Bargaining with the Devil

by Robert Mnookin

  You nod your agreement. That about sums it up.

  “Now, what about Bikuta? What’s important to them?” Spock asks.

  You say they are a terrific manufacturing firm with outstanding distribution channels throughout Asia. But they have little R&D capacity, so they need to enter into joint venture deals or licensing agreements with other firms. Their core long-term interests, like yours, are growth and profitability.

  Spock looks up: “Who are these other joint venture partners? Any in California or elsewhere in the United States?”

  You smile. “Not yet … but I recently heard that they are hoping to make a deal soon with Pressure-Measure Company, another venture-financed Silicon Valley start-up that’s bigger than we are. My friend Tom Zimring, a venture capitalist, is on their board.”

  Spock shows no emotion but you can tell he is pleased. “Obviously, Bikuta Corporation should care about its reputation as a reliable joint venture partner. That’s another interest. A well-publicized lawsuit here might affect its chances of making a deal with Pressure-Measure—and with others in the future. If I were in their shoes, I’d much prefer renegotiating the deal with you than facing litigation in Silicon Valley, even if I thought I had a good chance of winning on some jurisdictional technicality.”7

  “Does this mean we should sue?” you ask.

  “Not so fast,” Spock replies. “It means that you want to make them aware that, unless you are able to work out a reasonable fee with respect to the China sales, you will sue them here in California with as much publicity as possible. You could also make them aware of your friendship with Zimring. You could acknowledge, however, that such litigation is not an attractive alternative for either of you and that there might be a variety of deals that would better serve the interests of both companies.”

  You then ask the obvious. “Suppose we were to make a new joint venture deal, one that covered China sales and perhaps had a new formula for license fees. Maybe a sliding scale that depended on total sales. How could I be sure they’d keep their word going forward? I don’t trust them. I’m not about to get screwed a second time!”

  Spock replies, “You can’t be sure. You have to worry about enforcement. That’s where your lawyer comes in. The new contract has to have some teeth. You will want to make sure that a California court has jurisdiction, that there are strict representations and warranties, and that the loser of any future enforcement action must pay the winner’s legal fees.”

  You are beginning to feel less desperate. It seems you have more options than you thought.

  What has Spock done here? In assessing the Bikuta case, he has asked five basic questions that are useful for ordinary conflicts of all sorts. Because our focus in this book is on negotiating with an adversary—indeed, someone whom you see as an enemy—I will frame the questions in those terms.

  1) Interests: What are my interests? What are my adversary’s interests?

  2) Alternatives: What are my alternatives to negotiation? What are my adversary’s alternatives?

  3) Potential negotiated outcomes: Is there a potential deal (or deals) that could satisfy both parties’ interests better than our alternatives to negotiation?

  4) Costs: What will it cost me to negotiate? What do I expect to lose in terms of tangible resources: money and time? Will my reputation suffer? Will negotiating set a bad precedent?

  5) Implementation: If we do reach a deal, is there a reasonable prospect that it will be carried out?

  We will now consider this method in more detail, with examples from other contexts.

  Interests: What are my interests? What are my adversary’s interests?

  When individuals are in conflict, they often think in terms of “positions”—what they want or demand. For example, Bikuta insists that it should pay no royalty on Chinese sales, while you demand “fifteen percent or else!” These are positions, not interests. Interests are the fundamental needs and concerns that lie underneath those positions. There is only one way to meet a position, but often many ways to serve an interest. In this case, as we’ve seen, your company and Bikuta Corp. each have a financial interest in long-term profitability. Because there may be many options that might serve these core interests, framing the conflict in terms of core concerns (rather than positions) will give you more flexibility when you get to the later steps.

  Ironically, people in conflict often find it difficult to articulate their interests. This is usually because they haven’t thought about them, or are not used to thinking about goals on this level. They know what they want—or what they say they want—but not why they want it. For anyone embroiled in a dispute, the analysis begins with the following questions:

  What are my basic goals in this situation? What am I trying to achieve—and why? In the big scheme of things, what’s important to me?

  Some of your interests may be tangible, for example, money, goods, resources, and physical property. Other important interests may be intangible, such as maintaining the morale of your employees, upholding your reputation, and being treated with self-respect. There may also be “trade-offs” between interests. Prioritize them—some may be very crucial, others less important but “nice to have.”

  Next, given the available information, what do you know about your adversary’s interests? What do they value—and why? This will help you evaluate any potential deal from their perspective. This can be particularly challenging at the organizational and international levels, where identifying the interests at stake requires an extra set of questions: Whom do you talk to? Who defines the interests? Is the “adversary” in fact comprised of subgroups that have competing interests?

  Note that you probably won’t feel like pondering the enemy’s interests. Force yourself. I explain why below.

  Alternatives: What are my alternatives to negotiation? What are my adversary’s?

  This question highlights your choices away from the negotiating table. If you decide not to negotiate, what actions can you take unilaterally—without the cooperation of the other side? And how well do those actions serve your interests?

