Negotiations - the art of getting things done


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Negotiations - the art of getting things done

  2. 2. Negotiating in Three DimensionsQ&A with: James K. SebeniusPublished: October 2, 2006Author: Martha LagaceTactics, deal design, and set-up are three crucial components of the most effective negotiations. Yet manynegotiators focus only on the tactical part, running the risk of undermining their own best interests. How can younegotiate more skillfully and confidently with clients, partners, and adversaries as well as with colleagues withinyour organization?In this Q&A, James Sebenius and David Lax, authors of 3-D Negotiation: Powerful Tools to Change the Game inYour Most Important Deals, discuss the common mistakes of negotiators, the power of a three-dimensionalapproach, why negotiating is an essential skill, and where the science of negotiation is headed.Negotiation is a core competence for life, "not merely an important skill to be wheeled out for special occasions,"they argue.James K. Sebenius is the Gordon Donaldson Professor of Business Administration at Harvard Business School anda principal of Lax Sebenius LLC, a negotiation strategy firm. He also serves on the Executive Committee of theProgram on Negotiation at Harvard Law School. David A. Lax, a former faculty member at Harvard BusinessSchool and investment banker, is now principal of Lax Sebenius LLC.Martha Lagace: 3-D Negotiation presents a multi-dimensional approach for people who thought negotiation wasonly about what happens at the bargaining table. What common mistakes do you see and what typical assumptionsabout negotiation are you challenging?James Sebenius and David Lax: Even experienced negotiators make mistakes in all three dimensions. Let us startwith the least familiar kind of mistake. Flaws in our third dimension, the set-up of a negotiation, can take manyforms: wrong parties, wrong issues, wrong walkaways, wrong sequence, wrong basic process choices. Heres onecommon set-up error (among many): It is easy to make one kind of mistake in your choice of negotiating agents.You know the importance of using a skilled and knowledgeable negotiating agent as well as crafting a contract thataligns your agents incentives with your own. Yet a well-structured contract with your agent may not be enough.For example, top executive pay attorney Joe Bachelder once took his client aside after the first negotiating session.The board had selected his client to be its next CEO and was working out his compensation package. Bachelderinformed his client that he would end up with everything he wanted from the negotiation. Why was Bachelder soconfident of total victory? Because, he explained, the board had put the firms well-regarded general counsel incharge of the negotiations. Why was this a mistake? It was not an issue of effectiveness: The general counsel wasundoubtedly a skilled negotiator. Yet, as Bachelder happily informed his client, "When this is over, youre going tobe that guys boss. He knows that. He cant fight you too hard on anything."
  3. 3. In retrospect, the board made a simple set-up error; it got the parties wrong in this negotiation. For its representativein these critical talks, the board should have hired an outside specialist, with properly aligned interests andincentives. More generally, you should look hard at a potential agents other interests and relationships to determinewhether he or she is part of the right negotiating set-up.Negotiators sometimes can discover hidden sources of value and then craft agreements to unlock that value andovercome barriers created by poor deal design.Now lets move to some errors in our most familiar first dimension, face-to-face tactics "at the table." Negotiatorslisten and communicate poorly, make cross-cultural gaffes, fail to respond effectively to hardball styles, and so on.One of the most common tactical errors arises when people become fixated on their bargaining "positions" ratherthan probing for the full set of underlying "interests," or what each side really cares about. Failure to uncoverinterests often leads to mistakes in our second dimension, deal design, such as treating potentially more cooperativeagreements as pure price deals in which the interests of the parties are strictly opposed.Consider an example of both kinds of mistakes from the U.S. Midwest. In this case, environmentalists and farmersopposed a power companys plans to build a dam. On the surface, the parties appeared to have deep, irreconcilablepositions, which had resulted in a long stalemate. Yet a superior deal could be designed if the parties looked pasttheir stubborn bargaining positions to their underlying interests.By stepping back and mapping the parties real interests, it emerged that the farmers were worried about reducedwater flow below the dam, the environmentalists were focused on the downstream habitat of the endangeredwhooping crane, and the power company urgently needed new generating capacity and a greener image. After acostly legal impasse that threatened to last for years, the three groups designed a better deal that included a smallerdam built on a fast track, water-flow guarantees, downstream habitat protection, and a trust fund to enhancewhooping crane habitats elsewhere.Working solo or jointly at the drawing board, negotiators sometimes can discover hidden sources of value and thencraft agreements to unlock that value and overcome barriers created by poor deal design. Here are some questions toask the next time your talks seem stalled for deal-related reasons: • Is price truly the only issue? • Can we unbundle different aspects of what looks like a single issue and give each side what it values most— at low cost to the other side? Are there other high-benefit, low-cost trades? • Should we add value-creating contingencies and risk-sharing provisions to the contract? • Can the contract cope not only with economic issues but also with the egos involved?These are but a few of the many common negotiating errors we see in practice.Q: Your 3-D alternative draws on three dimensions: tactics, deal design, and set-up. In a nutshell, what do theseelements mean individually and together? Should a negotiator weigh them equally, especially under time pressure?A: Whether your focus should be on one or a combination of tactics at the table, deal design, or set-up moves awayfrom the table depends directly on the nature of the barriers that you face. When you have a potential deal in mind,we have developed a set of tools to quickly perform what we call a "3-D barriers audit" to determine what barriersstand between you and your desired agreement. While there are many specifics, the broad diagnostic questionsfollow our three-dimensional scheme.First, you should ask whether it is a tactical or people-related barrier like communication, trust, misperceptions, orthe like. Second, you should ask whether the problem is deal-related: Does the proposed agreement offer
  4. 4. value to the parties to be more attractive than no deal? Does it accomplish their objectives? Third, are there set-upproblems such as wrong parties, interests, no-deal options, sequence, or basic process choices?When talks stall, its tempting to jump to conclusions: "Its purely a price gap." "Theyre being unreasonable.""Were not communicating well." "Were in a weak position." Instead of focusing on the first explanation that leapsto mind, you should critically diagnose the key barriers to the kind of agreement you have in mind; this will thenallow you to devise the most promising approach to overcoming them. Without an accurate barriers assessment, thestrategy and tactics you craft may address the wrong problems.Imagine that a supplier is negotiating with an important but difficult client who adamantly refuses to budge oncertain contract terms. Assuming that they face an interpersonal or tactical barrier, suppliers often seek training onthe principles of persuasion, joint brainstorming, how to make advantageous initial offers, body language, and soon.Yet apparent tactical or interpersonal barriers may actually be another type of problem. More broadly, the bestresponse to a barrier in one dimension may be moves within other dimensions. As the purchasing agent calms downa bit, for example, he mentions that cash is very tight, "especially this quarter." Is this a deal-design barrier?Perhaps a delayed payment schedule would do the trick, with the bulk of the payment due when procurementbudgets are replenished.The frustrated supplier also may be overlooking a fundamental set-up barrier. While top management from bothfirms might speak of the importance of "partnership" and "quality," the purchasing agent may be motivated bymonthly targets and pennies ground out of suppliers. To succeed, the supplier may need to create a more promisingset-up with more sympathetic parties involved in the negotiation.When talks stall, its tempting to jump to conclusions.This can mean finding and nurturing an influential internal champion on the other side who would truly benefitfrom added quality and service. The supplier might induce such an advocate to persuade the agent on her behalf,directly or via links to senior management. Beyond a good proposal and the effective interpersonal skills needed inthe initial two-party negotiation, a three- or four-party set-up—internal champion plus senior management inaddition to the supplier and agent—can maximize the odds of the suppliers success at the ground level.The broader point is to do a 3-D barriers audit, then craft a 3-D strategy to overcome those specific barriers. A 3-Dstrategy is an aligned combination of set-up moves away from the table, deal design moves "on the drawing board,"and tactics "at the table" all tailored to overcome the barriers youve identified.Q: One-on-one negotiations are often tough, but the complexity is magnified during multiparty negotiations,especially when some of the interested parties are not obvious. How do you advise flagging all key influencers?A: To get the set-up of a negotiation right, you need to get the parties right. You might think that the parties aresimply you and the person on the other side of the table, but it is often much more complex, requiring an act ofdisciplined imagination rather than a mechanical list. In our new book, we systematically work through ways to getthe right "all-party map." In a nutshell, you need to take a disciplined look beyond the usual suspects to figure outwho might really matter: potential and actual parties, internal and external players, principals and agents, decisionmakers and influencers, allies and blockers, and high- and low-value parties, as well as those who must approve andimplement the deal. Map the relationships among those on your all-party map by assessing the informal as well asthe formal decision and governance processes.For example, to improve the odds of your ultimate target saying "yes," we often use a process called "backwardmapping." Start by trying to discern who influences the target player and to whom that player defers. For example,
