BATNA – No deal options Chapter 6

BATNA – No deal optionsChapter 6

• A comparison of your options, your best option might be walking away.

• For example using another supplier, making something yourself, going to court etc.

• Perception and reality of BATNA play a key role in most negotiations.

• Often not given enough time by negotiators.

BATNA

1. Use your best BATNA and that of the other parties to find a ZOPA (Zone of potential agreement)

2. Make sure the other side sees you as able to walk away.

3. Protect your BATNA4. Consider worsening your BATNA in carefully

selected circumstances5. Use your understanding of BATNAs to understand

if negotiation can change things.

BATNA

• ZOPA means the set of possible agreements that is better for each side given its interests than their BATNA.

• Sellers minimum is lower than buyers maximum.

• Joe will sell his house for a min of $200,000 and Mary will buy it for a max of $250,000

ZOPA

• Let's assume that you're preparing to negotiate the sale of your car to a possible buyer, John. John is the only person who responded to an ad that you posted a week ago. You need at least $4,000 from the sale to finance the purchase of a truck that you have ordered. You want to keep your car for three more weeks, which is when the truck will arrive. The reasonable value of the car is $5,000. You've done a lot of research on this. You've looked at a lot of online calculators in coming up with this value. If you can't find a buyer willing to pay at least $4,500, you'll sell the car to a friend, Mary for 4,000. You know that Mary will let you keep your car for the next three weeks.

Question

1. What's your overall goal in reaching the negotiated agreement with John?

2. What issues are most important to you in reaching that goal?

3. What is your best alternative to a negotiated agreement?

4. what is your reservation price? (The lowest price That you will accept)

5. What is your most likely price? What's a reasonable price that you would be happy with?

6. And then finally what is your stretch goal?

Questions

• Negotiation research shows that the people who select the largest stretch goal Are the most successful in negotiations overall.

• If the stretch goal is completely unreasonable people might walk away from the deal.

Stretch Goal

1. Sell the car. 2. Price is an important issue and the reason

is that you need the money to buy a truck. The transfer date is important, because you need the car in the next 3 weeks.

3. Selling the car to your friend, Mary4. 4,500. 5. 5,000.6. 6,000.

Answers

• Johns reservation price is 5,500. • Reasonable price is 4,500 • Stretch goal is 3,500. • What two numbers is the zone of potential

agreement between?

ZOPA

• What if John needs the car immediately? How can you respond?

• Ask why?• Focus on his interests and maybe you can

meet those interests e.g. give John a ride to work every day.

Finding agreement

• A decision tree is a very useful tool in doing the BATNA analysis and making all sorts of business decisions.

Decision Trees

• Your company has sued a supplier for $4.6 million. There's a 50-50 chance your company will win. Future legal and other expenses to litigate the case total $400,000 which you will not get back. During negotiations, the defendant has offered to settle the case for two million. Should your company accept the offer?

Example

Choice

Litigate

4.2

-.4

Settle

2

Decision Tree

• Should you acquire Company A, which has a $21 million value, or Company B which has a $15 million value. The price is the same for both companies.

• If you acquire Company A, there's a 90% chance the government will challenge the acquisition, and a 60% chance the government will win. If the government wins, a value of A drops to 14 million because of legal fees plus sell-off costs. Even if the government loses, the value drops to 19 million because of legal fees. Where as if you acquire company B, there's not going to be a government challenge.

Decision Tree

Choice

A

GC

Win

Lose

No GC

B

No GC

Decision Tree

Choice

16.5

.9*16

.6*14

.4*19

.1*21

15

Decision Tree

• By understanding the other sides no deal options the ZOPA can be extended.

• Example of Japanese company buying 2/3rds of a US company.

• There were no good external options for the deal for the Japanese and negative internal options. The company had much cash.

• The US negotiators pushed for and got a higher price than they expected.

The other sides no deal options

• On some occasions your willingness to seriously consider no-deal options may be harmful e.g. an employer who likes loyalty.

• This could be viewed as a threat and lead to escalation.

• In most circumstances developing attractive outside options and showing a willingness to use them can help you to improve your results in negotiations.

Make sure they believe you can walk away

• “ If you can walk away you can’t negotiate.. He who cares least, wins”.

• The other sides observation of your calm readiness to walk away can be an advantage.

