Negotiations - the art of getting things done

www.bookfiesta4u.blogspot.com 1 www.powerpoint4u.blogspot.com

NEGOTIATIONS…

THE ART OF GETTING THINGS DONE…

(Article Pack)


Negotiating in Three Dimensions

Q&A with: James K. Sebenius

Published: October 2, 2006

Author: Martha Lagace

Tactics, deal design, and set-up are three crucial components of the most effective negotiations. Yet many negotiators focus only on the tactical part, running the risk of undermining their own best interests. How can you negotiate more skillfully and confidently with clients, partners, and adversaries as well as with colleagues within your organization?

In this Q&A, James Sebenius and David Lax, authors of 3-D Negotiation: Powerful Tools to Change the Game in

Your Most Important Deals, discuss the common mistakes of negotiators, the power of a three-dimensional approach, why negotiating is an essential skill, and where the science of negotiation is headed.

Negotiation is a core competence for life, "not merely an important skill to be wheeled out for special occasions," they argue.

James K. Sebenius is the Gordon Donaldson Professor of Business Administration at Harvard Business School and a principal of Lax Sebenius LLC, a negotiation strategy firm. He also serves on the Executive Committee of the Program on Negotiation at Harvard Law School. David A. Lax, a former faculty member at Harvard Business School and investment banker, is now principal of Lax Sebenius LLC.

Martha Lagace: 3-D Negotiation presents a multi-dimensional approach for people who thought negotiation was only about what happens at the bargaining table. What common mistakes do you see and what typical assumptions about negotiation are you challenging?

James Sebenius and David Lax: Even experienced negotiators make mistakes in all three dimensions. Let us start with the least familiar kind of mistake. Flaws in our third dimension, the set-up of a negotiation, can take many forms: wrong parties, wrong issues, wrong walkaways, wrong sequence, wrong basic process choices. Here's one common set-up error (among many): It is easy to make one kind of mistake in your choice of negotiating agents. You know the importance of using a skilled and knowledgeable negotiating agent as well as crafting a contract that aligns your agent's incentives with your own. Yet a well-structured contract with your agent may not be enough.

For example, top executive pay attorney Joe Bachelder once took his client aside after the first negotiating session. The board had selected his client to be its next CEO and was working out his compensation package. Bachelder informed his client that he would end up with everything he wanted from the negotiation. Why was Bachelder so confident of total victory? Because, he explained, the board had put the firm's well-regarded general counsel in charge of the negotiations. Why was this a mistake? It was not an issue of effectiveness: The general counsel was undoubtedly a skilled negotiator. Yet, as Bachelder happily informed his client, "When this is over, you're going to be that guy's boss. He knows that. He can't fight you too hard on anything."


In retrospect, the board made a simple set-up error; it got the parties wrong in this negotiation. For its representative in these critical talks, the board should have hired an outside specialist, with properly aligned interests and incentives. More generally, you should look hard at a potential agent's other interests and relationships to determine whether he or she is part of the right negotiating set-up.

Negotiators sometimes can discover hidden sources of value and then craft agreements to unlock that value and overcome barriers created by poor deal design.

Now let's move to some errors in our most familiar first dimension, face-to-face tactics "at the table." Negotiators listen and communicate poorly, make cross-cultural gaffes, fail to respond effectively to hardball styles, and so on. One of the most common tactical errors arises when people become fixated on their bargaining "positions" rather than probing for the full set of underlying "interests," or what each side really cares about. Failure to uncover interests often leads to mistakes in our second dimension, deal design, such as treating potentially more cooperative agreements as pure price deals in which the interests of the parties are strictly opposed.

Consider an example of both kinds of mistakes from the U.S. Midwest. In this case, environmentalists and farmers opposed a power company's plans to build a dam. On the surface, the parties appeared to have deep, irreconcilable positions, which had resulted in a long stalemate. Yet a superior deal could be designed if the parties looked past their stubborn bargaining positions to their underlying interests.

By stepping back and mapping the parties' real interests, it emerged that the farmers were worried about reduced water flow below the dam, the environmentalists were focused on the downstream habitat of the endangered whooping crane, and the power company urgently needed new generating capacity and a greener image. After a costly legal impasse that threatened to last for years, the three groups designed a better deal that included a smaller dam built on a fast track, water-flow guarantees, downstream habitat protection, and a trust fund to enhance whooping crane habitats elsewhere.

Working solo or jointly at the drawing board, negotiators sometimes can discover hidden sources of value and then craft agreements to unlock that value and overcome barriers created by poor deal design. Here are some questions to ask the next time your talks seem stalled for deal-related reasons:

• Is price truly the only issue? • Can we unbundle different aspects of what looks like a single issue and give each side what it values most—

at low cost to the other side? Are there other high-benefit, low-cost trades? • Should we add value-creating contingencies and risk-sharing provisions to the contract? • Can the contract cope not only with economic issues but also with the egos involved?

These are but a few of the many common negotiating errors we see in practice.

Q: Your 3-D alternative draws on three dimensions: tactics, deal design, and set-up. In a nutshell, what do these elements mean individually and together? Should a negotiator weigh them equally, especially under time pressure?

A: Whether your focus should be on one or a combination of tactics at the table, deal design, or set-up moves away from the table depends directly on the nature of the barriers that you face. When you have a potential deal in mind, we have developed a set of tools to quickly perform what we call a "3-D barriers audit" to determine what barriers stand between you and your desired agreement. While there are many specifics, the broad diagnostic questions follow our three-dimensional scheme.

First, you should ask whether it is a tactical or people-related barrier like communication, trust, misperceptions, or the like. Second, you should ask whether the problem is deal-related: Does the proposed agreement offer sufficient


value to the parties to be more attractive than no deal? Does it accomplish their objectives? Third, are there set-up problems such as wrong parties, interests, no-deal options, sequence, or basic process choices?