  5. 5. when we were advising a client who was eager to sell his company, we counseled him against his instincts toquickly open serious negotiations with a potential acquirers CEO. Instead, we researched whom the CEO wouldturn to regarding acquisitions. Of course, his CFO would be pivotal. Continuing to map backwards from the CFO,we turned up an analyst in the finance department whom the CFO deeply respected and who would almost certainlydo the valuation work on this somewhat unorthodox deal. After initial contact with the CEO, we spent a great dealof time ensuring that the key analyst bought into the deal. When intensive negotiations finally began with the CEO,the groundwork had been laid. The CEO turned to his CFO, who turned to his key analyst, who made our case fromthe inside.Q: Youve asserted that negotiation should be a core skill for virtually all managers. Why? How can managers whoare not directly involved with deal making assess and hone their own skills on a regular basis?A: Most important managerial problems involve people whose interests and perceptions are in some conflict.Effective management and leadership often depend on the capacity to envision and bring about sustainableagreements among these parties. This is true with respect to discrete transactions such as mergers, labor contracts,and out-of-court settlements. It is true when working out new supplier and customer relationships, dealing withlarge shareholders and creditors, as well as initiating and managing cross-border strategic alliances. It is true insidethe firm where people from different functional areas and divisions need to reach and implement new cooperativearrangements in response to change. It is true with respect to conflicts arising from the interaction of businesseswith governments as well as with environmental and other nongovernmental organizations. It is true as workforcesbecome more diverse and business increasingly crosses borders and cultures. And it is endlessly true forentrepreneurs who must come to productive terms with investors, potential employees and board members,technology partners, distributors, and possible acquisitions as well as would-be acquirers.Yet beyond such formal deals, negotiation is increasingly a way of life for effective managers for at least three setsof reasons.First, formal authority, hierarchy, and command are less and less able by themselves to ensure productivecooperation and genuine commitment. This is the case internally where cross-functional and inter-unit coordinationis crucial and where greater professionalization means that key employees and colleagues both have and value moreautonomy. It is also true externally with an increasing number of influential stakeholders outside the traditionalchain of command. Newer and flatter organizational forms—strategic alliances, joint ventures, tightly-knit supplychains across different firms, virtual corporations, network entities, as well as team-based processes—generallyrequire almost continuous negotiation to function effectively.Second, the sheer pace of change in markets, technologies, and competition puts a sharply increased premium onthe capacity of organizations to flexibly respond by devising new arrangements and renegotiating the old ones.Salient examples requiring some truly complex negotiations include the convergence of computing,telecommunications, and information/entertainment sectors as well as a steady flow of restructurings, especially inheavily leveraged parts of the corporate, financial, and real estate sectors. Operationally, "flexibility" in the face of afaster pace of change—combined with an increasing number of influential stakeholders—means that yesterdaysarrangements must be reworked into todays, and that todays will have to be altered to meet the needs of tomorrow.Persuading key stakeholders to abandon familiar practices and perceived entitlements can severely test a managersnegotiation skills.Third, increasing demographic diversity of the work force and genuine globalization of business raise the risks ofunproductive cultural misunderstandings and costly conflict. These outcomes can often be prevented or mitigatedby effective negotiation. In short, negotiation has always been a useful skill for managers to deal with disputes andto make deals. But with more influential stakeholders, with authority and hierarchy necessary but decreasinglysufficient, with looser organizational forms, with an increased pace of change, and with greater diversity and
  6. 6. reach, negotiation assumes greater importance. For effective managers, it is a way of life, a new core competence,not merely an important skill to be wheeled out for special occasions.To hone their negotiation skills, the first requirement is to recognize the prevalence of formal and informalnegotiating situations. Then, naturally, we suggest becoming familiar with the framework of 3-D negotiation. Muchlike the job of a manager, 3-D negotiation is not merely an interpersonal task, but also a substantive one (designingvalue-creating arrangements), and an architectural one (getting the set-up right to induce maximally productivecooperation).Q: Given geopolitical tensions today, what are the complexities of the challenges facing professional negotiatorswhose work is very high-stakes? If its possible to generalize, how do you view the skills and practices of mostnegotiators working on high-stakes issues? Are there large or different "skill issues" compared to previous periodsof time youve witnessed?A: There is a fruitful dialogue underway between people negotiating business, legal, and financial deals and theirinternational counterparts faced with life-and-death negotiating challenges. Each group can learn important lessonsfrom the other since there are remarkably many similarities.Here at Harvard, we have initiated and hosted an annual Great Negotiator Award series over the past six years,sponsored by an inter-university consortium of Harvard, MIT, and Tufts through the Program on Negotiation.Honorees have included such figures as George Mitchell, Charlene Barshefsky, Richard Holbrooke, LakdharBrahimi, Stuart Eizenstadt, and Sadako Ogata. Weve written detailed cases on the most challenging negotiationsfaced by these remarkable men and women—whether ending the war in Bosnia, creating an interim government inAfghanistan, crafting a U.S.-Chinese trade deal over intellectual property, or getting Protestants and Catholics inNorthern Ireland to come to terms. By spending intensive time with these great negotiators, writing cases on theirmost challenging deals, and relentlessly probing their thought processes and approaches to some of the worlds mostdifficult negotiations, we are able to add even more valuable source material to our intellectual and practicaltreasury.For example, when you asked above about how to get the right parties involved to set up the most promisingnegotiation, we might have drawn on the experience of one of our awardees, veteran U.N. diplomat LakdharBrahimi. Prior to his recent efforts negotiating interim governments in Afghanistan and Iraq, he took the lead inending the bloody, seventeen-year civil war in Lebanon. Should the negotiating set-up simply include the leaders ofthe warring factions? No. As Brahimi recalls:…we met in Jedda [Saudi Arabia] to discuss our plan. We needed the Americans with us. We needed the UnitedNations with us. We needed France with us because France was very close to the Christians and we needed theVatican, which is a very important player there. So we went to Beirut, Damascus, Baghdad, Paris, Rome,Washington, New York, London, Moscow, and Beijing. That is the first step to make sure that all the people whocarry some influence are really on board.Youll find the counterpart of Brahimis thought process in many complex private-sector deals. And this is but onerelatively straightforward example.Q: You have a chapter coming out in the new book Advances in Decision Analysis called "Negotiation Analysis:Between Decisions and Games." Please tell us more about the emerging field of negotiation analysis and what itcould mean for managers. Where do you see this field going in the future?A: This fairly technical chapter, mainly written for scholars and specialists, is Jims current take on the fieldincreasingly referred to as "negotiation analysis" that was pioneered by HBS emeritus professor Howard Raiffa, towhom both of us owe a great
  7. 7. Raiffas approach essentially joins two initially separated intellectual traditions, the descriptive and the prescriptive.For many years, cognitive and social scientists performed careful laboratory experiments to determine what subjectsactually do in negotiating situations, typically where better performance is rewarded with good money. This workled to many insights, but was fundamentally descriptive in nature. Meanwhile, largely in parallel, decision and gametheorists typically analyzed what ultra-rational people would (or should) optimally do when interacting with othersimilar beings in negotiations. Of course, real people do not typically act in the ultra-rational manner assumed bysuch "symmetrically prescriptive" models.Howard Raiffas intellectual innovation, since furthered by others such as HBS professor Max Bazerman, was tomake his highly rational prescriptive advice conditional on the most empirically accurate description of whatpeople actually do, often as studied by behavioral scientists. In a nutshell, this is the intellectual approach ofnegotiation analysis: to generate the best possible advice to one side given the most faithful possible descriptions oflikely behavior of the other side or sides.We have contributed to all aspects of this negotiation analytic quest, both theoretical and empirical, but especiallyby extensive fieldwork studying great negotiators and challenging negotiations. Weve also spent years, as part ofeach of our nonacademic careers—as investment bankers, entrepreneurs, and in government agencies such as theState Department—both doing deals directly and advising on them. This long-term engagement with deals anddealmakers has left us increasingly dissatisfied with the "one dimensional" model that dominates most currentthinking about negotiation. This model is primarily focused on the face-to-face tactical interplay "at the table."Extensive field observation and analysis has led us to codify the 3-D approach in which moves away from the tableset up the most promising situation.Of course we are