Make sure they believe you can walk away

• “ You would never do a deal without talking to anyone else. Never.”

• “Whenever we feel there’s a possibility of a deal with someone, we immediately call 6 other people”

• Adding another interested party at the start of the negotiation can be much more effective than having a better negotiating skill alone.

• It can help to change the perception of the other side and your self-perception.

Make sure they believe you can walk away

• Company A biggest and B next biggest Company C next biggest and D smallest.

• If company A buy company C then company B is left with a negotiation to but company D with no no-deal option.

• So company B should act first and approach company C for negotiations on a merger.

Improve no-deal options

• Edgar Bronfman was negotiating on behalf of survivors of the holocaust with Swiss banks

• The Swiss banks believed that all legal issues had been settled years before so had a strong position,

• Bronfman formed a “coalition of interests” away from the table which threatened the interests of the banks.

• The banks conceded and paid $1.25b.

Improve no-deal options

• Avoid actions which can accidently worsen your no-deal options.

• You can make a bargain which could worsen them.

• For example a Canadian company which needed cash quickly agreed to a nine-month period of exclusive negotiating rights with an Australian company.

• They had no credible alternative and accepted a not generous deal.

Protect your no-deal options

• This can be risky e.g. retreating armies burning bridges so troops had to fight.

• Companies can worsen their no-deal situations to bind themselves into staying with a deal.

• AT&T and BT made a deal with no exit options in the contract.

• The enterprise was unsuccessful and there was a messy break up.

Under special circumstances consider strategically worsening your no-deal options

• The closer the situation becomes to costless dominance or a perfect market the less important the role of negotiation becomes.

• For example in the currency market there a a large number of buyers and sellers so a no deal option is the market price.

• The opposite situations have more potential for negotiation, the closer the power of the parties and the more imperfect the market.

Use the no-deal options to decide the role for negotiation

• No deal options are just one part of a negotiations set-up.

• We can find a ZOPA by understanding no deal-options

• As no-deal options can be a source of power improving your no-deal options and worsening those of the other side can influence the outcome of the negotiation.

• The advanced negotiator looks at the value of the time spent on moves away from the table compared to time spent on interpersonal tactics at the table.

Summary

Get the parties rightChapter 4

• Who could be potential interested parties when buying a car?

Question

• You• Sales Rep• Sales Manager• Spouse• Kids• Other Dealers

Answer

• Interested parties may not be obvious and if you can’t indentify them correctly you could have some problems.

• Who is missing from the table?• Who shouldn’t be there?

Interested parties

1. Does the map include the highest-value players, to ensure that your deal can create the greatest possible value?

2. Does the map include the full set of potentially influential players, including those who may be part of the “informal negotiation”?

3. Does your map identify potential blockers (as well as potential allies), does your all-party map include those involved in the internal decision making and governance processes?

Parties Mapping

4. Does the map pinpoint agents or representatives who may have the wrong incentives and the ability to shape the decisions of other parties by distorting or selectively providing information in a self-serving way?

5. Does the map anticipate potential negotiations with those who must approve the deal?

6. Does your all-party map take account of those who must implement the agreement?

7. Are too many parties unnecessarily complicating the negotiation?

Parties Mapping

• We often look too narrowly, mainly to familiar circles, in determining the parties with whom we should negotiate

• “Who might value this deal the most, and is that player part of the negotiation?

• The player could be external or inside the company you are talking to.

High value players

Adding a party

• You can find and nurture an influential internal champion elsewhere on the other side—one who really understands and benefits from the deal.

• It’s the uniquely high value that you offer to the champion—value that is potentially at risk if there is no deal—that gives the internal high-value player a stake in the success of the negotiation.

Internal Champion

Internal Champion

• A great salesperson seeks to identify and win over the ultimate decision makers, who may be different from those at the table.

• An informal negotiation can overshadow the formal one.

• You should be on the look out for parties who may not be signing the contract but have influence.

Have you mapped all the potentially influential players?

Have you mapped all the potentially influential players?

• While favorable overall economics are generally necessary for a deal to succeed, they are often not sufficient, given the range of interests that may matter.

• Keep all potentially influential internal players on your radar screen—especially those who may wield blocking power. Don’t lose sight of their interests or their capacity to affect the deal.

Have You Included Those Involved in the Decision-Making and Governance Processes?

