“Diplomacy is the art of letting someone else have your way.”
– Sir David Frost
What is Negotiation?
Negotiation is a dialogue between two or more parties with the purpose of developing an agreement between parties. A typical agreement involves scope, price, and terms. The scope is what the agreement covers, whether it is a product, service, job, partnership, etc. The price reflects the payment for the scope of the agreement. While terms include everything else, such as the length of the agreement, ways to break the agreement, when to make payments, expected service and quality levels, penalties, delivery options, along with a myriad of other potential terms.
Element #1 – asymmetric information
A key negotiation concept is asymmetric information, which is meaningful information that one party has that the other party doesn’t know. Asymmetric Information can be the needs & interests of a party, BATNA (Best Alternative to a Negotiated Agreement), or how an agreement will affect the economics of a party. Imagine you knew everything in the head of the other negotiating party including their objectives, economics, motivations, lowest acceptable price, skeletons in the closet, capabilities, and their BATNA. If you did, you would easily be able to negotiate the most favorable scope, price, and terms. One of the goals of a negotiation is to reveal as much meaningful information of the other party.
Needs & interests
A negotiation starts with the needs & interests of the parties. In the famous negotiation book “Getting to Yes,” one of the essential negotiation strategies is to negotiate interests rather than positions. An interest is a higher level than a position, such as “we need an efficient HR process,” while a position would be “we need the cheapest HR tracking system.” In exploring the interests and the priorities of those interests of both parties, often “win-win” solutions can be discovered.
Best alternative to a negotiated agreement
Another core negotiation concept is BATNA or the Best Alternative to a Negotiated Agreement. You should never accept negotiation terms that are worse than your best alternative to a negotiated agreement. A key to effective negotiation is the expansion of other options to create a better BATNA. In a supplier negotiation, this translates into opening up the process to other potential suppliers.
As an example, say you are negotiating to purchase your dream house. The price is much higher than you want to pay. In this situation, the next best thing to do is to better understand your options. Here are some options for purchasing your expensive dream house.
Your BATNA is the alternative that you are most comfortable with. In this case, set your floor price at a level where one of these other three options is equivalent or better than buying your expensive dream house. But, understand your BATNA is only the first step. Often the most powerful step is trying to understand what the BATNA is for the person on the other side of the negotiation.
In the case of the dream house, trying to understand the seller’s motivations and BATNA is critical to understanding if they are playing hardball and how far they may be willing to drop the price. Their options for their BATNA could include waiting for another buyer or selling to another buyer that has put in an offer. Asking the right questions will provide a better understanding of their BATNA, including:
• How many offers are on the house?
• How much interest has there been?
• How long has the house been on the market?
• Do the sellers need to move soon?
Understanding the seller’s context and probable BATNA can help you figure out how much room there is for negotiation and help you figure out at what price point do you walk away and choose your BATNA, instead of purchasing the expensive dream house.
One of the biggest pieces of asymmetric information is the economics of both parties. Both parties typically have an “acceptable price range”, that are based on their economics, willingness to pay or accept a price, and BATNA. The more you can understand the economics and “acceptable price range” of a party, the more potential value you can get out of a negotiation. The “acceptable price range” is typically the last thing a buyer or seller would ever reveal, but it is important to acknowledge that if the two ranges don’t overlap, there may not be a possible agreement. That being said, the price is often just one part of an agreement, and flexibility in scope or terms can often make up the difference in a price range gap between two parties. Check out the visual below, which goes over how “acceptable price ranges” influence whether or not a negotiated agreement can be made.
There are many examples of trying to better understand the other party’s economics. At most strategy consulting firms, negotiation and procurement projects often conduct an exercise in “bottom-up costing”, creating an in-depth understanding of a supplier’s cost structure and margins.
Another example of understanding economics is in buying a car. Today, it is easy to go online and figure out the invoice price of a vehicle, reducing the range of potential haggling a buyer typically needs to endure. And, when dealing with a large fixed cost, small variable cost business, such as software as a service (SaaS) platforms, you need to realize that their marginal cost to add another customer is typically minimal.
Element #2 – relationship & communication
A negotiation can be the beginning of a long relationship. It is essential to establish the tone and dynamic of the relationship during the negotiation. Trust and respect should start in the negotiation since they are the foundation of any strong long-term relationship. In a negotiation, trust is about staying true to commitments, acting in good faith, and not lying or attempting to be deceitful. While respect is built by being a strong negotiator, principled and fact-based, and exploring “win-win” solutions.
Negotiation is a dialogue, necessitating communication skills. What to communicate, when and how are tough questions to answer and can ultimately determine the outcome of a negotiation. From a communication standpoint, the first thing to realize is negative emotions are not productive. Blowing up and making a hard stance can shut down a negotiation. The second thing to focus on is how much you are talking versus asking questions and listening. Success often comes from revealing the other party’s asymmetrical information, and one of the best ways to get it is to ask excellent questions and listen.
Element #3 – an agreement
An agreement happens when both parties are satisfied with the scope, price, and terms of the deal. To get to an agreement where both parties are satisfied can take tremendous patience, collaboration, and creativity.
