Archive for November, 2009

How to prepare for an important negotiation

Sunday, November 22nd, 2009

As I’ve stated in previous posts, preparation is the key to a successful negotiation outcome.  Here are some elements you should prepare before entering into a negotiation:
Resistance point:  A resistance point is the point at which the negotiator will walk away from the table.  This bottom line value of a negotiator may also be referred to as resistance price or reservation price/point.  It is not just a monetary value but a total value assigned to all of the issues for an entire package.  The resistance point is set prior to negotiating while the negotiator is in a rational state and should never be changed at the table because of influence (e.g., intimidation, attractiveness or confidence) exerted by the other negotiator (Galinsky, Mussweiler, & Medvec, 2002).  A negotiator’s resistance point should never be revealed to the other party who will likely push for the deal to close at that point.  Nor should negotiators lie about their resistance point.  If a negotiator continues to entertain discussion beyond a previously stated bottom line, credibility is lost.  Although negotiators may inquire about each other’s resistance point, it is wise not to answer or, instead, give a vague answer (e.g., “My resistance point depends on many factors”) before moving onto another topic.   When negotiating, if there is concern that the resistance point was set in error, it is recommended that a negotiator step away from the table to do more research before changing it.  A resistance point should never be changed at the table and negotiators should not agree to a deal beyond their resistance point.  Many negotiators are resistant to close a deal near their bottom line (but not beyond it) thinking this shows weakness or failure, but it is important to realize that this offer is still better than any alternative to this agreement (see BATNA).  If the other party’s proposal is beyond a negotiator’s resistance point, it is important to tell the other side that a deal cannot be made at the present proposal but allow a face saving way for the other side to re-approach the deal, in case they misstated their resistance point and want to continue negotiating.  The resistance points of the two parties involved in a negotiation defines what is called the zone of possible agreement (ZOPA), the area where an agreement can be made.  Negotiators cannot determine prior to discussion whether a ZOPA actually exists. 

Aspiration point:  An aspiration point is where a negotiator would ideally and realistically like to settle.  Similar to the resistance point, this is also set prior to a negotiation and is based on research.  The aspiration point sets the ceiling to counteract the power of the floor (resistance point).  Setting a realistic but optimistic aspiration point helps parties to work harder to think more creatively to find value in order to achieve their goals (Thompson, 1995).  A common mistake made by many managers, however, is setting the aspiration point unrealistically high.  Those with unrealistically high aspirations will tend to use an opening offer (anchor) that is too extreme, which may lead to distributive behaviors from the other side, reducing the likelihood of a settlement.  In addition, negotiators who realize their error will tend to lose confidence in their requests and dismiss their aspiration point, refocusing efforts toward their bottom line and settling for too little.  When putting a first proposal on the table, negotiators will usually start with a package that is just a bit better than their aspiration point or at their aspiration point. When setting their aspiration point, negotiators should consider the size and amount of concessions they can make without losing credibility, if they need to settle at their resistance point (see concession making). 

Best alternative to a negotiated agreement (BATNA):  The negotiators’ BATNA are the alternatives that are available if they walk away from the negotiation (see Fisher, Ury, & Patton, 1991, for review).  Those with a strong BATNA have increased leverage in a negotiation. If there are several alternative vendors who can supply the same part, the buyer is in a strong position to use leverage.  However, if there is only one vendor who can supply the needed part, the buyer has little leverage and is at the mercy of the other party.  A weak BATNA should never be revealed because the other side can take advantage of it and push the negotiator to his or her resistance point.  A strong BATNA may be revealed as a point of information for the other side, especially if the other negotiators are not realistic in their proposal and need to have their expectations adjusted.  It is important to reveal a strong BATNA as information and not wield it as a threat, which can damage relations.  Instead of threatening to use a competitor’s product which often leads to an attack-defense spiral, negotiators can express concern about the price difference with the nearest competitor and suggest a preference for trying to work out an agreement if possible.   Unless a strong BATNA is specific, it will not be viewed as credible.