hardly alone. Exceedingly popular negotiation courses for MBAs and executives abound at majorbusiness schools. Negotiation analysis, in all its three dimensions—tactics, deal design, and set up—is the provinceof a wide range of scholars. Were very bullish on the field.Excerpt from "Get the No-Deal Options Right," 3-D Negotiation: Powerful Tools to Change the Game in Your MostImportant Deals, by David A. Lax and James Sebenius.Editors Note: Often stuck in a tired "win-win vs. win-lose" debate, many negotiation books focus exclusively onface-to-face tactics at the table. Yet, hard or soft, table tactics are only the "first dimension" of David A. Lax andJames K. Sebenius new "3-D negotiation" approach, developed from their decades of doing deals and analyzinggreat dealmakers. Moves in their "second dimension"—deal design—systematically unlock economic andnoneconomic value by creatively structuring agreements for the long term.But what really sets the 3-D approach apart is its "third dimension": set up. Before even showing up at a bargainingsession, 3-D negotiators ensure that the right parties have been approached, in the right sequence, to address theright interests, by the right process, and facing the right consequences of walking away if there is no deal. This newarsenal of moves away from the table—to set up or reset the situation most favorably—often has the greatest impacton the negotiated outcome. Superior set-up moves plus insightful deal designs can enable you to reach remarkableagreements at the table, unattainable by standard tactics.Several elements of a negotiation comprise its set up: the actual and potential parties, the full set of their interests,each sides best no-deal option, the sequencing, and basic process choices. Great negotiators work hard to ensurethat all these elements add up to the most favorable possible set up.In this excerpt from 3-D Negotiation, Lax and Sebenius introduce one critical set-up factor: each sides best no-dealoption, or walkaway. The negotiating implications of what you (and your counterparts) would do in the event of nodeal has a long history, but has been most memorably captured by Roger Fisher, Bill Ury, and Bruce Patton
  8. 8. Getting to Yes as the "BATNA," or Best Alternative to Negotiated Agreement. Lax and Sebenius take this ideaseveral steps further in their introduction to the importance of each sides best no-deal option.Excerpt:Many inexperienced negotiators think that they must hang on at all costs until a deal is done. But theyd be wise tolisten to the words of Robert Rubin, former U.S. Secretary of the Treasury and cochairman of Goldman Sachs:"When others sense your willingness to walk away, your hand is strengthened … Sometimes you are better off notgetting to yes."1 Both the perception and reality of no-deal options play a key role in most negotiations. Lets getreally basic for a moment: Contrast two distinct situations in which you might negotiate with a new car salesperson. • Situation 1: The salesperson has the strong impression that you have firmly decided on the car of your dreams—call it car A—and it is right there on his lot. You are obviously a serious buyer. As you settle into the chairs in front of the salespersons desk, your spouse tells you firmly, "Honey, weve looked for a long time and weve seen absolutely nothing. Our old clunker may not even make it off this lot. This car is perfect!" Now you sit down to talk price. • Situation 2: The salesperson sees you debating with yourself whether you really prefer car A (same as previous) thats right there on his lot, or a car (car B) thats at a different dealership. This time your spouse exudes ambivalence: "Honey, I think I prefer car B." Yes, you like car A a lot, but car B has a few features that you clearly prefer, and it is also priced below car A. In this scenario, you are negotiating the price of car A in order to help you decide whether to choose it over that other nice car, which you also like a lot, but, conveniently, is elsewhere, but not too far away. Now you sit down to talk price.It wont surprise you to read that you are likely to strike a far better price in Situation 2—in which you appear tohave an excellent no-deal option and the willingness to choose it—compared with the price you work out inSituation 1, in which you appear to have no good alternative to car A. Much more broadly than this simple situation,getting the set-up right means getting each sides no-deal options right. And getting no-deal options right isfundamental to each sides choice of "yes" or "no."Should you ultimately say "yes" to a proposed deal? The answer to that question depends on more than simply thevalue of that deal. It also depends on a comparison of your options in which you determine whether, to you, thevalue of saying yes exceeds the value of saying no. Sometimes, going back to Rubins words, you are better off notgetting to yes. And the same logic, of course, holds true for your counterparts across the table.The particulars of a proposed deal define the value of "yes." But how is the value of "no" determined? It depends onhow well your interests are served by choosing your best "no-deal" option—the most promising course of actionyou would take if you decided to say no to the proposed deal. Along with getting all the parties right and mappingtheir interests accurately, understanding—and often shaping—everybodys best no-deal option is the thirdfundamental element of a negotiations set-up.2Your best no-deal option may involve simply walking away and doing without any agreement. (What will theconsequences of that course of action be?) It may involve going to another dealer, supplier, or buyer, makingsomething in-house rather than procuring it externally, going to court rather than settling, forming a differentcoalition or alliance, or taking a strike. In the case of multinational peace talks, one nations best no-deal option mayinvolve anything ranging from the imposition of economic sanctions all the way up to the unilateral use of force—blockading, bombing, or invading. And, in the course of negotiating, your best no-deal option may be to continuethe process, perhaps in the hope of a better offer. In all cases, assessing your no-deal option helps establish thecritical relevant threshold: as compared to what? Meanwhile, of course, the other side is (at least informally)making its own assessment of its best no-deal
  9. 9. When we work with our clients, we frequently talk in terms of the "deal/no-deal balance." Picture an old-fashionedscale with two pans. On one of the pans you stack up the value of your best no-deal option, and on the other pan,you stack up the value of saying yes to the proposed deal. As the negotiations proceed, you regularly "check thescale," metaphorically speaking, to see how your deal/no-deal balance looks. Although the negotiations often focuson the "yes pan," your actions as well as outside-world factors may be affecting the "no pan," as well. Plus, theother side may have its finger on the scale too: busily improving its no-deal options—and, perhaps, trying to worsenyours. Whatever is going on in the negotiation, your best no-deal option sets the hurdle—in terms of the full set ofyour interests—that any agreement must clear to be acceptable. Ditto for them.All too often, negotiators get caught up in intense tactical interplay at the table. It feels like thats where the actionis, and where your attention should be focused. Many negotiators, even experienced ones, pay insufficient attentionto (1) their best no-deal option, and (2) the deal/no-deal balance. In too many cases, they treat their no-deal optionsmainly as afterthoughts, rather than as primary elements of the set-up. This can be a fatal mistake. Like parties andinterests—no-deal options are foundational to favorably shaping the set-up: defining necessary conditions for anydeal, strongly influencing outcomes, and often suggesting actions away from the table to set up more promisingsituations.In the balance of this chapter, well present five prescriptions for using the power of no-deal options to drive greatdeals. 1. Use your best no-deal option, and those of the other negotiating parties, to determine whether and, if so, where a zone of possible agreement exists. 2. Make sure the other side sees you as ultimately able and willing to walk away. When your counterpart(s) perceives a credible increase in your willingness to walk away—especially in the direction of an attractive no-deal option—your at-the-table outcomes often improve. Therefore, take steps to improve your best no- deal option and consider actions to worsen that of your counterpart. 3. Take care to protect—and do not inadvertently weaken—your no-deal options. 4. Consider worsening your own no-deal option in certain very carefully selected circumstances. 5. When diagnosing a potential negotiation, use your understanding of no-deal options to distinguish between those situations in which negotiation can play a major role and those in which it must play a lesser role.Determine if a zone of possible agreement existsOne simplified way to view negotiations is to see them as a sort of tug of war—a battle that takes place along anadversarial line segment (the "rope"), with the seller tugging toward "high" and the buyer tugging toward "low."The buyers closely-guarded true maximum determines the one end of the line segment (i.e., the maximumacceptable price if there is to be a deal), and the sellers equally well-guarded true minimum bounds the other end(i.e., the minimum acceptable price if there is to be a deal). It doesnt much matter whether the tug of war concernsthe price of a car or a house, an insurance settlement, or the sale price of a company. In all cases, you should keepthe mental image of the "price line segment" in mind; it has a very tight relationship to each sides best no-dealoption.Your best no-deal option, again, is the most attractive course of action you could take in the event of no agreementin the current negotiation. The value you place on your best no-deal option sets the bar—in terms of the full set ofyour interests—that any agreement must exceed to be acceptable; this is also true for the other side. As such, no-deal options imply the existence or absence of a Zone of Possible Agreement (ZOPA), a bit of jargon we find useful.The ZOPA simply means the set of possible agreements that is better for each side, given its interests, than its bestno-deal