Distributive negotiations assume there is a fixed pie, and the winner and loser are determined by establishing extreme positions, haggling, bluffing and brinksmanship. While integrative negotiation assumes that value can jointly be created and the size of the pie can be enlarged in a negotiation through exploring interests, collaborative problem solving and stretching the thinking to create “win-win” solutions.
I’ve often seen distributive negotiations turn into integrative negotiations, especially around software and IT purchases. It typically starts out with a customer having very specific and often unreasonable requirements for what they want, and they dive into the negotiation with a strict focus on price. Then, if the seller, supplier or vendor has their wits about them, they back up the dialogue and dive into “solution selling” trying to understand the actual needs and interests of the customer. Often, the customer will keep on trying to engage in a focused discussion of price, and keep a hard stance on their requirements. But, inevitably, the conversation flips to one of interests, and how a lot of what the vendor has “out-of-the-box” will exceed the expectations and needs of the customer, with a little configuration here and customization there. Then all of the sudden the conversation evolves from price and requirements to interests and growing the total pie through partnering on solutions.
What are the other best practices with negotiations?
Below are some other negotiation best practices.
Source multiple options
Any significant negotiation can be improved by sourcing multiple options (i.e., Improving your BATNA). Typically, 15-30% of the work is in sourcing 2-5 good options.
When I led the brand agency partnership negotiation for a company, we contacted 50 agencies, used a standard scorecard, and narrowed it down to five agencies to go through the RFP process. Getting sellers or vendors to compete against each other also strengthens the buyers negotiating power. It is effective to break down the various terms of different vendors and work each separate term against vendors. It can be as simple as saying; “I’m in a tough position since one of the vendors was able to give us 60-day payment terms.” With a little silence, the other vendor will typically give the same terms.
Use an RFP and scorecard
Before you get to a formal negotiation, you might want to use an RFP (Request for Proposal) to start breaking down the information asymmetry of vendors or potential partners. In the RFP ask for a vendor’s capabilities, differentiation, and best terms and pricing for different scopes.
Have a game plan
Negotiation is a game between two or more players. In any game, you should have a solid game plan. Download the Negotiation Game Plan (below) to outline your needs, interests, price range, ranked terms and scope, BATNA and relationship & communication strategy. Write down as much as you know about the same elements for the other negotiating party. Then, figure out the significant questions you would like answered by the other party.
Use a reverse auction
If you are sourcing commodity products or have negotiated various suppliers to similar terms, and the decision comes down to price, you may want to use a reverse auction, and have suppliers bid against each other. I’ve seen millions saved by using reverse auctions. Typically, the best practice is to do a blind reverse auction, where suppliers don’t see the bids of other participants, and then once the auction is complete, open it back up for 20 minutes for suppliers to put in one more bid. You can use platforms such as Ariba, Coupa, or SciQuest.
Breakdown the information asymmetry wall
Asking good questions is the key to breaking down information asymmetry. And, they can be simple questions, such as:
o How many customers do you have?
o What has your growth been?
o Which customer has the best pricing? Why?
o What is important to you in this Negotiation?
o What are the big drivers of your economics?
o When does your financial quarter end?
o What are some ways we can work together to come down on price?
Be the first to anchor
In the book Give and Take, the authors dispute the adage not to give out the first offer. They point to research that shows if you are first to anchor with an aggressive offer, the negotiation typically starts to anchor and coalesce around the price and terms of the aggressive offer. So, either anchor or be anchored.
Use the power of reciprocity
Give and take is a useful strategy because people have a propensity to reciprocate. Typically, you want to give up a less important concession and ask for an important concession in return.
Negotiations have a flow, and if the flow can start with agreement then agreement typically continues, given people like to be consistent in their behavior. A tactical strategy is to start the negotiation by focusing on what can be agreed upon and get the “yes” momentum rolling.
Get to yes
The key to integrative negotiations is to be open and creative to facilitate the collaborative problem solving necessary to find solutions to expand the pie. The famous negotiating book “Getting to Yes” outlines four steps. First, separate the people from the problem. Second, focus on interests, not positions. Third, generate options for mutual gain. Fourth, insist on using objective criteria.
DOWNLOAD THE NEGOTIATION GAME PLAN WORKSHEET
To get you going on your next negotiation, download the free and editable Negotiation Game Plan Worksheet.
Next time you have a negotiation do the prep work you need to be successful. Use the Negotiation Game Plan Worksheet to organize your thoughts.
Start with stating the negotiating partner and negotiating topic. Then start listing and rank ordering your needs and interests. Then fill out what you think your partner’s needs and interests are.
Move on to identifying and ranking the desired scope of the negotiation for you and what you think for the other party. Then, go over the most important terms you want and think through your partner’s most desired terms.
Next, think through your target and walk away price ranges. And, codify what your BATNA (Best Alternative to a Negotiated Agreement).
Once you do this, then tackle some of the tactics in the negotiation, including what your communication and relationship development strategies are.
Thinking through your game plan will set you up for a higher probability of success in your negotiation.