When talks stall, it's tempting to jump to conclusions: "It's purely a price gap." "They're being unreasonable." "We're not communicating well." "We're in a weak position." Instead of focusing on the first explanation that leaps to mind, you should critically diagnose the key barriers to the kind of agreement you have in mind; this will then allow you to devise the most promising approach to overcoming them. Without an accurate barriers assessment, the strategy and tactics you craft may address the wrong problems.

Imagine that a supplier is negotiating with an important but difficult client who adamantly refuses to budge on certain contract terms. Assuming that they face an interpersonal or tactical barrier, suppliers often seek training on the principles of persuasion, joint brainstorming, how to make advantageous initial offers, body language, and so on.

Yet apparent tactical or interpersonal barriers may actually be another type of problem. More broadly, the best response to a barrier in one dimension may be moves within other dimensions. As the purchasing agent calms down a bit, for example, he mentions that cash is very tight, "especially this quarter." Is this a deal-design barrier? Perhaps a delayed payment schedule would do the trick, with the bulk of the payment due when procurement budgets are replenished.

The frustrated supplier also may be overlooking a fundamental set-up barrier. While top management from both firms might speak of the importance of "partnership" and "quality," the purchasing agent may be motivated by monthly targets and pennies ground out of suppliers. To succeed, the supplier may need to create a more promising set-up with more sympathetic parties involved in the negotiation.

When talks stall, it's tempting to jump to conclusions.

This can mean finding and nurturing an influential internal champion on the other side who would truly benefit from added quality and service. The supplier might induce such an advocate to persuade the agent on her behalf, directly or via links to senior management. Beyond a good proposal and the effective interpersonal skills needed in the initial two-party negotiation, a three- or four-party set-up—internal champion plus senior management in addition to the supplier and agent—can maximize the odds of the supplier's success at the ground level.

The broader point is to do a 3-D barriers audit, then craft a 3-D strategy to overcome those specific barriers. A 3-D strategy is an aligned combination of set-up moves away from the table, deal design moves "on the drawing board," and tactics "at the table" all tailored to overcome the barriers you've identified.

Q: One-on-one negotiations are often tough, but the complexity is magnified during multiparty negotiations, especially when some of the interested parties are not obvious. How do you advise flagging all key influencers?

A: To get the set-up of a negotiation right, you need to get the parties right. You might think that the parties are simply you and the person on the other side of the table, but it is often much more complex, requiring an act of disciplined imagination rather than a mechanical list. In our new book, we systematically work through ways to get the right "all-party map." In a nutshell, you need to take a disciplined look beyond the usual suspects to figure out who might really matter: potential and actual parties, internal and external players, principals and agents, decision makers and influencers, allies and blockers, and high- and low-value parties, as well as those who must approve and implement the deal. Map the relationships among those on your all-party map by assessing the informal as well as the formal decision and governance processes.

For example, to improve the odds of your ultimate target saying "yes," we often use a process called "backward mapping." Start by trying to discern who influences the target player and to whom that player defers. For example,


when we were advising a client who was eager to sell his company, we counseled him against his instincts to quickly open serious negotiations with a potential acquirer's CEO. Instead, we researched whom the CEO would turn to regarding acquisitions. Of course, his CFO would be pivotal. Continuing to map backwards from the CFO, we turned up an analyst in the finance department whom the CFO deeply respected and who would almost certainly do the valuation work on this somewhat unorthodox deal. After initial contact with the CEO, we spent a great deal of time ensuring that the key analyst bought into the deal. When intensive negotiations finally began with the CEO, the groundwork had been laid. The CEO turned to his CFO, who turned to his key analyst, who made our case from the inside.

Q: You've asserted that negotiation should be a core skill for virtually all managers. Why? How can managers who are not directly involved with deal making assess and hone their own skills on a regular basis?

A: Most important managerial problems involve people whose interests and perceptions are in some conflict. Effective management and leadership often depend on the capacity to envision and bring about sustainable agreements among these parties. This is true with respect to discrete transactions such as mergers, labor contracts, and out-of-court settlements. It is true when working out new supplier and customer relationships, dealing with large shareholders and creditors, as well as initiating and managing cross-border strategic alliances. It is true inside the firm where people from different functional areas and divisions need to reach and implement new cooperative arrangements in response to change. It is true with respect to conflicts arising from the interaction of businesses with governments as well as with environmental and other nongovernmental organizations. It is true as workforces become more diverse and business increasingly crosses borders and cultures. And it is endlessly true for entrepreneurs who must come to productive terms with investors, potential employees and board members, technology partners, distributors, and possible acquisitions as well as would-be acquirers.

Yet beyond such formal deals, negotiation is increasingly a way of life for effective managers for at least three sets of reasons.

First, formal authority, hierarchy, and command are less and less able by themselves to ensure productive cooperation and genuine commitment. This is the case internally where cross-functional and inter-unit coordination is crucial and where greater professionalization means that key employees and colleagues both have and value more autonomy. It is also true externally with an increasing number of influential stakeholders outside the traditional chain of command. Newer and flatter organizational forms—strategic alliances, joint ventures, tightly-knit supply chains across different firms, virtual corporations, network entities, as well as team-based processes—generally require almost continuous negotiation to function effectively.

