Beyond Winning

by Robert H Mnookin

  We begin with a framework for understanding the tensions inherent in negotiation generally, and then move on to complexities that make value creation especially challenging in legal negotiations. Part I develops the central idea that negotiation requires the management of three discrete tensions, which are ignored at the negotiator’s peril. They are the tensions between creating and distributing value (Chapter 1), between empathy and assertiveness (Chapter 2), and between principals and agents (Chapter 3). Much as one might like to think otherwise, making the right moves or using good technique will not cause these tensions to disappear. They are present in most negotiations, from beginning to end, and should be consciously and thoughtfully considered.

  In Part II we move from a general theory of negotiation to the world of legal negotiations—where tort cases, real estate sales and leases, intellectual property licenses, custody battles, corporate mergers, and countless other deals and disputes are negotiated in the shadow of the law. What comparative advantages do lawyers bring to these negotiations that so often make them essential players? The good news is that in both dispute resolution (Chapter 4) and deal-making (Chapter 5) lawyers have special opportunities to create value that would not otherwise be available to their clients. The bad news is that in many negotiations lawyers, urged on by clients, engage in wasteful and costly distributive battles. Indeed, we suggest that legal culture—the implicit expectations that lawyers and clients may hold about how the game is played and how they are expected to perform—can have a profoundly negative impact at the bargaining table (Chapter 6).

  Figure 1

  As a framework for understanding these challenges, we develop the core idea that every legal negotiation involves a system of relationships. The simplest system consists of four individuals (two clients and two lawyers) engaged in four key relationships (the relationship between the two clients; the relationship between the two lawyers; and two sets of lawyer-client relationships). While each individual brings different beliefs, expectations, and perspectives to the table, to understand the system underlying legal negotiations it is most helpful to focus on the relationships rather than the individuals. Each relationship, if healthy, can support the process of legal problem-solving. If any one of the four relationships is troubled, it can prove to be a barrier.

  To complicate things further, these relationships interact (Figure 1). The relationship between the two opposing lawyers, for example, can be a source of strength or can itself become part of the problem. If the relationship is good, the lawyers can act as a bridge between clients who cannot effectively communicate. On the other hand, if the lawyers’ relationship is hostile, they may become deal-breakers rather than deal-makers, whose short-sighted moves and countermoves do not serve either client’s long-term best interests. Even if contentious lawyers eventually settle a case or close a deal, their adversarial behavior may have escalated transaction costs and rancor between their clients.

  The lawyer-client relationship has its own dynamic. A lawyer can provide special information and skills that help a client make informed legal decisions and act on them efficiently. Or a lawyer can manipulate a client by withholding information or by framing the discussion in a way that inflames emotions and prolongs disputes. A client, for his part, may enjoy making his lawyer feel insecure, may impose unrealistic demands, or may withhold relevant facts. And when it comes to fees, professional boundaries, orientation, and strategy, neither the lawyer nor the client may be skilled at communicating their expectations and limits.

  The entire system of relationships among lawyers and clients in a legal negotiation has inherent communication problems. As in the child’s game of telephone, messages become garbled as they pass through the chain of independent perceptions. At each point in the exchange, one player or another may lose, change, or filter information—innocently or deliberately—and thereby create a great deal of strategic uncertainty for the other players in the system. To the extent that value creation demands accurate and nuanced information exchange, these communication uncertainties may compound the difficulty of finding and exploring creative solutions to a problem.

  We believe that more collaborative and productive legal negotiations—what we call problem-solving negotiations—are possible.1 Part III provides concrete advice to lawyers about how they can change the traditional game from adversarial bargaining to problem-solving without exposing themselves or their clients to an unacceptable risk of exploitation. Using the example of a divorce negotiation, we begin by making the case that a strong lawyer-client relationship is the bedrock of effective negotiation (Chapter 7). We offer comprehensive guidelines on how to achieve such a relationship, including ways to define and allocate roles, explore interests, evaluate legal opportunities and risks, identify decision points, design an efficient process, and manage expectations.

  Once lawyers have laid the groundwork behind the table with their clients, they need to establish a strong working relationship with the lawyer across the table. In Chapter 8 we discuss how to create a problem-solving environment with the other attorney, which can include playing an educative role. We also show lawyers how to protect themselves when faced with hard-bargainers and how to negotiate a workable process for going forward. Against this backdrop of advice about how best to manage relationships both behind the table and across the table, we offer specific advice about how to settle disputes (Chapter 9) and close deals (Chapter 10) without running up crushing transaction costs or leaving value on the table.

  Part IV introduces and briefly addresses the professional and ethical dilemmas that legal negotiations pose (Chapter 11) and the added complexities of negotiating with organizations and multiple parties (Chapter 12). Negotiations with a neighbor over the backyard fence are complicated enough—negotiations between two corporations involving large teams of lawyers, experts, and executives are more complicated still.