  10. 10. Suppose that the sellers true minimum falls below the buyers true maximum, as depicted in Figure. In this case, apotentially profitable ZOPA exists; that is, agreement can be better for each side than the value of its best no-dealoption. Figure The ZOPA (Zone of Possible Agreement) as a Battle Line Sellers minimum Buyers maximumTo be more concrete, lets say that Joe is selling his condo and has an acceptable offer (to him) for $450,000. Betty,meanwhile, would pay up to $500,000 for Joes condo, rather than (a) buying another condo or (b) doing without acondo. The Joe-Betty ZOPA, therefore, obviously exists and is the set of prices between $450,000 and $500,000.Of course, its easy to imagine a scenario with no ZOPA. For example: If Joe already had a $500,000 offer whileBetty could buy exactly what she wanted elsewhere for $450,000, thered be no ZOPA for Joe and Betty.Each side typically knows its own limits, which it must continually assess and reassess as new information unfolds.The problem is that many negotiators have only a hazy sense of their own no-deal options, or how to value them—especially when it comes to more complex no-deal options than the simple buy-sell price deal weve been using toillustrate our points so far. If Joe and Betty were involved in trying to settle a major class-action lawsuit, rather thanselling and buying a condo, the no-deal options would be considerably more difficult to calculate.Lets see how accurately assessing the true ZOPA—trivial in theory, but tricky in practice—can be immenselyprofitable when done well. Sometimes the most important attributes of the other sides no-deal options can beinvisible—unless you actively look for them.We once advised an American firm during a lengthy negotiation with a major Japanese company. The stated goal ofthe talks was to create a large-scale joint venture under Japanese control. In fact, creating this joint venture wouldrepresent a sale of about two-thirds of the U.S. firm, permitting it to concentrate on what it felt to be anotherbusiness line with higher potential. During an excruciatingly detailed, two-year process, the negotiations weresuspended several times, due to what the Japanese negotiators described as a "breakdown of its internal consensusprocess." Each time, however, the Japanese managed to resume negotiations, after painstaking internal efforts torebuild and strengthen consensus within their company on the central role of the deal to their long-term globalstrategy.When a European firm unexpectedly made a tender offer for the entire American business, the Japanese firmsuddenly had to fish or cut bait. When the Japanese signaled their intention to intensify the negotiations—in part tohead off the Europeans—negotiators for the U.S. firm reassessed the ZOPA on price: that is, the least that the U.S.firm would accept and the most the Japanese company would pay for majority control of the part of the to be contributed to the joint venture.Obviously, the price ZOPA depended on financial valuations, including the strategic benefits and costs to each sideof completing the transaction. Yet, at the very last moment before the U.S. board was about to authorize itsnegotiators to proceed in the final deal process, we pressed our client to think once again about the reality of theJapanese no-deal option. We quickly reviewed the other strategic options open to the Japanese firm and confirmedtheir undesirability.This last-minute, deeper look at the Japanese situation, moreover, began to focus our collective attention on theinternal consequences of no deal to our Japanese counterparts. Having worked through a grueling consensusprocess, virtually everyone at the Japanese company—from the major owners, to the board to senior managers,
  11. 11. all those subunits that had required that massive persuasion effort—was deeply committed to doing this deal. Thecompany was cash-rich, so minimizing the price of the deal was important, but not central.Armed with this understanding, the U.S. negotiators were able to leverage the Japanese companys nearly irresistibleorganizational momentum—the firm had spent over two years mentally integrating the U.S. operations into its long-term strategy. Now, rather than face the extreme internal organizational costs of "losing," the Japanese firm agreedto pay an extraordinarily high amount for the U.S. firm, far more than would have been the case absent thefrustratingly lengthy consensus process. (In fact, it was almost triple its share price at the outset of the process.) OneAmerican negotiator described how, in effect, the Japanese entity had "fallen in love" over time with its target—andpaid the price.This exceedingly profitable outcome (from the American point of view) probably would not have been possible hadthe U.S. negotiators thought of the transaction in conventional valuation terms and focused on external no-dealoptions. Instead, the other sides consensus process—when recognized by the U.S. side as affecting the Japanese no-deal option—was used to recognize that the true ZOPA extended well beyond what would otherwise have beenjustifiable.Excerpted by permission of Harvard Business School Press from 3-D Negotiation: Powerful Tools to Change theGame in Your Most Important Deals. Copyright 2006 David A. Lax and James K. Sebenius; all rights reserved. Toorder, please call (800) 988-0886 or purchase online: the authorsMartha Lagace is Senior Editor.David A. Lax is a former faculty member at Harvard Business School and an investment banker. He is now aprincipal of Lax Sebenius LLC, a negotiation strategy firm.James K. Sebenius is a principal of Lax Sebenius LLC. He is the Gordon Donaldson Professor of BusinessAdministration at Harvard Business School and serves on the Executive Committee of the Program on Negotiationat Harvard Law School.Negotiating When the Rules Suddenly ChangePublished: September 11, 2006Author: Michael WheelerHow can you negotiate when the rules suddenly change, and no one knows whether your particular market isheaded up or down? Regrouping from the cancellation of the 2004-2005 season due to failed labor negotiations,National Hockey League (NHL) teams and players faced this challenge in July 2005 when they radicallyrestructured their collective bargaining agreement (CBA). The new CBA instituted a uniform cap (as well as
  12. 12. floor) on team payrolls. It also set maximums and minimums for individual contracts and declared many moreplayers free agents, allowing them to sign with whatever team made the richest offer.Imagine that youre an NHL general manager. You have a month, at most, to fill your teams roster before trainingcamp begins. Whats your strategy? If you expect that your rivals will go on a spree and overspend for big-nameplayers, it would be smart to sit back, protect your budget, and then scoop up the excess talent. But if the otherowners move cautiously in this new terrain, it would be in your interest to aggressively sign stars before the marketheats up.Either strategy carries risks. You wouldnt want to blow your budget on a few marquee players and have little left toround out the team. Then again, theres no point in holding lots of cash with no one worthwhile to spend it on.Conventional negotiation theory doesnt say much about how to craft and execute strategy in such dynamic markets.Assessing your walkaway point is useful in stable situations but less helpful if you dont know whether your optionswill get better or worse.It pays to look for strategic insight from contexts where uncertainty, risk, and change are the only constants.Military science, in particular, offers powerful lessons for negotiators, whether they are settling disputes or makingdeals. As it says in Warfighting: The U.S. Marine Corps Book of Strategy (Currency, 1995), "The very nature ofwar makes certainty impossible; all actions in war will be based on incomplete, inaccurate, or even contradictoryinformation."Many negotiation scholars have shied away from drawing parallels to battlefield strategy, due to its associationswith violence and brute force. In fact, contemporary theory of maneuver warfare is surprisingly nuanced and supple.Three axioms apply to negotiators who must cope in volatile environments: (1) make a bump plan, (2) be bold andquick, and (3) learn and adapt.Axiom #1: Make a bump planMilitary strategist Carl von Clausewitz coined the term friction, "the force that makes the apparently easy sodifficult." Friction doesnt just refer to adverse weather or enemy fire. It can also be mental and self-induced,resulting from the "lack of a clearly defined goal, lack of coordination, unclear or complicated plans," and othersigns of ill preparation, according to Marine doctrine.Mental and organizational friction infiltrates negotiation as well. When the stakes rise, so do tension andmiscommunication. Totally eliminating friction is unrealistic on the battlefield and at the bargaining table. In bothinstances, you need the authority and the emotional steadiness to cope in spite of uncertainty.Strategy is further complicated by the fact that the other parties are independent actors with their own objectives andplans. While youre striving to influence their behavior, theyre just as determined to shape your decisions to theiradvantage. According to Warfighting, appreciating this dynamic interplay between opposing human wills is anessential factor in understanding the nature of war.When formulating negotiation strategy, strive to view the landscape as other parties see it. Returning to our hockeyexample, the NHL general managers had to work on at least three different levels as they raced to sign players.They had to assess a particular players value to their own team and what other clubs would be likely to pay him.They also had to weigh what sort of precedent, good or bad, that deal would set for the other players they weretrying to sign. Finally, they had to anticipate how their moves would affect the decisions of competing teams.NHL general managers who were willing to delegate would have been better positioned to see the big
