Negotiation Skills — Part I

Reference: Negotiation Genius: How to Overcome Obstacles and Achieve Brilliant Results at the Bargaining Table and Beyond — Deepak Malhotra

First of all, I would like to give credit to Deepak Malhotra for publishing this great book about negotiation skills. This book, in my opinion, covers the whole negotiation skills from the basic toolkit to the advanced practice of real-world negotiation.

The book is divided into three parts, which are :

1. The Negotiator’s Toolkit
2. The Psychology Of Negotiation
3. Negotiating In The Real World

However, my stories about negotiation skills are expected to be divided into more than three parts.

THE NEGOTIATOR’S TOOLKIT

In this part, Deepak gives us a great framework that we can use to analyze, prepare for, and execute negotiation we might encounter. The fundamental strategy for negotiation starts with claiming the value of the negotiation. Claiming the value of the negotiation needs a great and strategic preparation so that we do not make a faulty preparation. But, most of the cases, the mistake in the negotiation is not faulty preparation rather than lack of preparation. Most people fail to prepare adequately for a negotiation, hence sometimes make the negotiation more of art without any science. Thus, it is critical to adopt a thorough methodology in preparing to negotiate. This book gives five steps on pre-negotiation phase (preparation phase), which are:

1. Assess your BATNA (Best Alternative to Negotiated Agreement), or “what will I do if the current negotiation ends in no deal?”. Without defining BATNA, it is impossible to know when to accept a final offer and when to walk away to avoid loss in the negotiation. We need to estimate the value associated with each alternative we have.
2. Calculate your RV (reservation value), or your walk-away point in the current negotiation. This value is the range in which you believe that the value of the negotiation should be. For example, for a $50 million offer, you believe that it should be a 10–15 percent increase from that point. Hence your reservation value should be within $55–57.5 million. This range is dependent on your risk appetite and your research. Keep in mind that this range is not based on what you originally paid for the item or the price that you hope to achieve, but the range should be based on your realistic research of the price of your item should be.
3. Assess the other party’s BATNA, after you know the lowest offer you would be willing to accept, you will need to figure out how high a price you will able to negotiate. In other words, you have to know the BATNA of the other party. If the other party’s alternative is more limited than yours, you can have greater bargaining power on the negotiation table.
4. Calculate the other party’s RV, this step is more likely the same as step three, but we need to do a calculation on the value of the RV. The calculation could be based on the fact about the other party’s plan for the item of the negotiation. For instance, if you are negotiating property and assuming that the property will be used for an apartment rather than for an office building, it might be the cast that the other party’s RV is relatively lower.
5. Evaluate ZOPA (Zone of Possible Agreement), after knowing both party’s BATNA and RV, you could evaluate the zone of possible agreement.

Figure 1, ZOPA illustration

ZOPA gives you the lay of the land but tells you little about where exactly the negotiation will end. As a seller, you want to push the value to the maximum point where the buyer is willing to pay. On the contrary, as a buyer, you want to push the value to the minimum point where the seller is willing to accept.

COMMON MISTAKES OF NEGOTIATION

What are the common mistakes of a negotiator :

1. Made the first offer when not in a strong position to do so
2. Made the first offer that was not sufficiently aggressive
3. Talked much, listen less
4. Tried to influence the other party but did not try to learn from the other party
5. Did not challenge the assumptions made about the other party
6. Miscalculated the ZOPA and did not reevaluate the ZOPA during the negotiation
7. Made greater concessions than the other party did

As it turns out, these mistakes are among the most common that negotiators make as they attempt to claim value in a deal. So, the question is SHOULD YOU MAKE THE FIRST OFFER?

Most of the experienced executives said that you should never make the first offer. Letting the other party make the first offer provides valuable information and tells you where they are coming from. But, many executives believe you should always make the first offer; by doing so, they argue, you take control of the dialogue and negotiate “on your terms”. The right answer is ……..“IT DEPENDS.”

The primary benefit of making the first offer in negotiation is that it establishes an anchor. Especially when the other party is uncertain about the correct, fair, or appropriate outcome, they are likely to gravitate toward any number that helps them focus and resolve their uncertainty. Hence, there may be an advantage to making an aggressive first offer in a negotiation. But, when made prematurely, a first offer can be extremely costly. Imagine that your calculation of the other party’s reservation value is too low, you might have a much lower first offer, which stimulates the other party to lower their actual reservation value.

As this discussion suggests, whether you should make the first offer or not depends upon how much information you have. If you believe you have sufficient information about the other side’s reservation value, it pays to make a reasonable (i.e., sufficiently aggressive) opening offer that anchors the discussion in your favor. If you suspect that you may not have enough information about the ZOPA, you’d be wise to defer an opening offer until you have collected more information. In this case, it may even be a good idea to let the other party make the first offer. Notice that a lack of information can also lead you to anchor too aggressively, demanding an amount that might offend the other side and drive them away.

When the other party makes the first move, you become vulnerable to the effects of anchoring.