Second, the sheer pace of change in markets, technologies, and competition puts a sharply increased premium on the capacity of organizations to flexibly respond by devising new arrangements and renegotiating the old ones. Salient examples requiring some truly complex negotiations include the convergence of computing, telecommunications, and information/entertainment sectors as well as a steady flow of restructurings, especially in heavily leveraged parts of the corporate, financial, and real estate sectors. Operationally, "flexibility" in the face of a faster pace of change—combined with an increasing number of influential stakeholders—means that yesterday's arrangements must be reworked into today's, and that today's will have to be altered to meet the needs of tomorrow. Persuading key stakeholders to abandon familiar practices and perceived entitlements can severely test a manager's negotiation skills.

Third, increasing demographic diversity of the work force and genuine globalization of business raise the risks of unproductive cultural misunderstandings and costly conflict. These outcomes can often be prevented or mitigated by effective negotiation. In short, negotiation has always been a useful skill for managers to deal with disputes and to make deals. But with more influential stakeholders, with authority and hierarchy necessary but decreasingly sufficient, with looser organizational forms, with an increased pace of change, and with greater diversity and global


reach, negotiation assumes greater importance. For effective managers, it is a way of life, a new core competence, not merely an important skill to be wheeled out for special occasions.

To hone their negotiation skills, the first requirement is to recognize the prevalence of formal and informal negotiating situations. Then, naturally, we suggest becoming familiar with the framework of 3-D negotiation. Much like the job of a manager, 3-D negotiation is not merely an interpersonal task, but also a substantive one (designing value-creating arrangements), and an architectural one (getting the set-up right to induce maximally productive cooperation).

Q: Given geopolitical tensions today, what are the complexities of the challenges facing professional negotiators whose work is very high-stakes? If it's possible to generalize, how do you view the skills and practices of most negotiators working on high-stakes issues? Are there large or different "skill issues" compared to previous periods of time you've witnessed?

A: There is a fruitful dialogue underway between people negotiating business, legal, and financial deals and their international counterparts faced with life-and-death negotiating challenges. Each group can learn important lessons from the other since there are remarkably many similarities.

Here at Harvard, we have initiated and hosted an annual Great Negotiator Award series over the past six years, sponsored by an inter-university consortium of Harvard, MIT, and Tufts through the Program on Negotiation. Honorees have included such figures as George Mitchell, Charlene Barshefsky, Richard Holbrooke, Lakdhar Brahimi, Stuart Eizenstadt, and Sadako Ogata. We've written detailed cases on the most challenging negotiations faced by these remarkable men and women—whether ending the war in Bosnia, creating an interim government in Afghanistan, crafting a U.S.-Chinese trade deal over intellectual property, or getting Protestants and Catholics in Northern Ireland to come to terms. By spending intensive time with these great negotiators, writing cases on their most challenging deals, and relentlessly probing their thought processes and approaches to some of the world's most difficult negotiations, we are able to add even more valuable source material to our intellectual and practical treasury.

For example, when you asked above about how to get the right parties involved to set up the most promising negotiation, we might have drawn on the experience of one of our awardees, veteran U.N. diplomat Lakdhar Brahimi. Prior to his recent efforts negotiating interim governments in Afghanistan and Iraq, he took the lead in ending the bloody, seventeen-year civil war in Lebanon. Should the negotiating set-up simply include the leaders of the warring factions? No. As Brahimi recalls:

…we met in Jedda [Saudi Arabia] to discuss our plan. We needed the Americans with us. We needed the United Nations with us. We needed France with us because France was very close to the Christians and we needed the Vatican, which is a very important player there. So we went to Beirut, Damascus, Baghdad, Paris, Rome, Washington, New York, London, Moscow, and Beijing. That is the first step to make sure that all the people who carry some influence are really on board.

You'll find the counterpart of Brahimi's thought process in many complex private-sector deals. And this is but one relatively straightforward example.

Q: You have a chapter coming out in the new book Advances in Decision Analysis called "Negotiation Analysis: Between Decisions and Games." Please tell us more about the emerging field of negotiation analysis and what it could mean for managers. Where do you see this field going in the future?

A: This fairly technical chapter, mainly written for scholars and specialists, is Jim's current take on the field increasingly referred to as "negotiation analysis" that was pioneered by HBS emeritus professor Howard Raiffa, to whom both of us owe a great deal.


Raiffa's approach essentially joins two initially separated intellectual traditions, the descriptive and the prescriptive. For many years, cognitive and social scientists performed careful laboratory experiments to determine what subjects actually do in negotiating situations, typically where better performance is rewarded with good money. This work led to many insights, but was fundamentally descriptive in nature. Meanwhile, largely in parallel, decision and game theorists typically analyzed what ultra-rational people would (or should) optimally do when interacting with other similar beings in negotiations. Of course, real people do not typically act in the ultra-rational manner assumed by such "symmetrically prescriptive" models.

Howard Raiffa's intellectual innovation, since furthered by others such as HBS professor Max Bazerman, was to make his highly rational prescriptive advice conditional on the most empirically accurate description of what people actually do, often as studied by behavioral scientists. In a nutshell, this is the intellectual approach of negotiation analysis: to generate the best possible advice to one side given the most faithful possible descriptions of likely behavior of the other side or sides.

We have contributed to all aspects of this negotiation analytic quest, both theoretical and empirical, but especially by extensive fieldwork studying great negotiators and challenging negotiations. We've also spent years, as part of each of our nonacademic careers—as investment bankers, entrepreneurs, and in government agencies such as the State Department—both doing deals directly and advising on them. This long-term engagement with deals and dealmakers has left us increasingly dissatisfied with the "one dimensional" model that dominates most current thinking about negotiation. This model is primarily focused on the face-to-face tactical interplay "at the table." Extensive field observation and analysis has led us to codify the 3-D approach in which moves away from the table set up the most promising situation.

Of course we are hardly alone. Exceedingly popular negotiation courses for MBAs and executives abound at major business schools. Negotiation analysis, in all its three dimensions—tactics, deal design, and set up—is the province of a wide range of scholars. We're very bullish on the field.

