CREATING VALUE IN NEGOTIATION
After reading part I of the negotiation skills article here, you will realize that most of the negotiation tools covered in the first article tell you how to claim the value of your negotiation. Most people will focus on claiming the value of what is in the negotiation table. However, a great negotiator needs to focus not only to claim the value but also to create value on the negotiation.
This article will discuss more on identifying additional tactics and strategies that should be part of your negotiation toolkit. The additional tactics and strategies will help you to answer complex questions in negotiation such as how should you create value through a multi-issue negotiation; should you negotiate the easiest issues first, hardest issues first or neither; how should you structure your offers; how you should handle sharp differences in beliefs or expectations regarding the value of the deal; what is the role of compromise in negotiation; and what should you do after negotiation.
In a multi-issue negotiation, the best way to deal with it is to evaluate systematically on how well you have done your negotiation. Remember, we do an evaluation not only based on our perspective but also based on your negotiation counterpart’s perspective. As mentioned in the first article, you should have done your calculation first about yours and your counterpart’s BATNA and RV(Reservation Value). It is also the case that multi-issue negotiation is the best moment possible to prove that a negotiation is not a zero-sum game. We could extract more value for each other by reaching the most efficient point of the negotiation.
For instance, imagine you are a film producer and you have two films to release. Many TV stations approached a negotiation with you for your first film. After you meet with a TV station production manager and you negotiate about your first movie, it turns out you also tell the production manager that you will release your other movie shortly. The production manager seems interested in your other movie and wants to negotiate a licensing fee package for both of your movies. From this case, we can learn that if you add issues for your negotiation turns out you can generate more revenue for you.
Adding issues to negotiation is an important tactic for value creation because of a simple formula: more issues = more currency. You could also combine the contingency contracts in this multi-issue negotiation such as a passage on your agreement that the licensing fee is paid if your movie, in this case, reaches some such rating. However, you must remember that the goal of your multi-issue negotiation should be to maximize value.
PREPARATION STRATEGIES FOR VALUE CREATION
In the previous article, we discussed the necessity of assessing your BATNA, calculating your RV, and evaluating the ZOPA before every negotiation. Here are the additional strategies for preparation:
- Identifying your multiple interests, a more effective strategy to prepare for a negotiation is to think about all of the things that you value that the other party might have the ability to provide. Other than the variable you have already agreed to negotiate, try to think additional variables to discuss with your counterpart. For instance, you will negotiate your salary with your boss, try to think of other tangible and intangible benefits to negotiate in the table other than the number of your paycheck. The goal is not to overwhelm the other party with demands, but to give them a lot of different ways to compensate you and make you happy.
- Create a scoring system, identifying issues is only the first step. Next, you need to think about your relative priorities over the many issues. For example, how much are you willing to give up on price to get more favorable financing terms or better delivery date? How do you trade off salary against stock options, starting date, or promotion track? How much would you be willing to give up in salary to work in a specific division of the firm? A scoring system offers a way to organize your interests and priorities so that you can answer these questions efficiently. To create a scoring system, list each issue and weight it according to its importance using a computer spreadsheet program.
- Calculate a package RV, instead of having a reservation value for each issue (“The lowest salary I will accept is $X, the lowest signing bonus is $Y, and the lowest number of stock options is Z”), you should use your scoring system to calculate an overall reservation value. For example, if your BATNA is to accept an offer from Company A, entering the specifics of the offer from Company A into your scoring system will give you the total value (in points or dollar terms) of that offer. This is your package reservation value (PRV). Now, in your current negotiation, you know not to accept any offer that gives you a total value less than your PRV.
- Identify other party’s multiple interests, In negotiation, there often will be issues that you do not care about — but that the other side cares about very much! It is critical to identify these issues. For example, you may be indifferent between whether you start your new job in June or July. But if your potential employer strongly prefers that you start as soon as possible, that’s a valuable piece of information. Now you are in a position to give them something that they value (at no cost to you) and get something of value in return.