  13. 13. Friction was high in each of those domains. Confidential information about contract talks was sometimes leaked tothe press. Key players who seemed ready to sign with one team suddenly bolted to another. Some general managersgave fat contracts to players long past their prime. Each transaction altered the overall negotiation landscape.In rapidly changing marketplaces, you cant provide for every contingency. But you can take a page from MarineCorps practice and develop bump plans. Rather than mapping out every possibility, commanders practice a form ofanalytic triage by focusing on two negative possibilities, discarding almost everything else. The first element isanticipating the enemys most likely course of action. The second is preparing for the biggest, most damaging risksby identifying the greatest threats to success.Translated to the negotiation arena, creating a bump plan means ultimately making an informed bet on how youexpect things to unfold, while also contemplating what youll do if events go the other way. A hockey generalmanager who values premier goaltending should identify a handful of potential players. But in case he gets stymiedwith all of them, he should be open to assembling a team thats more offensively oriented.Axiom #2: Be bold and quickWhen the rules of negotiation have changed drastically, should you be bold or cautious? As a general principle, theMarines have a bias for action. For them, a mediocre decision is better than wavering. Applied to negotiation, beingproactive allows a firsthand reading of the market and gives you a key role in shaping how the game evolves.As soon as the new CBA was in place, some NHL general managers moved quickly to buy out the existingcontracts of some of their older players. Having read the agreements small print, they realized that, for only sixdays in July 2005, such buyouts would not be counted toward the annual salary cap. By freeing up their budgets,they put themselves in a great position to aggressively pursue prime talent.Boldness and quickness go hand in hand on the battlefield. As Warfighting states, "Since war is fluid andopportunities fleeting, focus applies to time as well as to space. We must focus not only at the decisive location butalso at the decisive moment."Timing is just as important in negotiation. In volatile situations, you and your organization must be poised to actquickly. But dont confuse quickness with frenzy. In the heat of the moment, its easy to bicker over minor pointsand lose sight of larger objectives. NHL general managers who tried to play a central role in all contract talks likelywere swamped with information and misallocated their time. Those who were willing to delegate would have beenbetter positioned to see the big picture.Individuals and organizations should operate at a high tempo but not one so fast that they compromise their strategicjudgment or tactical execution. Having a metric in place that rates your priorities and weighs tradeoffs will enableyou to make good decisions on the fly.Axiom #3: Learn and adaptBolstering your capacity to sense and respond is key to prospering in turbulent situations. Its also at the heart ofmaneuver strategy in the military. Much of the best contemporary thinking in this realm was advanced by the lateColonel John Boyd, a Pentagon maverick. His decision-making model has become influential in the United Statesand abroad, in fields as diverse as consumer marketing and college rugby.Boyds animating insight sprang from his study of Korean War air battles between American F-86s and SovietUnion-made MiG-15s. Although the Soviet plane could accelerate faster, was better armed, and could performbetter at higher altitudes, the F-86s won 90 percent of the
  14. 14. Boyd attributed the success of the American F-86 to two factors. First, the F-86 had hydraulic controls that allowedit to transition between activities—climbing, banking, and accelerating—more rapidly than the MiG-15. Second, theF-86 had a bubble canopy that gave pilots unobstructed views from all angles—this meant that the pilots hadsuperior situational awareness, enabling faster decision making. Each maneuver increased the F-86s edge over itsopponent until it cumulatively achieved a dominant position.From this example, Boyd conceived of the OODA loop—the repeated process of observing, orienting, deciding, andacting. He concluded that tactical and strategic victory hinges on cycling through this loop faster than the enemy (orby disrupting the enemys ability to connect those activities efficiently).The first two elements—observing and orienting—are especially important for negotiators thrust into newenvironments. Your strategy must be driven not only by your goals but also by what you will learn while achievingthem. Thus, negotiating with an individual NHL player has dual purposes: getting him signed and gaining a betterfeel for what other teams and players are doing. Faxed exchanges of offers might accomplish the former but yieldlittle general intelligence. Your eyes and ears have to be open for clues about where the overall market is headed.The more novel the circumstances, the more important situational awareness becomes for the negotiator. You needthe capacity to organize and analyze data as it comes in so that you can confirm or reorient your strategy, ifnecessary. That way, you can align your tactical decisions with your larger objectives. The more efficiently youmanage this process, the more up to date youll be on current conditions. Cycling through these loops of analysisand action faster than other negotiators will give you a significant edge.Reprinted with permission from "When the Only Constant is Change," Negotiation, Vol. 8, No. 12,
  15. 15. Five Steps to Better Family NegotiationsPublished: July 9, 2007Authors: John A. Davis and Deepak MalhotraNegotiations between family members who own a business are different—different from negotiations betweennon-family members and also different from negotiations between family members who dont have a business. Thisis because family relationships are distinctive kinds of relationships, and having a family business raises the stakesof—and often complicates—a family negotiation.Consider first what sets family relationships apart. Relatives (especially in nuclear families) typically have long-standing relationships that are based on strong emotional ties and lifelong feelings of dependency. Thesecharacteristics lead to stronger loyalty and sensitivity to one another but also greater reactivity in their interactions.Family relationships also have deeply ingrained patterns that have developed over years of interacting. Relativesdevelop and play certain roles in their families, which tend to become fixed and limit the ways family membersinteract. Some of these patterns and roles can aid communication and negotiation, and some can derailcommunication and dispute resolution. In addition, communication between family members is notoriouslycomplicated. Because of the sensitivity of their relationships, relatives struggle between openness and caution intheir statements to one another. Family members also tend to have difficulty listening to one another withoutjudging what they hear in the context of countless prior experiences that may have little to do with the current topicthey are discussing.In addition to these factors that apply to all family relationships, family members who are in business together havea lot at stake and feel pressured to consider whats good not only for the family but also for the business and itsowners. There is generally a lot more for family members to manage—and negotiate over—in a family businesssystem. Issues such as dividends and reinvestment, nepotism and professionalism, loyalty to stakeholders, andorganizational change are ever present; they can be tripwires that spark intense feelings and have wide-rangingimplications for the business, family, and owners. In many cases, family members have multiple roles in the system,like father-owner-manager, daughter-employee, or aunt-owner. These multiple roles and ties can create more sharedobjectives and as a consequence, more potential for value creation. However, these multiple roles and ties can beconfusing to coordinate. Relatives can experience role confusion (should I act as a father or boss, a daughter or vicepresident?) and struggle over the appropriate role to play in a particular negotiation (e.g., is this a father-daughternegotiation or a boss-employee negotiation?). In vaguely defined situations, there is increased opportunity formisunderstanding and conflict.But given the distinctive nature of negotiations for families in business, 5 basic principles of negotiation that haveproven relevant in a wide variety of deal-making and dispute-resolution cases can help family negotiations to beproductive while protecting family relationships. Some of the 5 principles of effective negotiation are easier forfamily members in family business systems to apply, and others are more difficult. But all 5 principles of effectivenegotiation can be successfully leveraged in negotiations between family members in family business systems. Wewill review the principles and their applicability to family negotiations below.1. Analyze the negotiation spaceThe negotiation space consists of all parties that are affected by the negotiation, or that can affect the negotiation.Before you negotiate, it is critical that you consider the interests, the power, and the constraints facing each party. Inthe case of family businesses, many of the parties affected by a negotiation, or able to affect it, will be around for
  16. 16. long time. It is dangerous to negotiate only considering the interests of those at the bargaining table when those whoare not at the table will be affected by what is negotiated and can assert their rights or power in the future.A typical strength of family negotiations is that family members generally prefer to reach mutually acceptableoutcomes in their negotiations.The negotiation space in a family business system is often extensive and typically complex, involving familymembers, employees, and owners of the business, and also may involve key stakeholders of the family businesssystem (e.g., customers and suppliers of the business, members of the community in which the family lives, etc.).Because family members in a family business system have highly interrelated lives, even if a relative is not directlyinvolved in a negotiation, he or she might have a keen interest in its outcome and be able to affect the outcome. Forexample, if a father and his son are negotiating over the sons employee compensation, the negotiation space islikely to include (among others) the sons immediate boss, the sons coworkers, his sister (who is considering joiningthe business next year), and his mother. The wife-mother may not be a manager, board member, or owner, and haveno official say in this matter, but she may still have a strong influence on both the father and the son, and hersupport may be critical for reaching a negotiated outcome that everyone finds acceptable and fair.2. Dont try to beat the other sideWinning in a negotiation doesnt necessarily mean that the other party needs to lose. On the contrary, mostsuccessful negotiations entail the possibility of mutual value creation, compatible if not aligned interests, andcooperation. In fact, trying to beat the other side often results in negative results for both sides. The person inflictinginjury will almost always end up losing—psychologically, socially, and/or financially—as well. This is obvious in anegotiation between family members who want or need to keep a mutually supportive family relationship.A typical strength of family negotiations is that family members generally prefer to reach mutually acceptableoutcomes in their negotiations. This