Excerpt from "Get the No-Deal Options Right," 3-D Negotiation: Powerful Tools to Change the Game in Your Most

Important Deals, by David A. Lax and James Sebenius.

Editor's Note: Often stuck in a tired "win-win vs. win-lose" debate, many negotiation books focus exclusively on face-to-face tactics at the table. Yet, hard or soft, table tactics are only the "first dimension" of David A. Lax and James K. Sebenius' new "3-D negotiation" approach, developed from their decades of doing deals and analyzing great dealmakers. Moves in their "second dimension"—deal design—systematically unlock economic and noneconomic value by creatively structuring agreements for the long term.

But what really sets the 3-D approach apart is its "third dimension": set up. Before even showing up at a bargaining session, 3-D negotiators ensure that the right parties have been approached, in the right sequence, to address the right interests, by the right process, and facing the right consequences of walking away if there is no deal. This new arsenal of moves away from the table—to set up or reset the situation most favorably—often has the greatest impact on the negotiated outcome. Superior set-up moves plus insightful deal designs can enable you to reach remarkable agreements at the table, unattainable by standard tactics.

Several elements of a negotiation comprise its set up: the actual and potential parties, the full set of their interests, each side's best no-deal option, the sequencing, and basic process choices. Great negotiators work hard to ensure that all these elements add up to the most favorable possible set up.

In this excerpt from 3-D Negotiation, Lax and Sebenius introduce one critical set-up factor: each side's best no-deal option, or walkaway. The negotiating implications of what you (and your counterparts) would do in the event of no deal has a long history, but has been most memorably captured by Roger Fisher, Bill Ury, and Bruce Patton in


Getting to Yes as the "BATNA," or Best Alternative to Negotiated Agreement. Lax and Sebenius take this idea several steps further in their introduction to the importance of each side's best no-deal option.

Excerpt:

Many inexperienced negotiators think that they must hang on at all costs until a deal is done. But they'd be wise to listen to the words of Robert Rubin, former U.S. Secretary of the Treasury and cochairman of Goldman Sachs: "When others sense your willingness to walk away, your hand is strengthened … Sometimes you are better off not getting to yes."1 Both the perception and reality of no-deal options play a key role in most negotiations. Let's get really basic for a moment: Contrast two distinct situations in which you might negotiate with a new car salesperson.

• Situation 1: The salesperson has the strong impression that you have firmly decided on the car of your dreams—call it car A—and it is right there on his lot. You are obviously a serious buyer. As you settle into the chairs in front of the salesperson's desk, your spouse tells you firmly, "Honey, we've looked for a long time and we've seen absolutely nothing. Our old clunker may not even make it off this lot. This car is perfect!" Now you sit down to talk price.

• Situation 2: The salesperson sees you debating with yourself whether you really prefer car A (same as previous) that's right there on his lot, or a car (car B) that's at a different dealership. This time your spouse exudes ambivalence: "Honey, I think I prefer car B." Yes, you like car A a lot, but car B has a few features that you clearly prefer, and it is also priced below car A. In this scenario, you are negotiating the price of car A in order to help you decide whether to choose it over that other nice car, which you also like a lot, but, conveniently, is elsewhere, but not too far away. Now you sit down to talk price.

It won't surprise you to read that you are likely to strike a far better price in Situation 2—in which you appear to have an excellent no-deal option and the willingness to choose it—compared with the price you work out in Situation 1, in which you appear to have no good alternative to car A. Much more broadly than this simple situation, getting the set-up right means getting each side's no-deal options right. And getting no-deal options right is fundamental to each side's choice of "yes" or "no."

Should you ultimately say "yes" to a proposed deal? The answer to that question depends on more than simply the value of that deal. It also depends on a comparison of your options in which you determine whether, to you, the value of saying yes exceeds the value of saying no. Sometimes, going back to Rubin's words, you are better off not getting to yes. And the same logic, of course, holds true for your counterparts across the table.

The particulars of a proposed deal define the value of "yes." But how is the value of "no" determined? It depends on how well your interests are served by choosing your best "no-deal" option—the most promising course of action you would take if you decided to say no to the proposed deal. Along with getting all the parties right and mapping their interests accurately, understanding—and often shaping—everybody's best no-deal option is the third fundamental element of a negotiation's set-up.2

Your best no-deal option may involve simply walking away and doing without any agreement. (What will the consequences of that course of action be?) It may involve going to another dealer, supplier, or buyer, making something in-house rather than procuring it externally, going to court rather than settling, forming a different coalition or alliance, or taking a strike. In the case of multinational peace talks, one nation's best no-deal option may involve anything ranging from the imposition of economic sanctions all the way up to the unilateral use of force—blockading, bombing, or invading. And, in the course of negotiating, your best no-deal option may be to continue the process, perhaps in the hope of a better offer. In all cases, assessing your no-deal option helps establish the critical relevant threshold: as compared to what? Meanwhile, of course, the other side is (at least informally) making its own assessment of its best no-deal option.


When we work with our clients, we frequently talk in terms of the "deal/no-deal balance." Picture an old-fashioned scale with two pans. On one of the pans you stack up the value of your best no-deal option, and on the other pan, you stack up the value of saying yes to the proposed deal. As the negotiations proceed, you regularly "check the scale," metaphorically speaking, to see how your deal/no-deal balance looks. Although the negotiations often focus on the "yes pan," your actions as well as outside-world factors may be affecting the "no pan," as well. Plus, the other side may have its finger on the scale too: busily improving its no-deal options—and, perhaps, trying to worsen yours. Whatever is going on in the negotiation, your best no-deal option sets the hurdle—in terms of the full set of your interests—that any agreement must clear to be acceptable. Ditto for them.