  One alternative might be to do nothing: walk away from the deal and ignore the conflict. Another alternative might be to find another partner. There is also the use of coercive force. Every bigger child who snatches a toy from a smaller one understands the attractions of a self-help strategy. However, legitimacy is an important consideration, especially when using force, so one must be ready to justify any coercive tactics. Where legal rights are involved, a lawsuit is a coercive alternative. In a labor-management conflict, strikes or lockouts are, for the most part, alternatives used to coerce concessions in bargaining. In the international arena, a naval blockade or an air strike may be an alternative to diplomatic negotiations.

  Next, for each alternative, consider the full range of possible outcomes. With regard to litigation, for example, it’s not enough to consider only the best possible outcome. What happens if you lose the case? What are the odds of winning or losing? Even if you win, are there any negative consequences?8

  Once you have evaluated your alternatives, identify the best of the lot. This is your Best Alternative to a Negotiated Agreement, or “BATNA.” If you later decide to negotiate, this will be an important reference point for evaluating any deal that is on the table. You should never be willing to accept a negotiated deal that doesn’t serve your interests better than your BATNA.

  Finally, try to assess your enemy’s alternatives and how they could affect you. You may not know exactly what their alternatives are, but sometimes you’ll have a good idea. In this case, you know that Bikuta won’t be able to license a similar product from any other R&D company. You also know that if you do bring suit, Bikuta’s BATNA is to defend against it in court (or risk a court-imposed injunction and damages).

  The better your BATNA—that is, the better your alternatives away from the table—the more bargaining power you have at the table. The same is true for your adversary. Therefore, before you
decide whether to negotiate, you should work hard to create the best possible alternatives for yourself and to diminish, if possible, your opponent’s perception of his own BATNA.

  Negotiated outcomes: Are there potential negotiated outcomes that can satisfy both sides’ interests better than our respective alternatives to negotiation?

  This step requires some creativity and several steps. First you must imagine a range of potential deals. Then you must evaluate them in light of each party’s interests: What are the benefits and risks to each side? Finally, you must compare those deals with each party’s BATNA and ask, Which is better?

  This, too, involves some guesswork, but the goal is pragmatic. If a potential deal doesn’t meet your adversary’s interests better than its BATNA, why should they agree to it? Indeed, if either side’s BATNA is clearly superior to any deal you can envision, it makes no sense for that party to negotiate.9 But if you can envision negotiated deals that could be better than both sides’ BATNAs, you should proceed to the next steps.

  Costs: What are the expected costs of negotiation?

  The negotiation process itself imposes costs, which you will incur regardless of whether you reach a deal. These must be taken into account.

  Transaction Costs: The negotiation process involves costs in terms of time, money, manpower, and other resources.10 For example, most department stores, restaurants, and museums do not negotiate on price. Why won’t Macy’s negotiate over the price of a suit? Because the store in Herald Square alone receives about thirty thousand visitors a day and negotiating with that many people would be inefficient.11 Consider the expense involved in training salespeople to negotiate with customers, the cost of devising complicated compensation schemes with incentives for “good negotiators,” the time that might be wasted on haggling, and the possible damage to reputation and branding. These costs outweigh the benefit of any extra sales that might be made with selective price adjustments.

  The negotiation process may also impose costs arising from the disclosure of information. Parties usually have to disclose information in order to reach a deal. Certain disclosures are riskier than others, particularly if one is negotiating with an adversary capable of exploiting this information in the future. For a business, disclosing intelligence-gathering capabilities or trade secrets may be unacceptably risky. For an individual, disclosing personal desires or preferences may weaken her bargaining power in the future.

  Spillover Costs: Negotiating with one party may adversely affect you in future dealings with other parties. One such cost may involve reputation. For example, a physician may prefer not to settle a malpractice claim, even if settlement would be cheaper than litigation, in order to avoid any implication that she was in any way at fault.

  A related spillover cost concerns precedent. Although settling a frivolous lawsuit for a token amount might make sense in light of immediate cost savings, a defendant might worry that his willingness to negotiate at all might invite a flood of similar claims. Similarly, an employer might refuse to negotiate with unlawfully striking workers for fear of encouraging future strikes.12

  Implementation: If a deal is struck, will it be implemented?

  This question is strategic and practical. Even if a deal is made, there is a risk that it may not be honored. This is particularly true when you are dealing with an unreliable adversary.

  One dimension to this problem involves the relationship between agents and principals. Your adversary may simply lack the authority—or the institutional or political power—to bind his constituents to the deal. Or the other side may be a diverse set of stakeholders who can’t agree. For example, suppose you need the agreement of all the adjacent homeowners to put up a new fence, and there is no clear representative with whom to negotiate.

