed your walk-away, and elegantly meet your interests.
By preparing to propose multiple packages at the same time, you can avoid having a preliminary offer misconstrued as a final offer. Each package should be designed to test whether your estimates of the deal space are correct. The more extensively you prepare to address the other side’s interests, the more value-creating opportunities you are likely to find once talks begin.
Explore interests and add issues. When seated at the bargaining table, what’s the best way to uncover your negotiation counterpart’s unspoken interests? Ask questions, then listen carefully to his answers. Even if you’ve decided to make the first offer and are ready with a number of alternatives, the process of asking and listening to assess interests should always come before proposing options.
Note that if your style of listening isn’t sufficiently empathetic, it won’t elicit honest responses. Furthermore, you’ll have to ask a lot of questions to get a clear picture of someone’s interests. Also, to model the type of response you’re seeking, you must be willing to reveal your own interests. All too often many people assume that exposing their interests will give the other side an unfair advantage, but this is rarely true.
If your attempts to uncover the other party’s interests fail, even after you’ve revealed your own, try probing in a different way. Suppose that you ask a potential client, “Are you more concerned about the cost or the quality of the service we are proposing to provide?” His reply: “Both!” You might then ask, “Would you prefer that we assign our most senior staff member to your account, even though her hourly rate is a bit higher than anyone else’s? She’s one of the best in the field, without a doubt.” The client’s response will reveal whether he’s more concerned about price or quality.
Here’s another way to probe the same person’s interest: “Other clients have raved about some of our junior people—and we take only the best—assigning them entirely to a single account. This has allowed us to charge a lower hourly rate than usual while giving the client the attention they want. Would you like to talk to some of our clients who have used this approach?”
Value creation can be especially difficult when parties get snagged on an underlying value difference. When this happens, bridge the gap by identifying overarching values that could provide a motivation to work together. Take for example the abutters challenging Anaconda, the manufacturer (see chapter 1), to pay more attention to the health concerns of nearby residents. As a member of Anaconda’s management team, rather than arguing that your company has to stay focused on the bottom line, point out that you share the neighbors’ commitment to environmental and health improvement. Then consider proposing an effort to replace aging, polluting equipment with more efficient production technologies that will save your firm money in the long run while simultaneously reducing the neighbors’ health risk. Such value-creating opportunities can be uncovered by searching for a common interest, such as commitment to health and environmental improvement, rather than letting differences between you dominate the discussion.
Play the What-If Game. The practice of value creation almost always means playing the What-If Game. Specifically, to test whether a trade genuinely creates value, try it out on the other side.
Imagine that you’re renegotiating a contract with a customer who is satisfied with the product you currently supply. Your company, however, has invested heavily in a new, improved version of the product, and your own interest lies in persuading the customer to switch to it. By questioning him about his interests, you learn that he’s concerned about the rising costs associated with expanding his business. Here’s one what-if scenario you might propose: “If I offered you a 10 percent rebate on every new unit you purchase beyond the $50,000 mark, would you be willing to switch to our improved version?”
Assuming you’ve agreed to brainstorm ideas before putting together a final deal, you can feel comfortable testing a variety of packages. You can further reduce the risk that your customer will assume prematurely that you’re ready to make a specific offer by putting forward more than one what-if proposal at a time. “I can either offer you free delivery,” you might say before he has had a chance to respond to your first offer, “or give you a 10 percent rebate on orders of the new product that exceed $50,000.” The other party’s response should reveal which trade he values more. If he appears to value a rebate more than free delivery, follow up with two more proposals: “I could even give you a rebate of 15 percent on orders above $100,000 if you buy the new version of the product, or I can extend the payment due date by three months with no interest.” Each package is designed to create a little more value by taking advantage of mutually beneficial trades.
Make no mistake: there comes a time in every negotiation when the value you’ve created must be divided or distributed. That’s the moment when your chance to win arises. Sometimes anxiety about this competitive dimension inhibits negotiators’ ability to create value. Sharing information and engaging in empathetic listening may seem like risky behaviors when you anticipate a distributive battle, but I hope I can convince you otherwise.
Bring new parties to the table. What do you do when little or no trust exists between negotiators? Consider recruiting an intermediary, trusted by both sides, to serve as a go-between focused on creating value. This role could be filled by a professional mediator or by someone with whom both sides have worked in the past, such as a banker who has financed earlier deals. The neutral person’s duties would include meeting privately with each side, exploring their interests, and helping to identify mutually advantageous trades. Adding a neutral to the negotiation can assist you in overcoming any uneasiness or reluctance about revealing information about your interests. (Both sides retain subsequent deniability if the go-between is unable to suggest value-creating trades.)