All too often, negotiators get caught up in intense tactical interplay at the table. It feels like that's where the action is, and where your attention should be focused. Many negotiators, even experienced ones, pay insufficient attention to (1) their best no-deal option, and (2) the deal/no-deal balance. In too many cases, they treat their no-deal options mainly as afterthoughts, rather than as primary elements of the set-up. This can be a fatal mistake. Like parties and interests—no-deal options are foundational to favorably shaping the set-up: defining necessary conditions for any deal, strongly influencing outcomes, and often suggesting actions away from the table to set up more promising situations.

In the balance of this chapter, we'll present five prescriptions for using the power of no-deal options to drive great deals.

1. Use your best no-deal option, and those of the other negotiating parties, to determine whether and, if so, where a zone of possible agreement exists.

2. Make sure the other side sees you as ultimately able and willing to walk away. When your counterpart(s) perceives a credible increase in your willingness to walk away—especially in the direction of an attractive no-deal option—your at-the-table outcomes often improve. Therefore, take steps to improve your best no-deal option and consider actions to worsen that of your counterpart.

3. Take care to protect—and do not inadvertently weaken—your no-deal options. 4. Consider worsening your own no-deal option in certain very carefully selected circumstances. 5. When diagnosing a potential negotiation, use your understanding of no-deal options to distinguish between

those situations in which negotiation can play a major role and those in which it must play a lesser role.

Determine if a zone of possible agreement exists

One simplified way to view negotiations is to see them as a sort of tug of war—a battle that takes place along an adversarial line segment (the "rope"), with the seller tugging toward "high" and the buyer tugging toward "low." The buyer's closely-guarded true maximum determines the one end of the line segment (i.e., the maximum acceptable price if there is to be a deal), and the seller's equally well-guarded true minimum bounds the other end (i.e., the minimum acceptable price if there is to be a deal). It doesn't much matter whether the tug of war concerns the price of a car or a house, an insurance settlement, or the sale price of a company. In all cases, you should keep the mental image of the "price line segment" in mind; it has a very tight relationship to each side's best no-deal option.

Your best no-deal option, again, is the most attractive course of action you could take in the event of no agreement in the current negotiation. The value you place on your best no-deal option sets the bar—in terms of the full set of your interests—that any agreement must exceed to be acceptable; this is also true for the other side. As such, no-deal options imply the existence or absence of a Zone of Possible Agreement (ZOPA), a bit of jargon we find useful. The ZOPA simply means the set of possible agreements that is better for each side, given its interests, than its best no-deal option.


Suppose that the seller's true minimum falls below the buyer's true maximum, as depicted in Figure. In this case, a potentially profitable ZOPA exists; that is, agreement can be better for each side than the value of its best no-deal option.

Figure

The ZOPA (Zone of Possible Agreement) as a Battle Line

Seller's minimum Buyer's maximum

To be more concrete, let's say that Joe is selling his condo and has an acceptable offer (to him) for $450,000. Betty, meanwhile, would pay up to $500,000 for Joe's condo, rather than (a) buying another condo or (b) doing without a condo. The Joe-Betty ZOPA, therefore, obviously exists and is the set of prices between $450,000 and $500,000.

Of course, it's easy to imagine a scenario with no ZOPA. For example: If Joe already had a $500,000 offer while Betty could buy exactly what she wanted elsewhere for $450,000, there'd be no ZOPA for Joe and Betty.

Each side typically knows its own limits, which it must continually assess and reassess as new information unfolds. The problem is that many negotiators have only a hazy sense of their own no-deal options, or how to value them—especially when it comes to more complex no-deal options than the simple buy-sell price deal we've been using to illustrate our points so far. If Joe and Betty were involved in trying to settle a major class-action lawsuit, rather than selling and buying a condo, the no-deal options would be considerably more difficult to calculate.

Let's see how accurately assessing the true ZOPA—trivial in theory, but tricky in practice—can be immensely profitable when done well. Sometimes the most important attributes of the other side's no-deal options can be invisible—unless you actively look for them.

We once advised an American firm during a lengthy negotiation with a major Japanese company. The stated goal of the talks was to create a large-scale joint venture under Japanese control. In fact, creating this joint venture would represent a sale of about two-thirds of the U.S. firm, permitting it to concentrate on what it felt to be another business line with higher potential. During an excruciatingly detailed, two-year process, the negotiations were suspended several times, due to what the Japanese negotiators described as a "breakdown of its internal consensus process." Each time, however, the Japanese managed to resume negotiations, after painstaking internal efforts to rebuild and strengthen consensus within their company on the central role of the deal to their long-term global strategy.

When a European firm unexpectedly made a tender offer for the entire American business, the Japanese firm suddenly had to fish or cut bait. When the Japanese signaled their intention to intensify the negotiations—in part to head off the Europeans—negotiators for the U.S. firm reassessed the ZOPA on price: that is, the least that the U.S. firm would accept and the most the Japanese company would pay for majority control of the part of the U.S. business to be contributed to the joint venture.

Obviously, the price ZOPA depended on financial valuations, including the strategic benefits and costs to each side of completing the transaction. Yet, at the very last moment before the U.S. board was about to authorize its negotiators to proceed in the final deal process, we pressed our client to think once again about the reality of the Japanese no-deal option. We quickly reviewed the other strategic options open to the Japanese firm and confirmed their undesirability.

This last-minute, deeper look at the Japanese situation, moreover, began to focus our collective attention on the internal consequences of no deal to our Japanese counterparts. Having worked through a grueling consensus process, virtually everyone at the Japanese company—from the major owners, to the board to senior managers, to


all those subunits that had required that massive persuasion effort—was deeply committed to doing this deal. The company was cash-rich, so minimizing the price of the deal was important, but not central.