  Another dimension is time. Even if you believe that your adversary has the capacity to implement a deal, you must consider safeguards. Many deals involve implementation over time. Even if your enemy abides by the agreement now, he might have an incentive to defect later. Commercial lawyers who participate in deal-making often put a great deal of effort into preventing such defections by building penalties into the deal. Many commercial contracts include provisions for third-party enforcement—litigation in a particular jurisdiction, or arbitration—if the counterpart proves unreliable.

  But in some cases there is no effective formal enforcement mechanism. What then? Where there is a good relationship, personal trust may be sufficient. But with an adversary who has violated agreements in the past, the lack of any enforcement mechanism may be a deal killer. This factor is particularly common in the international sphere, where there is often no effective third-party enforcement. Instead, decision-makers must rely on a complicated system of monitoring, deterrence, and “soft-enforcement.”

  These five questions provide a framework for analyzing the benefits and costs, opportunities and risks. It won’t provide a bright-line test or crank-the-handle algorithm. But you shouldn’t be looking for that here anyway.

  Risk assessment is not an exact science. The future is uncertain, especially when dealing with an adversary. After the fact, some of your predictions may prove to be wrong. Some of the five questions you will be able to answer with confidence, such as identifying your own interests and priorities. Others, such as what your adversary really wants and how he views his own alternatives to negotiation, may be much harder for you to pin down. You won’t know precisely how your adversary will behave in response to your own actions. Disputes are dynamic, not static. Your moves affect the other side’s moves, and vice versa. If you were to draw a decision tree, it would be extremely complicated. Economists call this “strategic interdependence.”

  In fact, in many disputes, two reasonable people could analyze the same situation and reach different conclusions, based on different predictions and different assessments of the costs and benefits. Moreover, differences in their values and priorities would also influence their evaluations. There may be trade-offs among interests.

  That said, however, this framework can guide your analysis and may lead to a reasonably clear conclusion about whether you should negotiate or resist—a “yes” or “no.” If so, and if you are comfortable with that decision, your inquiry might stop here.

  But bargaining with a devil may raise issues that go beyond simply comparing costs and benefits.

  THREE

  Recognition, Legitimacy, and Morality

  Suppose you’ve heard Spock out. You understand his analysis. But his recommendation doesn’t sit well with you. What if you feel that continuing to do business with Bikuta is simply wrong—against your personal values? It’s not that you disagree with Spock’s pragmatic assessment of benefits and costs, but rather that you find his kind of analysis incomplete.

  You say to Spock, “I appreciate your evaluation, and I understand why you think I should negotiate. But I think it would be wrong.”

  When dealing with a “devil” it’s difficult to avoid a sixth question: What issues of recognition and legitimacy are implicated in my decision?

  You may be troubled by what you see as issues of principle. You may be asking yourself: What happened to the idea of justice? You may think that Bikuta deserves to be punished for what his company did in the past. Spock’s approach tends to be forward-looking, and any negotiated deal would have to serve Bikuta’s interests as well as yours—why else would he agree? But the idea of simply “moving on” may be downright offensive, especially if issues of honor, personal integrity, and identity are involved.

  Spock is puzzled. “You mean it would be a mistake to negotiate? Are you worried about the impact on your reputation with others? Or about setting a bad precedent? We’ve taken those factors into account as costs of negotiating.”

  To the extent your concerns can be expressed in terms of future consequences, Spock’s approach can encompass them. For example, you might feel that by negotiating with Bikuta, you would be condoning his past behavior and thereby encouraging more wr
ongful acts in the future. You might fear that negotiating with Bikuta would signal to others that you think his claims are legitimate, which could only help him. Or you might worry that choosing to negotiate may harm your reputation. With all of these concerns, so long as you identify the pragmatic consequences that might flow from them, Spock can include them in his analysis.

  But what about concerns that don’t comfortably fit into Spock’s framework? Suppose you say, “You’re missing my point, Spock. This isn’t about costs and benefits. This goes way beyond license fees and sales in China. It’s about my reputation with myself. To negotiate with Bikuta would compromise something very personal to me. It would make me complicit in his behavior and that’s a line I’m not willing to cross.”

  This is an important challenge. What is the proper role of moral judgments like these in decisions of this sort?1 Are they simply another trap?

  Let’s look at the “dual processing” model again. Neuroscientists and psychologists are now studying how human beings make moral judgments.2 Some psychologists think that moral judgments are primarily like aesthetic judgments: “They are gut feelings or intuitions that happen to us quickly, automatically, and convincingly. We see an event, or we hear a story told as gossip, and we know immediately that the act in question was right or wrong.”3

  This suggests that the intuitive system encompasses not just survival instincts but subjective impressions of all kinds: likes and dislikes, value judgments, and affinities that give our lives passion and meaning. I believe that moral judgments, too, arise from the intuitive side of the brain; they are gut feelings that are instinctively reached and deeply felt.

  Are they traps? Maybe. It depends on how you handle them. They certainly look like some of the traps that I discussed earlier, and they can be traps if you use them as an excuse for not going through Spock’s five questions.