However, there are several ways you can protect yourself from being overly influenced by the other side’s anchor :

1. Ignore the Anchor, The best thing to do if the other party makes an aggressive first offer — whether high or low — is to ignore it. Do not pretend you didn’t hear it, rather, respond to this effect: “Judging by your offer, I think we might be looking at this deal in very different ways. Let’s try to bridge that gap by discussing it.”
2. Separate Information From Influence, every offer is a combination of information and influence. The other party’s offer tells you something about what she believes and what she wants (information), but it also has the power to derail your strategy (influence). Your task is to separate the information contained in the particulars of the offer (and how it was made) from the other side’s attempt to influence your perceptions. The best way to stave off influence is to stick to your original game plan. If you walked in with a prepared first offer, don’t allow the other side’s anchor to soften it. This does not mean that you should ignore substantial information that changes your beliefs about the actual ZOPA.
3. Avoid Dwelling Their Anchor, many negotiators believe that if someone anchors aggressively, you should push them to justify the anchor, thereby exposing the frivolous nature of their extreme demands. This is a dangerous strategy. Why? Because the more an anchor is discussed in a negotiation, the more powerful it becomes. On the other hand, you do not want to miss out on the opportunity to learn something new about the deal or your counterpart’s perspective. To resolve this dilemma, try the following: if you are surprised by their offer, probe a little to find out if there is any substantive new information that you can obtain. If no such information is forthcoming, quickly shift attention away from the anchor by sharing your perspective and defining the negotiation in your terms.
4. Make an Anchored Counteroffer, Then Propose Moderation. If it is not possible to ignore or dismiss the other party’s anchor, you should offset its influence by making an aggressive counteroffer. In doing so, you retain the ability to capture as much of the ZOPA as possible. However, countering aggression with aggression comes at a risk: the possibility that both parties will become entrenched and reach an impasse. To mitigate this risk, you should offset their anchor with an aggressive counteroffer, and then suggest that you need to work together to bridge the gap.
5. Give the Other Party time to Moderate Their Offer Without Losing Face, if the other party’s initial offer is very extreme — far outside the ZOPA — you may need to inform them that their offer is not even a basis for starting the discussion. This assertion should be followed by information regarding your perspective and a candid invitation to reopen negotiations from a very different starting point. In other words, when reacting to very extreme offers, your foremost goal should be to re-anchor successfully, not to convey your outrage. And re-anchoring successfully often means helping the other side find a way to retract earlier demands and arguments.

Contingency Contract

Suppose you have done everything right: you have identified what you do not know, you have exhausted all sources of information before negotiation, and you have done everything you possibly can to obtain information from the other side. Yet you remain uncomfortable because you still lack certain vital information. What should you do now?

Deepak suggests you use a contingency contract. Contingency contracts are agreements that leave certain elements of the deal unresolved until the uncertainty is resolved in the future. For instance, a contingency contract might state: “The sale will be made at a base price of $46 million, with the condition that if the land is used for commercial development in the next seven years, the other party will pay an additional $10 million.” The moment this clause is included in the agreement, the other party no longer has a motivation to lie because the sale price is now tied. Notice that if the other party is planning to use the land for commercial development, and if Connie wants to keep this a secret, she will likely resist the inclusion of your proposed contingency contract. This could be the tool for you to keep you away from lies and to detect lies.

RELATIONSHIP MATTERS ON A NEGOTIATION

During a negotiation, sometimes we should be comfortable with silence. Many people are uncomfortable with silence, thus, they speak when they should not. A particularly dangerous time to speak is after you have made your offer and the other side is considering it. If the other side seems to be taking too long to respond, negotiators often grow nervous and start bargaining against themselves. Effective negotiators understand not only the power of silence but also the need to be comfortable with it. Just remind yourself that if you speak when it is their turn, you will be paid by the word.

Many people also think that negotiation is a zero-sum game, which is a game one party should win and the other party should lose. The reality is not always like that, in a negotiation, the ultimate goal that should be achieved is to make both party gain and win more. Whether the relationship is strengthened, weakened, or destroyed in the negotiation does depend on how satisfied each party is with the outcome. With this in mind, negotiation geniuses not only manage their own outcomes, but they also manage the other side’s satisfaction. What we want you to keep in mind is that you always have two distinct goals in any negotiation: to get a good deal and to strengthen your relationship. Ignoring either one can be disastrous.

To maintain a good relationship in a negotiation, if your counterpart gives you the first offer and you love it, you should not immediately agree to the offer. This might make your counterpart think that they are losing a lot because of the miscalculation of the lack of preparation. There are two approaches to deal with this kind of situation, whether to play hard (argue and try to make more money from your counterpart) so that the counterpart thinks the deal is good or to play nice (giving more than your counterpart expected) so that the counterpart thinks getting more from the deal. However, remember also to think that it might be the case that you are the one who miscalculation. In case you are doubtful, it is critical that you stop and ask yourself: “What do they know that I don’t?” and challenge your assumption through mindful questions.

In this part, we already discuss about claiming value on the bargaining table. But, the most important thing a negotiator should do is beyond claiming value, which is how to create value through negotiation. We will discuss how to create value in the next part.