When two parties have found little or nothing to trade, they can create value by inviting still more potentially interested parties to participate in the negotiation. Bringing in an additional equity partner, for example, might close a gap between a buyer and a seller, though a third party would likely reduce the original players’ profit. Similarly, a company seeking to buy a new technology through its global purchasing department might find that involving its engineering staff in early discussions with the license holder could lead to new ideas about how to test the technology (once it is in the buyer’s hands) in ways that will give the seller new performance results and thus greater credibility with a far larger market. While adding parties to a negotiation undoubtedly adds complexity, it can also help you enlarge the pie before turning to traditional issues such as cost, delivery, and maintenance.
FOUR VALUE-CREATING MOVES:
•Prepare to create value
•Explore interests and add issues
•Play the What-If Game
•Bring new parties to the table
In sum, remember that situations appearing to be zero-sum rarely are. The key to value creation? Bringing a degree of optimism about the chances of expanding the pie to every negotiati
on. It is a lot easier to win at win-win negotiation—that is, claim a disproportionate share of the value being distributed—if you have done everything you can to create as much value as possible.
NEGOTIATING STRATEGIC ALLIANCES
WHEN WE CARE A LOT about maintaining important relationships, we work harder to invent options that are good for our partners and great for us. Often business partnerships are important to a company’s strategy, but some are more important than others. This is especially true in supply chains, where producers of key components can be irreplaceable. When you are negotiating with such partners, you want to move into the trading zone as quickly as possible. But just because you are negotiating with a strategic partner doesn’t mean you shouldn’t try to claim as much value as you possibly can in such negotiations. By adjusting your approach when bargaining with a partner who is key to your strategy, you can build alliances in ways that will help you win at win-win negotiation.
Consider the relationship between “Brattlebury Corporation,” which manufactures computers and peripherals, and “Viatex,” the company that supplies the plastic ink cartridges for Brattlebury’s printers. The companies’ ten-year relationship has been a boon to both. For the past five years, the annual value of their contract has averaged $30 million.
But recently Brattlebury’s overall sales have been flatter than expected. In addition, a survey revealed that many of Brattlebury’s suppliers have grown dissatisfied with the company’s periodic requests for proposals. Negotiating a proposal every two years was costing everyone time and money.
So Brattlebury’s management resolved to explore cost-cutting measures with strategic partners like Viatex that provided crucial goods. These suppliers could not be replaced readily, and their goodwill was vital to meeting short-term corporate objectives.
Such relationships require special care and handling. During negotiations with a highly valued partner, negotiators must balance the need to get the lowest price possible with the need to maintain and enhance the alliance. Even if your company is not deeply embedded in a supply chain, you probably face ongoing negotiations with partners whose trust you want to preserve for strategic reasons. Here are five negotiating tactics that should become your standard practice when bargaining with a strategic partner. These will not block your way into the trading zone or minimize the chances of claiming a disproportionate share of the value you create.
Pay close attention to your partner’s unique needs and interests. As I have already pointed out, to signal commitment to maintaining their long-term strategic relationship, negotiators need to listen carefully to one another’s thoughts and feelings. Meeting regularly to probe interests is a simple but effective way to build relationships.
After identifying Viatex as a strategic partner, Brattlebury decided to present the supplier with the following proposal: a longer-term contract in exchange for 5 percent annual cost reductions. In addition, Brattlebury promised to collaborate on finding creative ways to make these cost cuts a reality, such as changing its specifications and requirements.
In meetings over the course of several months, representatives from Brattlebury and Viatex identified four potential ways to lower costs:
1.For the cartridges, Viatex could switch to a plastic that is considerably cheaper to source but that carries a slightly higher defect rate.
2.Currently, Viatex produces three designs for Brattlebury’s various printer lines. Brattlebury could change its specifications so that Viatex would need to produce only one design.
3.Brattlebury could agree to minimum and maximum delivery quantities each quarter. This would prevent Viatex from having to lay off employees during slow periods and hire and train employees during peak times.
4.Viatex could save money by doing fewer quality control checks at its plant if Brattlebury were willing to take on more liability for product defects.
After identifying possible moves that would be beneficial to both partners, each side worked independently to assess its actual costs and the savings associated with each proposed change.
Keep in mind that everyone’s interests always change in response to the unique opportunities and pressures they experience, both internal and external. Through regularly scheduled meetings, strategic partners can stay closely attuned to each other’s shifting interests and explore unexpected yet mutually advantageous opportunities.