Once the talks begin, we have to once again remember that the ultimate goal of the negotiation is to make a win-win deal between parties. Discussing the psychological perspective in the next article part, we focus on the correct approach for executing negotiations so that you create value and reach efficient agreements, while still capturing much of that value for yourself. Here are the strategies during the talks:
- Negotiate multiple issues simultaneously, We often ask seasoned negotiators the following question: when you are involved in a complex, multi-issue deal, which issues do you negotiate first, the easiest or the toughest? Most negotiators respond that it’s best to start with the easy issues. According to this logic, starting with easy issues allows negotiators to build trust and gather momentum toward an agreement; if you start with a difficult issue, you might derail the negotiation from the start. Another benefit of starting with an easy issue is that it allows you to make a low-cost concession early and set the stage for the other side to reciprocate later on issues of more value to you. While this strategy seems reasonable, some negotiators tell us that it is a better idea to start with the tough issues first. They point out that some issues are “make or break” if you can’t reach agreement on them, there’s no point in wasting time on other, less important issues. Finally, the third group of negotiators responds with the seemingly fail-safe answer “It depends.” As it turns out, we disagree with all three responses. While negotiators typically find it more natural (and easier) to negotiate one issue at a time, a much better strategy is to negotiate multiple issues simultaneously. Why? Because negotiating one issue at a time eliminates the possibility of logrolling
- Make package offers, negotiating multiple issues simultaneously does not mean that you must talk about every issue at the same time. It does mean that you should avoid reaching a final agreement on any one issue until you have had the opportunity to discuss every issue. Especially when there are many complex issues to discuss, a particularly productive approach is, to begin with, a discussion of each side’s perspective and preferred outcome on each issue. Finally, when it is time to exchange offers, make package offers. Instead of making an offer or demand on one issue (such as price or salary), propose a package deal that communicates to the other side your preferred outcome across all of the issues.
- Leverage differences of all types to create value, negotiation geniuses understand this crucial insight: you can leverage differences of all types to create value. For example, consider differences in risk preferences. If you are risk-averse and someone else is risk-neutral, you are in a position to pay that person to take on your risk. Sounds funny, right? But that is exactly what an insurance company does. You pay your health, automobile, or home insurance company a premium to cover your losses in case something goes wrong.
A great negotiator does not stop after having created value during the negotiation; they continue to seek out Pareto improvements even after the deal is signed. A powerful tool for value creation is the use of post-settlement settlements (PSS), settlements that are reached after the initial agreement is signed. Why, then, might you propose a post-settlement settlement? First, the already-signed agreement confirms the parties’ ability to work together to reach value-creating deals and creates an environment of optimism. Second, once a signed agreement exists, parties feel less anxious and are often more willing to share information. Third, if presented correctly, both sides will understand that they will only accept a PSS if it improves both of their outcomes.
Keep in mind that you don’t need to have this PSS immediately upon signing the initial deal. You might want to sleep on it. You might even wait a week or a month before revisiting the deal. The key, however, is to realize that your negotiation should not end when the deal is signed — it should end when you feel that you have exhausted all options for value creation.
Great negotiators always construct their questions to get valuable information during the negotiation. Investigative negotiation is both a mindset and a methodology. Investigative negotiators approach negotiations the same way a detective might approach a crime scene: the goal is to learn as much as possible about the situation and the people involved. Here are the key principles for negotiators:
- Don’t just ask what — Ask why. Most negotiators listen are a great listener of what the other party’s interest and a great communicator of what they want. However, the behavior sometimes leads people to miss the most important question, why the other party wants their what. While there was no room for compromise on what they wanted, a clear solution emerged when the focus shifted to why.
- Seek to reconcile interests, not demands. One of the biggest mistakes a negotiator can make is to focus exclusively on trying to reconcile the demands of each party. Investigative negotiators move beyond demands and instead focus on each side’s underlying interests. The key insight: negotiation geniuses are not discouraged when the demands of each party seem incompatible. Instead, they probe deeper to find out each side’s real underlying interests. This strategy allows them to think more broadly and creatively about agreements that might satisfy the interests of both sides.
- Create common ground with uncommon allies. According to the principle of co-opetition, it is possible to simultaneously cooperate and compete with others. The statement deep meaning is that we can create an alliance with our competitor if we have the same enemy or challenge to conquer. For example, there an employee against a director or CEO of the company sometimes loses the power to create or push a decision. But, if the employees (even sometimes they compete to be in such a position) create a union consist of more than fifty percent of the whole employee, the union might have an impact on the decision made by the director or CEO.