constructive attitude is due in no small part to the strength of family ties:Typically, family members are genuinely interested in one anothers welfare and prefer to avoid conflict because ofits effect on future interactions. But some family relationships are weakened to the point where beating the otherside is consciously or unconsciously desired by at least 1 party in the negotiation. So it is worth thinking throughwhether you wish to work together with the other side to negotiate and resolve conflicts—or whether you wish to"win." If its the latter, hopefully you will have a friend or advisor discourage you from this path.3. Understand the other partys interests, constraints, and perspectiveMany people see negotiation as an opportunity to persuade and influence the other side to give them what theywant. As a result, most people do not go into negotiation with the goal of listening to and learning about the otherparty. This is unfortunate, because to get what you want in negotiation, you often need to understand the other sidesneeds and interests so that you can "give a little to get a little (or a lot)." Even if the other side is entirely willing tohelp and is ready to give you what you want, it may be critical that you understand the constraints that he or shefaces in meeting your demands. In other words, effective negotiation requires that you understand the other sidesinterests and constraints, and that the other party understands your interests and constraints.Most family members are typically well intentioned when they negotiate, and one would think that such anorientation would make it easy for family members to listen to each others perspective and to learn about eachothers interests and constraints. But this isnt the norm for several reasons. First, relatives tend to be less curiousand inquiring about their relatives than they are of others they know less well. This stems partly from anassumption—common among family members—that they already know what the other party wants, likes, andneeds. Second, the long history of a family can also institutionalize roles for family members that are ratherintractable, making it difficult, for example, for parents, children, and siblings to see each other as they are currentlyrather than as they were when they were younger. Third, because families generally fear conflict, they avoid
  17. 17. conversations (that may be useful or necessary in a negotiation) for fear it will touch on a sensitive issue orencourage personal criticism that they wont know how to manage. While this might alleviate tension in the shortrun, it also perpetuates the status quo. The consequence: negotiations that involve listening, learning, and theexchange of authentic views between peers do not become the norm in most families.Ironically, it turns out, people in close relationships (such as spouses) often negotiate worse outcomes than dopeople who care less about their counterparts!1 Why? Because those in close relationships often avoid making theirown interests and priorities known to others—even when these are extremely important issues to them—andinstead, compromise across the board in order to avoid being perceived as greedy or overly self-interested. Thismakes it incumbent on family members to encourage others to identify their core interests and concerns.4. Avoid single-issue negotiations: identify and negotiate multiple issues simultaneouslyValue is created in negotiation when each party gets what it values most, and makes concessions on issues that theother side values more. But for this to happen, you need to identify all of the issues that are of concern to 1 or moreof the parties, and to negotiate multiple issues simultaneously. People will often get stuck on the most salient issuein a negotiation (e.g., salary or status) and spend too much time haggling over that 1 issue. Or, even when theyunderstand that there are a lot of issues to resolve, they will go through the issues 1 at a time—and then argueexcessively about their incompatible demands on each issue. Negotiators who negotiate multiple issuessimultaneously are more easily able to recognize value-creating tradeoffs. Because of the complex negotiation spacein which business families operate, and because family members in business have many overlapping goals andinterests, family members generally are negotiating multiple issues simultaneously. But they are not always doingso consciously, transparently, or systematically enough.While any multi-issue negotiation is going to be complicated, the likely outcome is considerably worsened whennegotiators become overly focused on a single issue or dimension. The far superior approach is for all partiesinvolved to work together to identify all of the issues that are relevant in the current negotiation, and then identifywhich issues are most important to each person (and which issues each person can concede on).5. Negotiate over interests, not positionsEffective negotiators get past stated positions (what the party demands) and understand the underlying interests(why the party wants what it demands). Often, disputes over positions will be irreconcilable, whereas a focus oninterests will lead to a mutually acceptable agreement. Some families are exceptional at encouraging familymembers to dream and explore their authentic interests and to express these interests within the family. Thesefamilies have cultures where family members can talk openly about their goals, needs, and fears. If a familymember doesnt know what his or her interests really are, a supportive family can encourage the family member totalk about possible scenarios and gradually uncover his or her true interests. This process requires patience and anonjudgmental and positive attitude about the family member and his or her possible choices. In a trustingenvironment where an individuals true needs, goals, and fears can be expressed, a negotiation over interests ratherthan over positions is more likely.Concluding thoughtsNegotiations between family members in family business systems are typically more complicated and difficult thanthose between non-related individuals in non-family business systems. Because family relationships have existedfor many years, they have deeply ingrained tendencies, some of which can facilitate a constructive negotiation andsome that can hinder it. But if some family members begin to leverage the 5 principles of effective negotiation wehave outlined, they will increase their chances of successful dealmaking and dispute resolution. The likelihood ofsuccess increases further if others in the family business system learn to put into practice these
  18. 18. About the authorsJohn A. Davis is a senior lecturer of business administration at Harvard Business School.Deepak Malhotra is an assistant professor in the Negotiation, Organizations & Markets unit at Harvard BusinessSchool.Four Strategies for Making ConcessionsPublished: March 6, 2006Author: Deepak MalhotraMost people understand that negotiation is a matter of give-and-take: You have to be willing to make concessionsto get concessions in return. But the process of making concessions is easier said than done. Consider how eventsunfolded in the following management-union negotiation, adapted from Richard E. Walton and Robert B.McKersies book A Behavioral Theory of Labor Negotiations: An Analysis of a Social Interaction System (ILRPress, 1991).The head of a manufacturing firm was preparing to initiate talks with the leadership of the employees union. Thebiggest issue on the table was a wage increase. The union was asking for a 4 percent increase, while managementwanted to raise salaries by only 1 percent.The executive considered the situation. During past negotiations, weeks were lost as each side jockeyed forposition, feigned willingness to walk away, and eventually compromised on an unsurprising outcome. In this case, adeal at 2.5 percent, the midpoint of the two parties opening positions, seemed likely to be agreeable to both sides.This time things would be different, he resolved. He would save everyone hassle and delay by making concessionsearly. Against the advice of the mediator, he opened discussions by announcing that the eventual outcome wasobvious and that he was prepared to make a final offer: 3 percent, the most he could have offered. The unionsleadership was pleased by this offer—yet they did not accept it. If the firm could offer so much at the outset, theyreasoned, perhaps they had set their sights too low. As the unions aspirations rose to unrealistic levels, a promisingnegotiation unraveled and culminated in a strike.Concessions are often necessary in negotiation. But, as this story shows, they often go unappreciated andunreciprocated. In this article, I present four strategies to help you maximize the likelihood that others willacknowledge your gestures of goodwill and reciprocate in kind.1. Label your concessionsIn negotiation, dont assume that your actions will speak for themselves. Your counterparts will be motivated tooverlook, ignore, or downplay your concessions. Why? To avoid the strong social obligation to reciprocate. As aresult, it is your responsibility to label your concessions and make them salient to the other party—a responsibilitythat the manufacturer in the introductory example neglected.Your concessions will be more powerful when your counterpart views your initial demands as serious