Armed with this understanding, the U.S. negotiators were able to leverage the Japanese company's nearly irresistible organizational momentum—the firm had spent over two years mentally integrating the U.S. operations into its long-term strategy. Now, rather than face the extreme internal organizational costs of "losing," the Japanese firm agreed to pay an extraordinarily high amount for the U.S. firm, far more than would have been the case absent the frustratingly lengthy consensus process. (In fact, it was almost triple its share price at the outset of the process.) One American negotiator described how, in effect, the Japanese entity had "fallen in love" over time with its target—and paid the price.

This exceedingly profitable outcome (from the American point of view) probably would not have been possible had the U.S. negotiators thought of the transaction in conventional valuation terms and focused on external no-deal options. Instead, the other side's consensus process—when recognized by the U.S. side as affecting the Japanese no-deal option—was used to recognize that the true ZOPA extended well beyond what would otherwise have been justifiable.

Excerpted by permission of Harvard Business School Press from 3-D Negotiation: Powerful Tools to Change the

Game in Your Most Important Deals. Copyright 2006 David A. Lax and James K. Sebenius; all rights reserved. To order, please call (800) 988-0886 or purchase online: http://harvardbusinessonline.hbsp.harvard.edu/.

About the authors

Martha Lagace is Senior Editor.

David A. Lax is a former faculty member at Harvard Business School and an investment banker. He is now a principal of Lax Sebenius LLC, a negotiation strategy firm.

James K. Sebenius is a principal of Lax Sebenius LLC. He is the Gordon Donaldson Professor of Business Administration at Harvard Business School and serves on the Executive Committee of the Program on Negotiation at Harvard Law School.

Negotiating When the Rules Suddenly Change

Published: September 11, 2006

Author: Michael Wheeler

How can you negotiate when the rules suddenly change, and no one knows whether your particular market is headed up or down? Regrouping from the cancellation of the 2004-2005 season due to failed labor negotiations, National Hockey League (NHL) teams and players faced this challenge in July 2005 when they radically restructured their collective bargaining agreement (CBA). The new CBA instituted a uniform cap (as well as a


floor) on team payrolls. It also set maximums and minimums for individual contracts and declared many more players free agents, allowing them to sign with whatever team made the richest offer.

Imagine that you're an NHL general manager. You have a month, at most, to fill your team's roster before training camp begins. What's your strategy? If you expect that your rivals will go on a spree and overspend for big-name players, it would be smart to sit back, protect your budget, and then scoop up the excess talent. But if the other owners move cautiously in this new terrain, it would be in your interest to aggressively sign stars before the market heats up.

Either strategy carries risks. You wouldn't want to blow your budget on a few marquee players and have little left to round out the team. Then again, there's no point in holding lots of cash with no one worthwhile to spend it on.

Conventional negotiation theory doesn't say much about how to craft and execute strategy in such dynamic markets. Assessing your walkaway point is useful in stable situations but less helpful if you don't know whether your options will get better or worse.

It pays to look for strategic insight from contexts where uncertainty, risk, and change are the only constants. Military science, in particular, offers powerful lessons for negotiators, whether they are settling disputes or making deals. As it says in Warfighting: The U.S. Marine Corps Book of Strategy (Currency, 1995), "The very nature of war makes certainty impossible; all actions in war will be based on incomplete, inaccurate, or even contradictory information."

Many negotiation scholars have shied away from drawing parallels to battlefield strategy, due to its associations with violence and brute force. In fact, contemporary theory of maneuver warfare is surprisingly nuanced and supple. Three axioms apply to negotiators who must cope in volatile environments: (1) make a bump plan, (2) be bold and quick, and (3) learn and adapt.

Axiom #1: Make a bump plan

Military strategist Carl von Clausewitz coined the term friction, "the force that makes the apparently easy so difficult." Friction doesn't just refer to adverse weather or enemy fire. It can also be mental and self-induced, resulting from the "lack of a clearly defined goal, lack of coordination, unclear or complicated plans," and other signs of ill preparation, according to Marine doctrine.

Mental and organizational friction infiltrates negotiation as well. When the stakes rise, so do tension and miscommunication. Totally eliminating friction is unrealistic on the battlefield and at the bargaining table. In both instances, you need the authority and the emotional steadiness to cope in spite of uncertainty.

Strategy is further complicated by the fact that the other parties are independent actors with their own objectives and plans. While you're striving to influence their behavior, they're just as determined to shape your decisions to their advantage. According to Warfighting, appreciating this dynamic interplay between opposing human wills is an essential factor in understanding the nature of war.

When formulating negotiation strategy, strive to view the landscape as other parties see it. Returning to our hockey example, the NHL general managers had to work on at least three different levels as they raced to sign players. They had to assess a particular player's value to their own team and what other clubs would be likely to pay him. They also had to weigh what sort of precedent, good or bad, that deal would set for the other players they were trying to sign. Finally, they had to anticipate how their moves would affect the decisions of competing teams.

NHL general managers who were willing to delegate would have been better positioned to see the big picture.


Friction was high in each of those domains. Confidential information about contract talks was sometimes leaked to the press. Key players who seemed ready to sign with one team suddenly bolted to another. Some general managers gave fat contracts to players long past their prime. Each transaction altered the overall negotiation landscape.

In rapidly changing marketplaces, you can't provide for every contingency. But you can take a page from Marine Corps practice and develop bump plans. Rather than mapping out every possibility, commanders practice a form of analytic triage by focusing on two negative possibilities, discarding almost everything else. The first element is anticipating the enemy's most likely course of action. The second is preparing for the biggest, most damaging risks by identifying the greatest threats to success.