• If you have skilled and informed agents faithfully representing you, and they will make negotiating choices that are exactly aligned with your interests.

• The reality of agency often departs from the ideal.

• Try to understand the agents relationships, their interests, and their ability to filter Information and shape decisions away from your direct scrutiny

Have You Mapped Influential Parties with the Wrong Incentives?

Get all the Interests RightChapter 5

• Define Interests?

Question

• Whatever you care about that is potentially at stake in the negotiation.

• Your interests are why you’re involved in this negotiation in the first place.

Answer

1. Whatever each party cares about that is at stake is an interest.

2. Make mapping interests—yours and theirs—a central priority.

3. Don’t let price overshadow a potentially richer set of interests.

4. Don’t mistake bargaining positions for the richer set of underlying interests.

5. Ask, listen and probe.

Get the interests right

6. Use standard public sources to map interests.7. Use internal sources.8. Use knowledgeable advisers 9. Be aware of unconsciously skewed perceptions: the mythical fixed pie, self-serving role biases, and partisan perceptions.10. Take deliberate steps to counteract the psychological mechanisms that can unconsciously change interest perceptions.

Get the interests right

• Negotiators often fail to sort out the truly “must-have” from the “important” and from the “desirable but not critical.”

• The best negotiators are very clear on their ultimate interests but know their trade-offs among lesser interests and are remarkably flexible and creative on the means of advancing

• Perfume supplier - amount of space allocated to the line, the desirability of the location on the sales floor, their look, cost-sharing on special promotions.

Make mapping interests a central priority – Your Interests.

• Your counterparts will say yes for their reasons, not yours.

• What do you need to understand about your counterpart e.g. their competitive challenges, before you can strike the best possible deal with them?

Make mapping interests a central priority – Their Interests.

• What are these people really trying to accomplish with this deal?

• What is their current strategy and how would this deal fit in? • Who is taking the lead? • What is this person (and her team) like, and what’s their

negotiating history?• How will this deal affect their status, compensation, and

future prospects? • Who else is paying special attention to the deal? • Who will have to approve it?

Make mapping interests a central priority – Their Interests.

• Student A is given an imaginary $100 to divide with student B as she likes.

• Student B can disagree with the arrangement and neither student will get anything.

• Can you negotiate an agreement?

Pair work

• People tend to care about much more than the monetary part.

• Relationships – North Vs South and East• The Social Contract – Resolving conflicts• The Negotiation Process - Respectful• Ethics - Reputations

Don’t let price overshadow a potentially richer set of interests.

• “Focus on interests, not positions.”• Issues are the things that are on the table and up

for direct discussion.• Positions are the negotiating parties’ stands on

those issues.• Interests, as we’ve noted earlier, are whatever you

or your counterparts care about that is at stake in the process.

• Compatible interests often underlie incompatible positions

Don’t mistake bargaining positions for the richer set of underlying interests.

A•Issue•Position•Interest

B•$100,000•Base Salary•Job security

Question

• If unsure of other sides interests an exploratory meeting can be set up.

• You could invite them for an informal dinner.• Direct communication can work wonders• E.g. Sales rep whose bonus was based on

new contracts.

Ask, Listen and Probe

• Internet searches often give you a good, even nuanced, understanding of people, companies, and industry contexts.

• Newspapers digital archives, Annual reports, 10-Ks, Analysts’ reports, can provide a useful outsider/insider perspective

Use public sources to map interests

• Sources who have personal experience in dealing with your prospective counterparts

• Whom do you know who has already negotiated with these people?

• What do they know about the other party’s concerns, preferences and hot buttons?

• A friendly lunch can yield enormous insights.

Tap Internal Sources

• Lawyers, accountants, investment bankers, or industry consultants.

• Ask in detail about their relevant industry experience and familiarity with your potential negotiating counterparts.

• Who on the other side is likely to be reasonable, and who is likely to be unreasonable? To what kinds of arguments are they receptive?

Tap Knowledgeable advisors

• Have an arm wrestle with your partner.• If you touch the table with your partners

hand you get 1 point.• How many points can you make in 15

seconds?

Activity

• The Mythical “Fixed Pie”• people cling to the perception of underlying

conflict, even where their real interests are compatible.