  Jamie Shapiro, Jennifer Savin, Tony Watson, and the other lawyers named in this book are fictitious, but the problem-solving approaches they use with their clients and with attorneys on the other side have been tried and tested over and over again in the practical world of legal negotiation.

  Our confidence in the ideas developed in this book stems from many sources—scholarly and applied. The academic and research tradition we draw on is rich and varied, and deeply interdisciplinary. This book weaves together insights from economics, game theory, psychology, and of course law.

  Our goal, however, was to produce a book that not only would help people better understand the dilemmas facing lawyers and clients but also would help lawyers and clients negotiate more effectively. We developed, tested, and refined these ideas both in the classroom and as practitioners. In the past five years, the three of us have taught negotiation to hundreds of law students and practicing lawyers at Harvard Law School and have used this material in a variety of workshops and consulting engagements throughout the world. In addition, as a neutral mediator and arbitrator, Mnookin has used the theories presented here to help resolve many complex, commercial disputes.

  In a culture where disgruntled clients, burned-out attorneys, failed deals, and destructive lawsuits are commonplace, a positive change in the way legal negotiations are conducted will not occur overnight. This book is not intended to be a manifesto for overthrowing current practices in the legal or business community. Its goal is much more pragmatic: to help lawyers, and the people who hire them, understand legal negotiation more fully and make their own negotiations more productive and rewarding—by solving clients’ problems one case at a time.

  I

  THE DYNAMICS OF NEGOTIATION

  In Part I we outline the three tensions inherent in negotiation, whether the goal is to make a deal or settle a dispute. The problem-solving negotiator cannot make these disappear, no matter how skilled she may be. The best she can hope to do is manage the three tensions effectively.

  The first tension is between the desire for distributive gain—getting a bigger slice of
the pie—and the opportunity for joint gains—finding ways to make the pie bigger (Chapter 1). Information drives this tension. Without sharing information, it is difficult to find trades that might create value and potentially make both negotiators better off. But if unreciprocated, openness can be exploited. Disclosing one’s preferences, resources, interests, and alternatives can help to create value but may pose a grave risk with respect to distributive issues. Negotiators are constantly caught between these competing strategic demands. Ultimately, an individual negotiator is typically concerned with the size of her slice, and only secondarily concerned with the size of the pie as a whole. Indeed, a negotiator who can easily claim a large share of a small pie may wind up with more to eat than one who helps bake a much bigger pie but ends up with only a sliver. A skillful negotiator moves nimbly between imaginative strategies to enlarge the pie and conservative strategies to secure an ample slice no matter what size the final pie turns out to be.

  The second tension is between empathizing with the other side—demonstrating an understanding of the other person’s interests and point of view—and asserting your own views, interests, and concerns (Chapter 2). This is an experiential tension. Often negotiators feel as if they must either assert themselves or listen to the other side, but they can’t do both. Skilled negotiators know that both of these very different interpersonal skills are critical to effective negotiation. On the one hand, it is essential that a negotiator assert her needs, goals, and point of view; good negotiators are masters of the art of persuasion—of getting other people to see things their way. On the other hand, the best negotiators also have the capacity to demonstrate their understanding of the other side’s needs, interests, and perspectives—what we mean by empathy. The tension between assertion and empathy arises because most negotiators find it difficult to excel at both. Assertion without empathy risks escalating conflict, while empathy without assertion risks jeopardizing one’s legitimate concerns.

  The third tension exists whenever an agent negotiates on behalf of a principal, and it arises because agents have interests of their own (Chapter 3). In the legal context, a lawyer acts as agent for her client. But the principal-agent tension can exist in a much broader range of relationships as well: when an employee negotiates on behalf of her company, a manager for her division, a diplomat for his nation, or a parent for her child. In each of these situations, one person speaks and acts on behalf of others. Employees, managers, diplomats, and lawyers all worry about their own careers, reputations, and income—as well as the needs of their principals. In other words, the interests of principals and agents rarely are perfectly aligned, and the agent’s interests may, to a greater or lesser degree, affect the agent’s behavior in ways that do not serve the principal’s interests. This tension is driven by the inevitable differences in incentives and information that exist whenever one person delegates a task to another. No fee structure or monitoring system can eliminate it entirely, but some methods of managing the principal-agent tension work better than others.

  1

  The Tension between Creating and Distributing Value

  Jim West needs to find an apartment. After visiting several places and finding nothing he likes, he stumbles across an ad in his local paper that looks enticing. One walkthrough with the listing agent convinces him: this is the place. Although the $1,200 rent is more than he had hoped to pay, the apartment’s high ceilings and cozy fireplace make him believe he could feel at home here. Jim arranges to meet with the owner of the condominium, Sara Grier. Jim learns that Sara is moving to France for a year to teach at a French business school. As they discuss various details in the lease, Jim wonders whether Sara intends to leave any of her furniture. He has some furniture of his own, but he doesn’t have a bedroom set, a desk, or lamps and rugs. Politely, Jim inquires whether Sara plans to store her beautiful antique bed and dresser or whether she will be taking the furniture with her.