- Interpret demands as opportunities. Typically, when facing demands from the other party, negotiators adopt a defensive posture: “How can I avoid accepting this demand?” Investigative negotiators confront demands the same way they confront any other statement from the other party: “What can I learn from this demand? What does it tell me about the other party’s needs and interests? How can I use this information to create and capture value?”
- Don’t dismiss anything as “their problem”. While our constraints are highly visible to us, it’s easy to overlook those of the other party. Negotiators often adopt the attitude “It’s their problem, not mine.” Unfortunately, in negotiation, their problem quickly becomes your problem. For example, if one party faces a deadline, the amount of time available to negotiate diminishes for both parties. Back to the fourth principle, we can see the problem as our opportunities to give something to create more value.
- Don’t let negotiation end with a rejection of your offer. negotiations should never end with a “no.” Instead, they should either end with a “yes” or with an explanation as to “why not”. You may discover that the other side has needs that you simply cannot meet, or that your competitor creates value in ways that you cannot. If so, you can confidently walk away from the negotiation knowing that no deal was possible. But you might instead discover that there were options you overlooked, needs you did not consider, or issues you did not explore carefully.
- Understand the difference between “selling” and “negotiating”. Selling involves telling people about the virtues of the product or service you have to offer, focusing on the strengths of your case, and trying to induce agreement or compliance. Effective negotiating requires this kind of active selling, but it also entails focusing on the other side’s interests, needs, priorities, constraints, and perspective.
All the principles addressed above are required for both parties to create value through negotiation. Usually, either one of the parties is eager to share private information with the other party and keep their card close to the vest for fear that if the other side knows they will exploit that. How, then, can you elicit the information necessary to create value, resolve conflicts, and reach efficient agreements? Here are five strategies for dealing with reticent negotiators.
- Build trust and share information, negotiators are more willing to openly share information regarding their interests, constraints, and priorities when they trust one another. What does surprise us is how rarely negotiators invest in trust-building before, during, and after their negotiations? Negotiation geniuses do not simply leverage trust when it is present; they build trust when it is absent. How you build trust with the other party? understand their speak language, increase the ties that bind, build trust when you’re not negotiating. It’s a matter of relationship, not only the negotiation.
- Ask Questions — Especially if you are surprised or skeptical, Negotiators often do not bother to ask questions because they assume the other party will not answer them. This is a colossal mistake. While there is no guarantee that someone will answer your questions, one thing is certain: your questions are more likely to be answered if you ask them than if you don’t. But asking the important questions is not enough; the real trick is in knowing how to ask them. Ask indirect questions such as what do you plan to do if we can’t provide you with the services you need? rather than what is your BATNA.
- Give away some information, it’s sometimes give and take relationship rather than take and give. Leverage the norm of reciprocity and be the first to give away some information. For example, you might say: “I know we have a lot to talk about. If you’d like, I can start by discussing some of the issues that are most important to me. Then you can do the same. When using this strategy, you must know what kinds of information to share and withhold. First, you should rarely give away your reservation value — and certainly not early in the negotiation.
- Negotiate multiple issues simultaneously, negotiating multiple issues simultaneously is also a great way to get information regarding the other party’s relative preferences and priorities. If you discuss one issue at a time, the other party is likely to treat each issue as the most important one in the negotiation.
- Make multiple offers simultaneously, imagine that you have tried all of the strategies above and the other party is still reluctant to provide the information you need. What you need now is a tactic that elicits information without him even knowing that he is giving it. Try this: Next time you are preparing to make an offer, don’t just make one. Instead, make two offers simultaneously. Specifically, make two offers that are of equal value to you, but that differ slightly from each other. You can analyze which offers the other party more preferred and know their interest. Making multiple offers simultaneously is a great tactic for other reasons as well. Not only does it allow you to discover the interests of reticent negotiators, but it also allows you to anchor more strongly (with two offers rather than one) and to simultaneously come across as flexible.
Negotiation is an information game. Those who know how to obtain information perform better than those who stick with what they know. It is not enough, however, to be equipped with a systematic approach for maximizing value creation and value claiming. In the next part, we delve into the mind of the negotiator and expose some of the psychological traps that can derail the strategy of even the savviest of negotiators.