• Self-Serving Role Biases• Partisan perceptions

Psychological Traps

• Knowing that such mechanisms exist can help in specific situations.

• It is useful to seek the views of outside, uninvolved parties who are not caught up in the dynamic.

• Prepare the argument for the other side.

Counteract physcolical mechanisms

Chapter 7 Sequence and Process

1. Scanning widely to map the range of potential parties as well as the relationships among them.

2. “Mapping backward” from the target (more promising) game to the current (less promising) situation.

3. Carefully orchestrating the stages of reaching the target setup, which calls for: Decisions on which parts of the process should be separated or combined, public or private.

Sequence

• It’s helpful to think in terms of a “value net” which may extend beyond the immediate confines of the negotiation.

• Who outside those confines might value an aspect of a deal the most? Who might minimize the costs of production, distribution, risk-bearing, finance, and so on? Who might supply a piece that’s missing from the current process? What devices might bring these potential value-creating parties and issues into the deal?

Scanning Widely and Mapping Backward

• Sometimes the answer to “who first?” is perfectly obvious. But in more complex situations, it often helps to focus on an interim “target” negotiation and map backward from that target to the

Scanning Widely and Mapping Backward

Scanning Widely and Mapping Backward

• As you scan for sequencing purposes, pay attention to the relationships among the players you’ll be dealing with.

• A common problem for a would-be sequencer is that the most critical party can be the most difficult to approach.

Scanning Widely and Mapping Backward

• Bill Daley, President Clinton’s key strategist for securing congressional approval of the North American Free Trade Agreement

• Daley’s response: make more calls, and in specific directions. “Can we find the guy who can deliver the guy?” he’d ask his aides. “We have to call the guy who calls the guy who calls the guy.”

Scanning Widely and Mapping Backward

1. Start with the endpoint and work back to the present to develop a timeline and critical path.

2. Next, you focus on the most-difficult-to-persuade player, who is either the ultimate target or is otherwise critical to the deal. whom would you ideally like to have on board when you initiate negotiations with the target?

3. How will you get that party on board? What would make it easier for him or her to say yes

4. Finally, continue mapping backward in this fashion.

Backward mapping

• We had no choice but to do it secretly and to do it quickly . . . There were no lawyers, no auditors, no environmental investigations, and no due diligence. Sure, we tried to value assets as best we could. But . . . we were absolutely convinced of the strategic merits . . . Why the secrecy? Think of Sweden. Its industrial jewel, Asea—a 100-year-old company that had built much of the country’s infrastructure—was moving its headquarters out of Sweden . . . I remember when we called the press conference in Stockholm on August 10. The news came as a complete surprise . . . Then came the shock, the fait accompli. [Then] we had to win over shareholders, the public, governments, and unions

Separate? Together? Public? Private? Framed How?

Revealing What Information?

• Getting Dad to say yes (“since Mom said OK” [untrue]) and then scurrying to Mom in the other room asking for permission (“since it’s OK with Dad” [also untrue: Dad’s OK depended on Mom’s]). By the time the parents get around to comparing stories, Junior has already left with the car

Separate? Together?

• Influencing whether a related negotiation happens before or after one’s own negotiation—as well as whether its results become public—can greatly affect outcomes. For example, while the United States was in separate talks with Japan, Hong Kong, and Korea over textiles a Korean negotiator announced that Korea would wait for the other Asian negotiators to go first. “After waiting for Hong Kong and Japan to go first,” one observer reported, “Seoul asked for the features they had secured and then got some more”.

Separate? Together?

• Alternative dispute resolution – Mediation and Arbitration

• Decide, Announce Defend• Full consensus

Process

• Corporate pledge • Screens• Contract clauses• Online dispute resolution• Arbitration• Mediation

ADR

• In the event of a business dispute between our company and another company which has made or will then make a similar statement, we are prepared to explore with that other party resolution of the dispute through negotiation or ADR techniques before pursuing full-scale litigation.

• Reactive devaluation. If you're in the middle of the dispute and you come to the other side and you say, well let's try going to mediation to, to resolve the dispute, your proposal might be devalued by the other side.

Corporate Pledge

• Screens are basically a list of questions designed for people in business non-lawyers, and based on the answers to those questions, the screen will advise you, for example, whether to use a binding ADR process or a non-binding process

Screens

• What do we mean by binding processes? And what do we mean by non-binding processes?