  SARA: I’m not sure. But my agent told me I could rent the apartment fully furnished for about $1,700 a month.

  JIM: Whew. That would be way more than I could afford. $1,200 is already a stretch. But it sure would be great not to have to scrounge for a bed somewhere. And your fireplace andirons are really nice; I’d rather not have to buy stuff like that. So if you’re just going to end up paying to store those things . . .

  SARA: I suppose I could leave some of the furniture. For a price.

  THE GOAL: CREATING VALUE THROUGH PROBLEM-SOLVING NEGOTIATION

  What’s going on in this negotiation between Jim and Sara? What’s at stake, and how can we better understand the dynamics at work?

  Jim and Sara are engaging in the central activity in problem-solving negotiation: the search for value-creating trades that can make one or both parties better off. Jim needs an apartment. Sara has one to rent. Jim has a couch and a dining room table but no bed. Sara has a bed and nowhere to store it. Through negotiation they may be able to capitalize on their different interests, resources, and capabilities and discover agreements that expand the pie. If they can reach a deal in which Jim uses some of Sara’s furniture in return for a slightly higher rent, their lease will be more economically efficient than if they ignore the possibility of this trade and Jim simply leases the place unfurnished.

  What do we mean by creating value? By definition, whenever there’s a negotiated agreement, both parties must believe that the negotiated outcome leaves them at least as well off as they would have been if there were no agreement. In this narrow sense, any negotiated outcome, if better than your best alternative away from the table, could be said to create value. In this book, however, when we talk about creating value, we typically mean reaching a deal that, when compared to other possible negotiated outcomes, either makes both parties better off or makes one party better off without making the other party worse off.1 Assume that Jim would prefer to rent Sara’s apartment unfurnished for $1,200 rather than to pursue other alternatives. If they were to agree to this simple transaction, Jim knows he would have to spend at least $2,000 purchasing the furniture he needs, and Sara knows that she will have to spend $100 a month to store the items she doesn’t plan to take with her. If Sara and Jim strike a deal in which Sara leaves some of her furniture and Jim pays her something extra per month to use it, each side is better off.

  Jim and Sara are both able negotiators, and they expect that their negotiation might present value-creating opportunities. So they search for these opportunities during their discussion:

  JIM: OK, it makes sense that if you leave your furniture, I’ll compensate you somehow. But before we get to that, let’s talk seriously about what would work for each of us here. I’ll be up front—I could really use all the furniture in your bedroom, and it would be nice to have the desk as well. What are your thoughts on leaving the furniture or taking it?

  SARA: I haven’t figured all that out yet. I’m really pretty flexible. I was going to store some of it and give some to friends. But I’d rather not have to go through the hassle of moving it and storing it.

  JIM: Yeah, that’s what I figured. I don’t need your couch or dining room table, or most of the other furniture in the living room. I’ve got one sofa I’ll be bringing with me, and a lot of other furniture in storage that I inherited recently, including a living room set that I’d like to use. So I’m pretty set there.

  SARA: Where’s your storage facility?

  JIM: Right downtown. I moved all of my grandmother’s furniture here from Albany when she moved into a retirement home.

  SARA: So when you move the living room set out, you’ll have some extra space in that storage unit, won’t you?

  JIM: Actually, I already have some extra space. Are you thinking we could share the storage unit?

  SARA: That might work really well. I wouldn’t have to rent a whole unit by myself. Most of the units I’ve seen are just too big for my needs anyway.

  JIM: Great. And maybe we could use the same mover and save some money there, too.

&n
bsp; Sources of Value

  To understand how to uncover value-creating trades, it helps to have a basic sense of their economic underpinnings. Here we first explore three sources of value in negotiation. Later we add a fourth.

  • Differences between the parties

  • Noncompetitive similarities

  • Economies of scale and scope

  DIFFERENCES BETWEEN THE PARTIES

  The notion that differences can create value is counter-intuitive to many negotiators, who believe that they can reach agreement only by finding common ground. But the truth is that differences are often more useful than similarities in helping parties reach a deal.2 Differences set the stage for possible gains from trade, and it is through trades that value is most commonly created. Consider the following five types of differences:

  Different Resources: In the simplest example, two parties may simply trade resources. A vegetarian with a chicken and a carnivore with a large vegetable garden may find it useful to swap what they have. Likewise, Jim might trade some of his storage space for Sara’s bedroom furniture.

  Different Relative Valuations: Even if both parties have chickens and vegetables, and both prefer chicken to some extent, they can still make useful trades. To put it in economic terms, if the two parties attach different relative valuations to the goods in question, trades should occur that make both better off. The party who more strongly prefers chicken to vegetables should be willing to pay a high enough price—in terms of vegetables—to induce the other party to give up at least some of her chickens.