Translated to the negotiation arena, creating a bump plan means ultimately making an informed bet on how you expect things to unfold, while also contemplating what you'll do if events go the other way. A hockey general manager who values premier goaltending should identify a handful of potential players. But in case he gets stymied with all of them, he should be open to assembling a team that's more offensively oriented.

Axiom #2: Be bold and quick

When the rules of negotiation have changed drastically, should you be bold or cautious? As a general principle, the Marines have a bias for action. For them, a mediocre decision is better than wavering. Applied to negotiation, being proactive allows a firsthand reading of the market and gives you a key role in shaping how the game evolves.

As soon as the new CBA was in place, some NHL general managers moved quickly to buy out the existing contracts of some of their older players. Having read the agreement's small print, they realized that, for only six days in July 2005, such buyouts would not be counted toward the annual salary cap. By freeing up their budgets, they put themselves in a great position to aggressively pursue prime talent.

Boldness and quickness go hand in hand on the battlefield. As Warfighting states, "Since war is fluid and opportunities fleeting, focus applies to time as well as to space. We must focus not only at the decisive location but also at the decisive moment."

Timing is just as important in negotiation. In volatile situations, you and your organization must be poised to act quickly. But don't confuse quickness with frenzy. In the heat of the moment, it's easy to bicker over minor points and lose sight of larger objectives. NHL general managers who tried to play a central role in all contract talks likely were swamped with information and misallocated their time. Those who were willing to delegate would have been better positioned to see the big picture.

Individuals and organizations should operate at a high tempo but not one so fast that they compromise their strategic judgment or tactical execution. Having a metric in place that rates your priorities and weighs tradeoffs will enable you to make good decisions on the fly.

Axiom #3: Learn and adapt

Bolstering your capacity to sense and respond is key to prospering in turbulent situations. It's also at the heart of maneuver strategy in the military. Much of the best contemporary thinking in this realm was advanced by the late Colonel John Boyd, a Pentagon maverick. His decision-making model has become influential in the United States and abroad, in fields as diverse as consumer marketing and college rugby.

Boyd's animating insight sprang from his study of Korean War air battles between American F-86s and Soviet Union-made MiG-15s. Although the Soviet plane could accelerate faster, was better armed, and could perform better at higher altitudes, the F-86s won 90 percent of the encounters.


Boyd attributed the success of the American F-86 to two factors. First, the F-86 had hydraulic controls that allowed it to transition between activities—climbing, banking, and accelerating—more rapidly than the MiG-15. Second, the F-86 had a bubble canopy that gave pilots unobstructed views from all angles—this meant that the pilots had superior situational awareness, enabling faster decision making. Each maneuver increased the F-86's edge over its opponent until it cumulatively achieved a dominant position.

From this example, Boyd conceived of the OODA loop—the repeated process of observing, orienting, deciding, and acting. He concluded that tactical and strategic victory hinges on cycling through this loop faster than the enemy (or by disrupting the enemy's ability to connect those activities efficiently).

The first two elements—observing and orienting—are especially important for negotiators thrust into new environments. Your strategy must be driven not only by your goals but also by what you will learn while achieving them. Thus, negotiating with an individual NHL player has dual purposes: getting him signed and gaining a better feel for what other teams and players are doing. Faxed exchanges of offers might accomplish the former but yield little general intelligence. Your eyes and ears have to be open for clues about where the overall market is headed.

The more novel the circumstances, the more important situational awareness becomes for the negotiator. You need the capacity to organize and analyze data as it comes in so that you can confirm or reorient your strategy, if necessary. That way, you can align your tactical decisions with your larger objectives. The more efficiently you manage this process, the more up to date you'll be on current conditions. Cycling through these loops of analysis and action faster than other negotiators will give you a significant edge.

Reprinted with permission from "When the Only Constant is Change," Negotiation, Vol. 8, No. 12, December 2005.


Five Steps to Better Family Negotiations

Published: July 9, 2007

Authors: John A. Davis and Deepak Malhotra

Negotiations between family members who own a business are different—different from negotiations between non-family members and also different from negotiations between family members who don't have a business. This is because family relationships are distinctive kinds of relationships, and having a family business raises the stakes of—and often complicates—a family negotiation.

Consider first what sets family relationships apart. Relatives (especially in nuclear families) typically have long-standing relationships that are based on strong emotional ties and lifelong feelings of dependency. These characteristics lead to stronger loyalty and sensitivity to one another but also greater reactivity in their interactions. Family relationships also have deeply ingrained patterns that have developed over years of interacting. Relatives develop and play certain roles in their families, which tend to become fixed and limit the ways family members interact. Some of these patterns and roles can aid communication and negotiation, and some can derail communication and dispute resolution. In addition, communication between family members is notoriously complicated. Because of the sensitivity of their relationships, relatives struggle between openness and caution in their statements to one another. Family members also tend to have difficulty listening to one another without judging what they hear in the context of countless prior experiences that may have little to do with the current topic they are discussing.

In addition to these factors that apply to all family relationships, family members who are in business together have a lot at stake and feel pressured to consider what's good not only for the family but also for the business and its owners. There is generally a lot more for family members to manage—and negotiate over—in a family business system. Issues such as dividends and reinvestment, nepotism and professionalism, loyalty to stakeholders, and organizational change are ever present; they can be tripwires that spark intense feelings and have wide-ranging implications for the business, family, and owners. In many cases, family members have multiple roles in the system, like father-owner-manager, daughter-employee, or aunt-owner. These multiple roles and ties can create more shared objectives and as a consequence, more potential for value creation. However, these multiple roles and ties can be confusing to coordinate. Relatives can experience role confusion (should I act as a father or boss, a daughter or vice president?) and struggle over the appropriate role to play in a particular negotiation (e.g., is this a father-daughter negotiation or a boss-employee negotiation?). In vaguely defined situations, there is increased opportunity for misunderstanding and conflict.