Question

• One possibility is to simply state in the contract we agree to go to mediation in the event of a contract dispute. And if the mediation fails, then we will move to arbitration

Contract Clauses

• Less effective however it's cheaper and more convenient

• E.g. Landlord bills me and my roommates for damages we didn't cause, broken window, broken screen, we live in a bad neighborhood. The landlord insists we caused the damage and then it had to be us so we got basically a dispute between landlord and tenant.

Online dispute resolution

• Arbitration is in a lot of our every day transactions. That's the fine print, that you and I never read when we sign up for a service.

Arbitration

• What we have here is a dispute between the owner of some real estate, and a contractor. The owner hired the contractor to build a building, problem is, after the construction started, the owner made some design changes. And as a result, the contractor is claiming an additional $55,000. Also there's a subcontractor involved, who did some plumbing work hired by the contractor, who also had to make changes and these cost an additional $95,000. So the owner has refused to pay, and this matter is now in arbitration.

Video

• If you were the arbitrator, how would you decide the case?

Question

• Facilitative - the goal of the mediator is to facilitate conversation, discussion, and negotiation between the two sides to reach a settlement.

• Evaluative - the mediator would do the same thing except also would be asked to give an evaluation of the mediation to provide certain expertise

• Transformative - to transform the relationship between the parties to give especially one party who might lack power, or who might lack a voice, more of a chance to express his or her feelings

Mediation

• The US Postal Service -800,000 employees• In 1997 they had 14,000 formal complaints with the

Equal Employment Opportunity Commission. • In 1998 they started to use transformative mediation for

these complaints.• They resolved over 17,000 informal disputes. They had

a 30% drop in formal complaints. They saved millions of dollars in legal costs and improved productivity, and 90% of the disputants 90% were satisfied with the process

Transformative Mediation

• A female employee, she's a letter carrier, files a complaint against her supervisor claiming that he addresses her by her route number instead of by her name.

• In transformative mediation and she's allowed to express her feelings, the parties realize that he addresses every letter carrier by route number. He had no clue that people found this offensive. He started greeting people personally, apologized for the past conduct, and the employee withdrew the complaint.

Transformative Mediation

• This is a dispute between a company called Compuplast and PM Limited.

• Compuplast has agreed to provide Robotics Software to PM Limited.

• However, it looks like the delivery date will be delayed. And PM Limited is very upset, because PM Limited produces door handles for the auto industry. And if they don't get this Robotic Software, they're going to lose a lot of business.

• So they cancel their contract with Compuplast and both sides have threatened to sue

Video

• How does mediation differ from negotiation?• What type of mediation is involved in this film

clip, is it evaluative, facilitative or transformative?

• How would you rate the mediator on a scale of one to ten?

Video Questions

1. The mediator uses a caucus where she met privately and confidentially with each party, to find out whether they had any private concerns, or private interests they did not want to express to the other party. She can try to control the emotions of the parties2. Facilitative3. Active listening, suggesting options to consider and reality testing

Answers

Case Study George Mitchell In Northern Ireland

• Aim to make an agreement to the British and Irish governments and eight political parties of Northern Ireland.

• 22 months of protracted discussions capped by an intense 6-day negotiating marathon to end the violence in Northern Ireland.

Intro

Sides

• In the fall of 1995, the British and Irish governments formally created the International Body on Decommissioning of Weapons to study the problem and the process of decommissioning.

• The governments felt that Mitchell would be fair, impartial, and acceptable to all parties in his dealing with the delicate issue of decommissioning.

Starting point

• Mitchell, Holkeri, and de Chastelain met with dozens of party leaders and government officials for six weeks.

• They worked long hours listening, taking notes, and devising the outline for their final report.

• Stepping outside their mandate, the chairmen also gathered information on a widevariety of issues, including language, flags, anthems, prisoners’ rights, discrimination, and the role of the police force.

Starting point

• The British government and some of the unionist parties insisted that the paramilitary organizations would have to give up their arms before the political parties with which they were associated could enter any negotiations.

• The political parties linked to the paramilitary organizations on both sides insisted that there could be no disarmament until after the negotiations were completed and an agreement reached

• The Irish government and the largest nationalist party, the Social Democratic and Labor Party (SDLP) wanted disarmament but feared that making it a precondition to negotiations would mean that there would never be any negotiation

Positions on decommissioning

• “We were convinced that prior decommissioning was unworkable…What could we recommend in its place that

• would provide the unionists with enough reassurance to enable them to enter into negotiations.