Focus more on creating value, less on distributional battles. While value creation is a cooperative enterprise, value distribution is primarily competitive—gains for one side typically generate losses for the other.
When negotiating with your most important strategic allies, emphasize creating value even more than you would with nonstrategic partners. This might mean devoting more time to brainstorming, considering more complex packages than usual, and sharing more details about your interests than you otherwise might. Winning at win-win negotiation with a strategic ally should be framed in terms of long-term gains and losses. With a long-term relationship comes an array of chances to recoup the value you may have forgone in one particular exchange.
By listening carefully to each other, Brattlebury and Viatex identified four possible ways to save money and add value. But how should they distribute the joint savings or gains they are creating between them? The answer depends on what is most important to each side. Remember that Brattlebury wants to achieve 5 percent savings from Viatex per year. Consequently, Brattlebury and Viatex must cut $1.5 million from this year’s $30 million contract to protect the status of their strategic relationship.
Emphasize the relationship’s long-term importance. When a business relationship is critical, we need to devote not only more time and energy to it but also more of ourselves. By getting to know your partners on a personal level, you can create social capital—goodwill or trust you can draw on over time. Something as simple as a business lunch—with time spent chatting about families or recent travel—can increase the chances that counterparts will believe each other when one insists that they have nothing more to offer on a particular issue.
Until individuals from Viatex and Brattlebury developed a strong working relationship over the course of numerous meetings and meals, anxiety about how to split potential joint gains stood in the way of realizing added benefits. A breakthrough moment came when a Viatex executive explained his concern about having to lay off employees and then later find qualified workers on short notice. In response, the Brattlebury executive suggested that Viatex take a more active role in ensuring that the $1.5 million cost-reduction target was met. Once they trusted each other enough to share their real priorities without fear of repercussions, the negotiators were able to improve their outcomes more than they originally thought possible.
Give strategic partners the benefit of the doubt. Cynicism runs rampant in today’s business climate. When the representative of a strategic partner argues that she can’t meet an important deadline or that she must have a higher price, you might be tempted to assume you’re being manipulated. As a result, you dig in your heels, stiffening your resolve and rebuffing demands. Unfortunately, a suspicious first reaction can be self-fulfilling. If you think your negotiating partner is trying to gain leverage unfairly, you’re likely to overreact, and the confrontation will escalate.
Instead, try giving strategic partners the benefit of the doubt when they make a special request. Take them at their word, then consider whether there’s a way to solve their problem without harming your organization. When you show the other side that you’re treating its requests seriously, you can avoid unnecessary rancor and preserve the relationship. You may not be able to find common ground, but you will certainly increase the odds of reaching a solution that pleases you both.
Let’s consider the hidden agendas in the Viatex-Brattlebury negotiation. Viatex’s executives are primarily concerned with protecting their workers so they can retain the skilled work-force required to produce their technical products. But if they can’t achieve higher profits e
ach year, they’re prepared to walk away from the alliance with Brattlebury and seek other clients. Meanwhile, Brattlebury doesn’t necessarily need a full 5 percent price cut from Viatex; it can actually save more than $1 million over the next five years simply by eliminating the administrative costs associated with the biannual RFP process.
Revealing these truths would require a great deal of trust on both sides. To identify the gains in the first place, each side must share some confidential information. Yet they both face pressure to keep this information under wraps, for fear the other side will get more than its fair share of the savings created. If Brattlebury thinks that Viatex might achieve greater benefits from the new agreement than Viatex has indicated, Brattlebury must be able to say so without destroying whatever trust has been built.
Avoid surprising partners you care about. No one likes surprises in a negotiation. We want to believe we’ve considered all the possibilities internally before coming to the negotiation table. Surprises reveal that we’re unprepared, and they also expose us to risk.
One of the easiest ways to rupture a good working relationship is to surprise a strategic partner with an unexpected change in procedure or a nonnegotiable demand. Surprising someone by raising an issue for which he can’t possibly be prepared is disrespectful, as is asking for a decision before he’s had a chance to understand the risks involved. Catching someone off guard might cause him to err in your favor, but you’ll pay the price later when he seeks retribution.
The challenge for strategic allies is to move effortlessly into value creation and only after that fall back on value distribution, with an emphasis on fairness and trust. By following this approach, negotiators can move quickly into the trading zone, where they can actually help each other maximize the value they take away from the deal.
Good for You, Great for Me Page 5