Some negotiators claim not to have a BATNA; it may just be a poor one.  Negotiators should always try to strengthen their BATNA prior to negotiating because it can increase their leverage.  A strong BATNA also helps the negotiator to project confidence in a negotiation, another source of power.  The perception of the strength of the negotiator’s BATNA can be just as important as the reality of that strength.  Negotiators that have a weak BATNA can still try to project confidence so that the other party does not realize how weak the negotiators’ alternative is and take advantage of them.  Some negotiators will go so far as to “leak” a strong BATNA by casually talking to others, hoping the information reaches its target, to try to influence the other side’s expectations and aspirations.  Negotiators who believe the other party has a strong BATNA tend to be less optimistic about what they can achieve in a negotiation and are prepared to make more concessions than if they believe the other party has a weak BATNA.  It is useful to try to uncover the other side’s BATNA by doing some research; this information may influence how negotiators interpret the strength of their own BATNA.  Customers may threaten to use their BATNA (e.g., a competitor’s product such as a microprocessor) in an attempt to get a lower price.  However, an outwardly strong BATNA of the customer may actually be weak if it is discovered that the customer would have to redesign their devices (e.g., flat screen televisions) at a great expense in order to accommodate the design differences of the competitor’s product.   

Issues:   Issues are what is to be discussed in the negotiation between the parties.  A common mistake that is made in a negotiation is to overly focus on one issue (e.g., money) which tends to lead parties to take on a distributive approach.  Including additional issues in a negotiation helps the parties to increase value (also known as expanding the pie), allowing for integrative negotiations to occur.  It is important for negotiators to put themselves in the other side’s shoes in order to understand whether there are issues of importance to the other side that may need to be considered.  Value can be created in a negotiation by trading off low priority issues for high priority issues (aka logrolling).   A top priority for the marketing department may be an earlier launch date while the length of duration of hardware support or warranty for end users is a lesser priority. To the engineering department, a shorter duration of hardware support or warranty may be of greater priority than an earlier launch date.  The logrolling solution is to agree to an earlier launch date in exchange for a reduced period of customer support.  In order to logroll, it is very important that both parties have an understanding of the importance of the different issues and communicate these preferences.  A common mistake is to make trade-offs based on a logical association between issues rather than priorities.  Negotiators often try to trade monetary items such as purchase price and royalties although a more optimal solution based on priorities may exchange a monetary value (e.g., purchase price) for a non-monetary value (e.g., contract duration or product labeling.)  Negotiation is not about logic but about satisfying each other’s preferences.  Some preferences of the other party may appear illogical, but it doesn’t matter if it costs little to satisfy these preferences and each side gets something of greater value in return. 

Interests:   Interests are the underlying reasons a negotiator has for holding a position in a negotiation.  A vendor may take an initial position of selling their software application for $65,000.  This is what they hope their customer will pay but a key interest may be to “land a big name client to attract other customers” or “to sell more lifetime licenses” for their product.  Interests can be any underlying need, concern, or desire that the negotiators may have.  Interests need not be rational and can often prevent a deal from being made if they are not addressed.  For example, an agreement may have been reached with a vendor, but a higher level manager may intervene to request an additional concession simply because he or she wants to put his or her “mark” on the deal.  Negotiators tend not to reveal their interests until they feel that they can trust the other side.   It may take some time to build a strong enough relationship so that the other side is willing to reveal these concerns.  The integrative approach to negotiation seeks to identify and address the different parties’ interests as a strategy to achieve mutual gains.

Objective criteria:  A standard or precedent that can serve as a benchmark for legitimizing the fairness of the current offer is called objective criteria (Fisher, Ury, & Patton, 1991).  Competitor prices presented for comparison can be considered as objective data.   Coming to the table with objective criteria can be a source of power, supporting the negotiator’s anchor and making it difficult to refute its legitimacy.  It is important to realize, however, that the selection of objective criteria can itself be subjective.  The competitor’s prices may be for products that contain less expensive features than those offered at your company (and this is not clearly stated on the price comparison data).  Negotiators should always bring their own objective criteria to the table and be willing to question and possibly discount the other party’s objective criteria.

Researching the other party:   It is important to research the culture of the other party’s company, and the other party themselves, in order understand how they may approach the negotiation.  For example, a company may be known in the industry to have a very competitive approach to negotiating.  Knowing this will influence the selection of negotiation strategies that are likely to be effective in dealing with this company and their negotiators.  In addition, it may be useful to search for third parties who may provide information about the other negotiators’ style and values.  A negotiator can use an Internet search to uncover information about the person and others who may know his or her reputation.  A search might reveal that a person is competitive, likes to use ultimatums and gambits, over-talks, or on the other hand is a “nice” person who is “fair” and doesn’t entertain competitor information.  The high-tech world is relatively small and it is easy to find out about another party.  With this in mind, it is important to be aware of your own reputation because while you are researching others, they will be researching you.