• They slowly began to consider the idea of “parallel” decommissioning, a strategy that had recently worked in El Salvador

Creative Solutions

• “At the heart of the problems in Northern Ireland is mistrust,” stated Mitchell, “Each (community) assumes the worst about the other. If there is ever going to be a durable peace and genuine reconciliation, what is needed is the decommissioning of mindsets. That means that trust and confidence must be built,over time, by actions in all parts of society.”

Creative Solutions

• Mitchell decided the best hope for progress would be to cancel the plenary sessions scheduled for the next two weeks. Instead he substituted a series of meetings in bilateral form, where the parties met and discussed the agenda and the rules of procedure, but only in small groups.

Process

Agenda

• All of the parties agreed that a logical next step should produce a document that identified all of the key issues for resolution.

• “Only when all of the issues were seen together could the parties get a sense of where the necessary compromises might be made.”

• Policing, prisoners, a civic Forum, Decisionmaking methods, safe-guards, and decommissioning.

Compromise

• I am pleased to announce that the two Governments, and the political parties of Northern Ireland, have reached agreement. The agreement creates new institutions: a Northern Ireland Assembly, to restore to the people the fundamental democratic right to govern themselves; and a North/South Council, to encourage cooperation and joint action for mutual benefit. It deals fairly with such sensitive issues as prisoners, policing, and decommissioning…This Agreement proves that democracy works, and in its wake we can say to the men of violence, to those who disdain democracy…your way is not the right way. You will never solve the problems of Northern Ireland by violence.

Agreement

• “Signs of chemistry became evident as parties and personalities got back to each other‘s points or ideas in other than negative tones.”

• Parties canvassed their various proposals, concepts and models but, more importantly, they explored each other’s ideas, seeking further explanations or offering explanations for their own reservations or objections.

Compromise

• Possible viewpoint of some trial Lawyers• ADR (alternative dispute resolution) stands

for alarming drop in revenue.

Litigation

• A decision is made on the project, and its characteristics and private terms are negotiated with those who must formally approve the deal. Then it is announced. If opposition arises, the contracting parties defend what they have done.

• aims at generating a comprehensive, detailed, legally binding, and permanent deal. This agreement, with recourse to the courts or binding arbitration, is expected to govern the details of the relationship.

Decide, Announce Defend

• Stone Container Corporation, then one of the world’s largest paperboard entities, used a DAD approach on a forestry initiative in the La Mosquitia region of Honduras.

• Stone executives negotiated quietly with the new president and his ministers, arriving at an agreement that, at the president’s request, was kept secret until the implementing regulations could be finalized.

• Leaked versions of the supposed agreement identified a huge tract that had been earmarked for logging by Stone (over a very long time frame).

• International activists from the Rainforest Action Network (RAN), along with other environmental and indigenous peoples’ advocates, rose in protest.

• On the eve of major protests in the capital city, the president unexpectedly withdrew his support.

DAD Example

• Seeks agreement among the full set of stakeholders.

• Stakeholder – Anyone who has an interest in the result of the negotiation, e.g. employees, NGOs, Government.

• Seeks a framework document with the key terms fixed, but often with a built-in expectation of continuing adaptation and possible renegotiation in the face of specified (or even unanticipated) events.

Full consensus

• Conoco’s effort to build consensus for its environmental management plan (EMP) for oil extraction in Ecuador’s Oriente region.

• Conoco sought to draw together a diverse set of stakeholders for a four-day meeting on a floating hotel on the Rio Napo.

• These groups voiced deep skepticism about Conoco’s real motives, and that consensus-building effort rapidly degenerated into suspicions and recriminations.

• Conoco then tried to negotiate an agreement with “moderate” environmental groups. Leaked minutes of these Conoco-NRDC meetings generated even greater controversy among stakeholders.

Full consensus Example

• Stone Container undertook another forestry project in Costa Rica using a stakeholder process but this time it was hosted by the government.

• Its Costa Rican talks included stakeholder groups, but only as advisers to the ultimate decision makers in government.

• While this project also attracted protesters, the process generated enough support that Stone could move forward with a version of the project, which was widely hailed.