  19. 19. When it comes to labeling, there are a few rules to follow. First, let it be known that what you have given up (orwhat you have stopped demanding) is costly to you. By doing so, you clarify that a concession was, in fact, made.For example, the manufacturer could have explained the effect of a 3 percent wage increase on his firms bottomline or discussed how difficult it would be for him to justify it to his board of directors.Second, emphasize the benefits to the other side. My own research suggests that negotiators reciprocate concessionsbased on the benefits they receive, while tending to ignore how much others are sacrificing. One way for themanufacturer to highlight the benefits he was providing to the union would be to contrast his offer with those madeby similar firms (assuming they were lower).Third, dont give up on your original demands too hastily. If the other side considers your first offer to be frivolous,your willingness to move away from it will not be seen as concessionary behavior. By contrast, your concessionswill be more powerful when your counterpart views your initial demands as serious and reasonable. Accordingly,spend time legitimating your original offer and then use it as a reference point when labeling your concession. Themanufacturer, for example, would have been wise to make concessions slowly. Eventually, he could point out thathis final offer was closer to the unions original demands than it was to his own.2. Demand and define reciprocityLabeling your concessions helps trigger an obligation to reciprocate, but sometimes your counterpart will be slow toact on that obligation. To increase the likelihood that you get something in return for your concession, try toexplicitly—but diplomatically—demand reciprocity.For example, consider the following negotiation between an IT services firm and a client. The client suggests thatthe IT firms cost estimates are unreasonably high; the IT firms project manager believes that the cost estimates areaccurate (and perhaps conservative) given the complexity of the project and the short deadline. If the projectmanager is willing to make a concession, she might say: "This isnt easy for us, but weve made some adjustmentson price to accommodate your concerns. We expect that you are now in a better position to make some changes tothe project deadlines. An extra month for each milestone would help us immeasurably."Notice that this statement achieves three goals. First, it labels the concession ("This isnt easy for us, but weve madesome adjustments ..."). Second, it tactfully demands reciprocity ("We expect that you are now in a better position tomake some changes ..."). Third, it also begins to define the precise form that reciprocity should take ("An extramonth for each milestone... "). While each of these elements is critical, negotiators often overlook the need to definereciprocity. Remember that no one understands what you value better than you do. If you dont speak up, youregoing to get what your counterpart thinks you value or, worse, what is most convenient for your counterpart to give.The strategy of demanding and defining reciprocity plays out in a variety of contexts; those who understand how touse it can profit from it immensely. A great example is a tactic consultants and contractors use. When a clientpraises her work, a smart consultant will quickly point out that the person who would really love to hear this praiseis her boss (or other potential customers). In this way, she defines for the appreciative customer how best toreciprocate.3. Make contingent concessionsOne hallmark of a good working relationship is that parties dont nickel-and-dime each other for concessions.Rather, each side learns about the interests and concerns of the other and makes good-faith efforts toward achievingjoint gains.Unfortunately, while fostering such norms is desirable, it is not always possible. Recently, one of my students in anexecutive education class explained that while he would be more than happy to engage in mutual
  20. 20. during his negotiations, he often has trouble doing so with his contractors and customers. Some are clearlyuntrustworthy or entirely self-interested. Such negotiators are likely to exploit his goodwill by refusing toreciprocate at all, much less in the way he has defined.The strategy of demanding and defining reciprocity plays out in a variety of contexts . . .My advice to the executive: When trust is low or when youre engaged in a one-shot negotiation, consider makingcontingent concessions. A concession is contingent when you state that you can make it only if the other partyagrees to make a specified concession in return. For example, if the executive was renegotiating a service contractwith a customer, he might suggest that a requested concession is impossible given the current contract but possibleunder certain conditions. He might say, "We can provide additional support but only if you agree to purchase someof the following additional services," or, "This is literally the best we can do on price right now. But if you canadjust some of your demands, we might be able to reopen the price issue."Contingent concessions are almost risk-free. They allow you to signal to the other party that while you have room tomake more concessions, it may be impossible for you to budge if reciprocity is not guaranteed. Keep in mind,however, that an over-reliance on contingent concessions can interfere with building trust. If you demandimmediate compensation every time you make a concession, your behavior will be seen as self-serving rather thanoriented toward achieving mutual satisfaction.4. Make concessions in installmentsWhich of these scenarios would make you happier?Scenario A:While walking down the street, you find a $20 bill.Scenario B:While walking down the street, you find a $10 bill. The next day, on a different street, you find another $10 bill.The total amount of money found is the same in each scenario—yet the vast majority of people report that ScenarioB would make them happier. More generally, extensive research (beginning with the work of the late StanfordUniversity professor Amos Tversky and the Princeton University professor and Nobel laureate Daniel Kahneman inthe 1970s) demonstrates that while most of us prefer to get bad news all at once, we prefer to get good news ininstallments.When trust is low or when youre engaged in a one-shot negotiation, consider making contingent concessions.This finding suggests that the same concession will be more positively received if it is broken into installments. Forexample, imagine that you are negotiating the purchase of a house and that a wide gap exists between your initialoffer and the sellers asking price. You are willing to increase your offer by a maximum of $40,000. You will bemore effective if you make two smaller concessions, such as $30,000 followed by $10,000, than if you make one$40,000 concession.There are other reasons to make concessions in installments. First, most negotiators expect that they will tradeoffers back and forth several times, with each side making multiple concessions before the deal is done. If you giveaway everything in your first offer, the other party may think that youre holding back even though youve been asgenerous as you can be. The manufacturer who offered a 3 percent wage increase to the employees union up frontfaced exactly this
  21. 21. Installments may also lead you to discover that you dont have to make as large a concession as you thought. Whenyou give away a little at a time, you might get everything you want in return before using up your entire concession-making capacity. Whatever is left over is yours to keep—or to use to induce further reciprocity. In the real estateexample, you might discover that the initial $30,000 increase in your offer was all that you needed to sign the deal!Finally, making multiple, small concessions tells the other party that you are flexible and willing to listen to hisneeds. Each time you make a concession, you have the opportunity to label it and extract goodwill in return.All of the above strategies are aimed at guaranteeing that the concessions you make are not ignored or exploited. Itis important to note, however, that when someone refuses to reciprocate, the refusal often hurts her as much as theparty who made the concession. Nonreciprocity sours the relationship, making it difficult for negotiators to trusteach other or risk further concessions. Thus, effective negotiators ensure not only that their own concessions arereciprocated but also that they acknowledge and reciprocate the concessions of others.Wheelers and Dealersby Deepak MalhotraCar salespeople truly understand how to use modest concessions to extract much larger ones. First, they spend along time legitimating the sticker price and suggesting that its not only fair, but nonnegotiable. When they do makeconcessions, they make sure these are salient to the buyer through techniques such as these: (1) seemingapprehensive as they drop the price, (2) making a show of speaking to the "boss" to get special permission, and (3)suggesting that they rarely, if ever, make such concessions.Car salespeople are also careful never to give up all their potential concessions in one shot. Typically, a salespersonwill drop the price a few hundred dollars at a time while demanding much greater incremental price increases fromthe buyer. Many salespeople will use contingent concessions as well, ratifying price reductions only if a buyeragrees to purchase accessories and add-ons. Dealers typically make huge profit margins on accessories and wouldprefer that you spend your money on these rather than on the car itself. Smart buyers can use this knowledge to theiradvantage. If you offer to purchase a $250 accessory in exchange for a $300 drop in overall price, the salesperson isquite likely to
  22. 22. Dealing with the Irrational NegotiatorPublished: October 3, 2007Authors: Deepak Malhotra and Max H. BazermanEditors Note: What do you do when the people with whom you are negotiating act in ways that can best be calledcounterproductive? Before throwing up your hands, take a deep breath and ask yourself 3 questions. Do thesepeople lack good information? Are they operating with constraints you dont know about? Are they holding ontohidden interests?According to Deepak Malhotra and Max H. Bazerman, chances are the main hurdle to smooth negotiation is behind1 of these 3 questions. When you label someone "irrational," you limit your own options, as they write inNegotiation Genius: How to Overcome Obstacles and Achieve Brilliant Results at the Bargaining Table andBeyond. The following excerpt describes strategies and tactics to overcome another partys counterproductivebehavior and keep the deal on track.These are ideas that anyone can put to use in multiple settings of business. As Malhotra and Bazerman observe,negotiation geniuses are made, not born. "What appears to be genius actually reflects careful preparation, anunderstanding of the conceptual framework of negotiation, insight into how one can avoid the errors and biases thatplague even experienced negotiators, and the ability to structure and execute negotiations strategically andsystematically.""All of the strategies you have described work when youre dealing with people who will listen to reason," anexasperated executive student remarked recently. "But the people I deal with are completely irrational. How can youpossibly negotiate with someone who is irrational?" As the executives question reveals, negotiators often strugglewith the task of trying to negotiate with those who behave recklessly, strategize poorly, and act in ways that seem tocontradict their own self-interests, and any would-be negotiation genius needs to understand how to deal with theseobstacles.Our advice is this: be very careful before labeling someone "irrational." Whenever our students or clients tell usabout their "irrational" or "crazy" counterparts, we work with them to carefully consider whether the other side