Hybrid Process Example

• Auspices – Who controls the process• Mandate – Who is making the decision• Participation • Decision rules – Sub-groups, Consensus• Agenda – Who deals with what issues• Staging of process• External communication• Post deal arrangements

Important design choices

• Will ADR be involved• Will we have a DAD or FC approach• We should use the checklist for process

design. You should decide whether to impose your preferences or leave some things to happen naturally.

Process Choice Summary

Agents and EthicsWebsite Week 2

• There's probably no other situation in business or in life that will challenge your ethical standards like a negotiation.

• There are a cluster of standards that are based on legal principles.

• There are general ethical standards that go beyond the law.

Law and ethics

• Sometimes the law has nothing to do with ethics - the law in England says that you have to drive on the left hand side of the road.

• “Thou shalt not kill” is a moral principles around the world, and it is also a legal principle.

Law and ethics

• Fraud, which is defined as false representation of a material fact that is relied on by the other side.

• Fiduciary duty, which is a high duty of trust and loyalty.

• Unconscionability, and that is conduct that violates principles of good conduct.

Ethical Standards

• Would you ever deliberately lie during a negotiation?

Question

• You have offered to sell your house for $300,000 to the buyer. Let's also assume that your reservation price is $250,000. That is, you would be willing to sell it to the buyer for as low as $250,000. During the negotiation, the buyer asks you, are you willing to sell your house for $250,000? And you say to the buyer, no, absolutely not. Now, have you committed fraud?

Question

• It is not fraud in the legal sense of the word. • False representation, you've lied. • Material fact, • It’s not a kind of representation that is relied

on by the other side. No buyer in this scenario should rely on your statement that you're not willing to change on price.

Answer

• A real estate developer hired an agent, and asked the agent to try to find a $10 million loan for a real estate development. The real estate developer, by the way, promised to pay a $50,000 commission to the agent for coming up with the loan. The agent was successful. The agent went to an insurance company and arranged for the $10 million loan. The insurance company was also very happy and decided to pay a finder‘s fee to the agent. So the agent then went to the developer and said, okay, I'm ready for my $50,000. And the developer said, I decided not to pay you. Now, what would be the logical result in this case?

Question

• The court decided, that the agent was not entitled to the $50,000 commission because agents owe a fiduciary duty to their principals, in this case the real estate developer. And by accepting payment from the other side, the agent breached this fiduciary duty. The agent was being paid by both sides. Whereas the duty of loyalty should have been only to the real estate developer

Answer

• If you're an agent or in the position of the agent and this situation arises, how could you arrange to be paid the $50,000 and also be paid the finder's fee?

Question

• Before accepting the finder's fee, he could have gone to the developer and explained the situation and asked permission to receive the finder's fee.

• The agent could have acted as a true finder. In other words, not be an agent for either party, which involves a fiduciary duty.

Answer

• Are these deals ok?• You bought a farm from a farmer and the

mineral rights from the farmer without disclosing the discovery you made of the gold on the farm.

• You bought stock in a mining company you are working for from another shareholder without disclosing the discovery of the gold

Question

• You're dealing at arms length with the farmer, and there's no general duty.

• because you're an employee of the company. You are buying stock from one of the company owners. You owe a fiduciary duty to the company. It violates insider trading laws.

Answer

• Procedural unconscionabilty - Does one party have an absence of choice because of unequal bargaining power?

• Substantive conscionabilty - Are the terms of the contract unreasonable?

Unconscionabilty

• I make a contract to give you 10 dollars for 20 dollars. Is this a legal contract?

Question

• Organizational standards. (If your employer has a Code of Conduct, does it provide standards for your negotiations?)

• Someone you admire. (What would someone you admire do in your situation?)

• Family test. (How would you feel when describing to your family what you did during a negotiation?)

Voluntary Ethical Standards and Guidelines:

• Newspaper test. (How would you feel if a newspaper article in the local paper described what you did during a negotiation?)

• Golden Rule. (Treat others as you want to be treated. Keep in mind that fairness is very important to the other side.)

Voluntary Ethical Standards and Guidelines:

• The J & J Credo. We believe our first responsibility is to the doctors, nurses and patients, then to mothers and fathers and all others who use our products and services. Such as the injured parties.