  23. 23. truly irrational. Almost always, the answer is no. In most cases, behavior that appears to be irrational has arational—albeit hidden—cause. Here, we will share the 3 most common reasons that negotiators erroneously judgeothers as irrational.We will also describe the dangers of doing so and explain how to avoid making such mistakes.Mistake 1: They Are Not Irrational; They Are UninformedAn executive (who is one of Deepaks students) was recently involved in a dispute with an ex-employee. Theemployee claimed that he was owed $130,000 in sales commissions for the work he had done prior to being firedfrom the firm a few months earlier. The executive, on the other hand, claimed the employee was owed nothing—infact, he insisted the employee had been overpaid by $25,000.What was the reason for the discrepancy? At the time the employee was fired, the companys accounts were a mess;records had been kept poorly. Since then, the firm had hired a new accountant and updated all of the records. Theserecords now clearly revealed that the employees claim was entirely illegitimate; if anyone had a claim to make, itwas the firm. The executive was uninterested in going to court to recoup the $25,000 that the firm was owed andwanted to drop the matter entirely.The executive called the employee and told him what the accounting records revealed; he also offered to send acopy of the records. He then made it clear that his case was airtight, but offered to forgive the $25,000 overpaymentif the employee agreed to forgo his groundless suit as well. The employees response: "No way. I dont need to seethe records. Ill see you in court!"The CEO was very confused. There was no way for the employee to win in court. Why was he behaving soirrationally?Deepak suggested to the executive that the problem was probably not that the employee was behaving irrationally,but that he lacked credible information. The executive was convinced that the employee would lose the court battle,but it was possible that the employee was still confident that he would win the case because he did not trust theexecutive or the firms record keeping. How could the executive educate the employee regarding his prospects forwinning in court? Deepak advised him to have an objective third party, specifically a professional accounting firm,conduct an audit of the records pertinent to this dispute and to mail the results to the employee. (This would be farless expensive than going to court.) Having this information would diminish the employees perceived likelihood ofwinning in court and make litigation a less attractive option. What was the result? The employee dropped the suit.When Deepak was in graduate school, an economics professor began his first day of class with the followingstatement: "I want you all to remember something—you are not stupid, you are just ignorant. If you were stupid, wecould not do much about it. But ignorance we can fix." This insight is as relevant to negotiators as it is to graduatestudents. Often, when the other side appears irrational, they are in fact uninformed. If you can help educate orinform them—about their true interests, the consequences of their actions, the strength of your BATNA (BestAlternative to a Negotiated Agreement), and so on—there is a strong likelihood they will make better decisions. Forexample, if someone says "no" to an offer that you know is in her best interest, do not assume she is irrational.Instead, work to ensure that she understands why the offer is in her best interest. She may simply havemisunderstood or ignored a crucial piece of information.Mistake 2: They Are Not Irrational; They Have Hidden ConstraintsIn 2005, the U.S. government passed legislation to increase food aid to countries that were in dire need of suchassistance. There was much support among politicians and activists for this initiative. Not surprisingly, however,there were also certain special-interest groups that opposed this legislation. Heres what was surprising: One of thegroups that voiced opposition was a consortium of nonprofit organizations whose mission it was to lobby for
  24. 24. increase in food aid to disadvantaged countries! What explains such seemingly irrational and self-defeatingbehavior? Why would this group oppose legislation that achieves precisely what it purports to want?The answer lies not in understanding the groups interests but in understanding its constraints. In order to increasethe amount of food sent to disadvantaged countries, the consortium had in the past partnered with American farmersto lobby the U.S. government jointly for greater aid. Why did the farmers join in this campaign? Because when theU.S. government increased food aid, it bought more food from American farmers. As a result, both the farmers andthe nonprofits got what they wanted."The problem was probably not that the employee was behaving irrationally, but that he lacked credibleinformation."This case, however, was different. Mindful of escalating budget deficits, Congress had decided that the only way toincrease foreign food aid was to purchase the food more cheaply—not from American farmers but from developingcountries. What would appear to be a double win for the nonprofits (increased food aid and increased support forpoor farmers in developing countries) instead created a predicament. If the nonprofits supported the legislation, theywould be severing ties with their long-standing coalition partner, the American farmer. Instead, the nonprofitsdecided that their long-term interests were best served by opposing legislation. This may still seem like aquestionable decision on moral, ethical, or other grounds, but it seems irrational only when we overlook the hiddenconstraints facing the nonprofits.The problem of hidden constraints is present in many negotiations. When a firm loses a star employee because itrefuses to raise her salary to match a competitors higher offer, the firm is not necessarily behaving irrationally; itmay instead be constrained by an HR policy that restricts it from creating huge pay differentials in the firm.Similarly, when your counterpart seems unwilling to make even small, reasonable concessions that could seal thedeal, you might tell yourself hes a fool, or you might try to discover how much authority he has to negotiate acomprehensive, value-maximizing deal. If he is heavily constrained, you might try to negotiate with someone whohas greater dealmaking authority.In negotiation, a wide variety of possible constraints exist. The other side may be constrained by advice from herlawyers, by the fear of setting a dangerous precedent, by promises she has made to other parties, by time pressure,and so on. Negotiation geniuses try to discover these constraints—and to help other parties overcome them—ratherthan dismissing others as irrational.Mistake 3: They Are Not Irrational; They Have Hidden InterestsSome years ago, a group of managers decided to promote Leslie, one of the firms administrative assistants. Lesliehad worked for the firm for 30 years and was only 2 years away from retirement. She had performed wellthroughout her career and received salary increases commensurate with her performance. Because she was alreadyat the top of her salary bracket, it was not possible for the managers to pay her more money; nor was she scheduledfor a formal performance appraisal. Rather, the managers simply wanted to do something nice for Leslie, so theydecided to surprise her with a promotion. Her job responsibilities would not change, but the new title would giveher greater status and prestige.When she heard of the promotion, Leslie was delighted. She understood that her salary or job responsibilities wouldnot increase, but that was fine with her.Soon after receiving the promotion, however, Leslie learned that she was among the lowest paid employees with herjob title. She also began to feel uneasy about having a "fake" job promotion—she was doing no more work
  25. 25. receiving no more pay than she used to, and this made her feel self-conscious with her coworkers. She asked for araise and voiced her willingness to accept more responsibilities, but was quickly denied."In negotiation, a wide variety of possible constraints exist."Within a few weeks of her promotion, Leslie decided that she would rather quit her job than be treated this poorly.By doing so, she lost 2 years of compensation and also took a hit in her retirement benefits. The managers, who hadonly the best of intentions, were left asking themselves, "Why did she behave so irrationally?"What the managers failed to appreciate was that money and status were not the only issues of interest to Leslie. Shealso cared about perceptions of fairness and equity. The managers felt they had given her more than she evendeserved. But in failing to see how their decision would play out in the future, they created a situation in whichLeslie felt undervalued, phony, and embarrassed.More generally, people will sometimes reject your offer because they think it is unfair, because they dont like you,or for other reasons that have nothing to do with the obvious merits of your proposal. These people are notirrational; they are simply fulfilling needs and interests that you may not fully appreciate. When others appearirrational, negotiation geniuses do not write them off as crazy. Instead, they investigate: "What might be motivatingher to act this way? What are all of her interests?"But What If They Really Are Irrational?If your counterpart truly is irrational—in other words, he is determined to work against what is in his best interest—then your options will be fewer. You can try to push through an agreement despite his irrationality, you can try to"go around him" by negotiating with someone else with authority who seems more willing to listen to reason (suchas his boss or colleague), or you may decide to pursue your BATNA because his irrationality has eliminated allhope of creating value. You might also leverage the various strategies for confronting your counterparts biases thatwe have outlined in Chapters 4-6.But we suggest—again—that you reconsider your assessment. Negotiators who are quick to label the other party as"irrational" do so at greater potential cost to themselves. When you use the "irrational" label, you limit your options,because there is not much you can say to someone who you truly believe is unable to reason, uninterested infulfilling her own interests, and incapable of negotiating effectively. Your options greatly increase when yourecognize that the other party is not irrational, but simply uninformed, constrained, or focused on interests that youdid not anticipate. And as you know, the more options you have, the more effectively you will negotiate.2. Malhotra, Deepak. (2006). Is Your Counterpart Irrational . . . Really? Negotiation 9 (3).Excerpted with permission from Random House, Inc. Copyright © 2007 by Deepak Malhotra and Max