• After a poisoning, Johnson & Johnson decided to recall 31 million bottles of Tylenol, which resulted in a $100 million loss.

Organizational standards

• doing onto others, as you would have them do unto you. Treating others as you want to be treated. Treating other people fairly.

Golden rule

• Attorneys often her from their clients, I want to sue that company. They treated me unfairly. And the attorney tries to point out, this lawsuit's going to cost a lot of money.

Fairness

• Warren Buffet decides to buy a $23 million company from Wal-Mart.

• Typically there are a lot of transaction costs. Millions of dollars in legal and accounting fees.

• In this case, all of that was avoided and Buffet concluded the negotiations with a two-hour meeting and a handshake.

• He trusted Wal-Mart,

Financial benefits of trust

• Which voluntary ethical guideline do you like. why?

Question

• Select one or more, of the general ethical standards, to use for guidance when ethical issues arise. Sometimes when ethical issues arise, it's tough to select a standard in the heat of the moment. So try to adopt one or more of these standards in advance

Summary

• Should you use an agent to negotiate for you?

• Should the agent be a secret agent?• We should find out how much authority the

agent has.

Agents

• Let's assume that you are a baseball superstar. You've just graduated form college and you're about ready to negotiate a contract with a pro team. If you hire an agent your fee is going to be probably 3% of your earnings. And so the question is should you negotiate with an agent, or should you negotiate on your own with probably some help from, from your friends or relatives? What are the factors you should consider in deciding whether to negotiate on your own or using an agent?

Question

1. Is the agent a better negotiator than you.2. Does the agent have more experience in

negotiating the kinds of issues that are going to arise

3. Does the negotiation involve a technical matter that requires the expertise of an agent; such as, a complex legal negotiation that requires a lawyer to negotiate

4. How much time do you have to invest in a negotiation

5. What's your relationship with the other side

Factors

• Companies for various reasons, don't want, the other side to know that they are in back of the deal.

• Walt Disney had to use an army of secret agents when buying 27,000 acres because he knew that if the people selling the land realized that he was behind the purchases, property prices would skyrocket.

• After he acquired the 27,000 acres, prices jumped from $183 an acre to $1000 per acre.

Secret Agent

• What is the first question you should ask in any negotiation?

Question

• Does the agent have authority from the principal to do the deal.

• You might go into great details in the negotiation with the agent, but at the end of the day the agent's going to say well, sorry, but I don't have authority. I have to go back and get approval from somebody else. And you might have to restart.

Answer

• Express Authority – Principal tells agent they have authority

• Implied Authority – Principal hires agent in a relevant position

• Apparent Authority – Principal indicates there is authority when actually there is not.

Types of agent authority

• A company hired an agent Lee to negotiate with a manufacturer. And the company gave the manufacturer a letter of authority. The company said, Lee is our authorized agent. Now, privately to Lee, the company said, Mr. Lee, you can acquire equipment, but you are not authorized to pay over 300 per unit. In other words, that was the reservation price. You cannot pay over 300 per unit. So we started negotiating with the manufacturer, and as it turned out paid 400 per unit. So now there's a contract. The company refused to honor the contract. And the question is, is the company bound by the contract made by its agent Lee?

Apparent authority - Question

• By giving the manufacturer the letter of authority saying Lee had authority to represent the company, the company created a situation where it appeared that Lee did have authority and the manufacturer should be able to rely on that letter of authority in holding the company liable.

Answer

• A borrower with no collateral who wants a personal loan says to you the banker what if I ask my general manager if he will sign a guarantee on behalf of the company. So the company will guarantee the loan. What would you do as the banker in this case?

• Are you now satisfied that if the borrower doesn't repay the loan that you will be repaid as a result of this guarantee?

Question

• That the company was not liable as general managers have no authority to guarantee loans made by employees.

• The bank should have asked the company, does the general manager have authority

Answer

• Check the 5 factors before deciding if you should use an agent or not.

• Is it appropriate to use a secret agent?• Do not assume the other side has full

authority just because they are negotiating with you.

• Determine authority at the beginning of a negotiation. Don't ask the agent. Ask the principal.

Agents - Summary

• Before we start the negotiation with the other side we should analyze the parties interests and no deal options.

• This helps us to set up the right negotiation and be prepared to make the best deal.

Setting up Summary