But given the distinctive nature of negotiations for families in business, 5 basic principles of negotiation that have proven relevant in a wide variety of deal-making and dispute-resolution cases can help family negotiations to be productive while protecting family relationships. Some of the 5 principles of effective negotiation are easier for family members in family business systems to apply, and others are more difficult. But all 5 principles of effective negotiation can be successfully leveraged in negotiations between family members in family business systems. We will review the principles and their applicability to family negotiations below.

1. Analyze the negotiation space

The negotiation space consists of all parties that are affected by the negotiation, or that can affect the negotiation. Before you negotiate, it is critical that you consider the interests, the power, and the constraints facing each party. In the case of family businesses, many of the parties affected by a negotiation, or able to affect it, will be around for a


long time. It is dangerous to negotiate only considering the interests of those at the bargaining table when those who are not at the table will be affected by what is negotiated and can assert their rights or power in the future.

A typical strength of family negotiations is that family members generally prefer to reach mutually acceptable outcomes in their negotiations.

The negotiation space in a family business system is often extensive and typically complex, involving family members, employees, and owners of the business, and also may involve key stakeholders of the family business system (e.g., customers and suppliers of the business, members of the community in which the family lives, etc.). Because family members in a family business system have highly interrelated lives, even if a relative is not directly involved in a negotiation, he or she might have a keen interest in its outcome and be able to affect the outcome. For example, if a father and his son are negotiating over the son's employee compensation, the negotiation space is likely to include (among others) the son's immediate boss, the son's coworkers, his sister (who is considering joining the business next year), and his mother. The wife-mother may not be a manager, board member, or owner, and have no official say in this matter, but she may still have a strong influence on both the father and the son, and her support may be critical for reaching a negotiated outcome that everyone finds acceptable and fair.

2. Don't try to beat the other side

Winning in a negotiation doesn't necessarily mean that the other party needs to lose. On the contrary, most successful negotiations entail the possibility of mutual value creation, compatible if not aligned interests, and cooperation. In fact, trying to beat the other side often results in negative results for both sides. The person inflicting injury will almost always end up losing—psychologically, socially, and/or financially—as well. This is obvious in a negotiation between family members who want or need to keep a mutually supportive family relationship.

A typical strength of family negotiations is that family members generally prefer to reach mutually acceptable outcomes in their negotiations. This constructive attitude is due in no small part to the strength of family ties: Typically, family members are genuinely interested in one another's welfare and prefer to avoid conflict because of its effect on future interactions. But some family relationships are weakened to the point where beating the other side is consciously or unconsciously desired by at least 1 party in the negotiation. So it is worth thinking through whether you wish to work together with the other side to negotiate and resolve conflicts—or whether you wish to "win." If it's the latter, hopefully you will have a friend or advisor discourage you from this path.

3. Understand the other party's interests, constraints, and perspective

Many people see negotiation as an opportunity to persuade and influence the other side to give them what they want. As a result, most people do not go into negotiation with the goal of listening to and learning about the other party. This is unfortunate, because to get what you want in negotiation, you often need to understand the other side's needs and interests so that you can "give a little to get a little (or a lot)." Even if the other side is entirely willing to help and is ready to give you what you want, it may be critical that you understand the constraints that he or she faces in meeting your demands. In other words, effective negotiation requires that you understand the other side's interests and constraints, and that the other party understands your interests and constraints.

Most family members are typically well intentioned when they negotiate, and one would think that such an orientation would make it easy for family members to listen to each other's perspective and to learn about each other's interests and constraints. But this isn't the norm for several reasons. First, relatives tend to be less curious and inquiring about their relatives than they are of others they know less well. This stems partly from an assumption—common among family members—that they already know what the other party wants, likes, and needs. Second, the long history of a family can also institutionalize roles for family members that are rather intractable, making it difficult, for example, for parents, children, and siblings to see each other as they are currently rather than as they were when they were younger. Third, because families generally fear conflict, they avoid certain


conversations (that may be useful or necessary in a negotiation) for fear it will touch on a sensitive issue or encourage personal criticism that they won't know how to manage. While this might alleviate tension in the short run, it also perpetuates the status quo. The consequence: negotiations that involve listening, learning, and the exchange of authentic views between peers do not become the norm in most families.

Ironically, it turns out, people in close relationships (such as spouses) often negotiate worse outcomes than do people who care less about their counterparts!1 Why? Because those in close relationships often avoid making their own interests and priorities known to others—even when these are extremely important issues to them—and instead, compromise across the board in order to avoid being perceived as greedy or overly self-interested. This makes it incumbent on family members to encourage others to identify their core interests and concerns.

4. Avoid single-issue negotiations: identify and negotiate multiple issues simultaneously

Value is created in negotiation when each party gets what it values most, and makes concessions on issues that the other side values more. But for this to happen, you need to identify all of the issues that are of concern to 1 or more of the parties, and to negotiate multiple issues simultaneously. People will often get stuck on the most salient issue in a negotiation (e.g., salary or status) and spend too much time haggling over that 1 issue. Or, even when they understand that there are a lot of issues to resolve, they will go through the issues 1 at a time—and then argue excessively about their incompatible demands on each issue. Negotiators who negotiate multiple issues simultaneously are more easily able to recognize value-creating tradeoffs. Because of the complex negotiation space in which business families operate, and because family members in business have many overlapping goals and interests, family members generally are negotiating multiple issues simultaneously. But they are not always doing so consciously, transparently, or systematically enough.

While any multi-issue negotiation is going to be complicated, the likely outcome is considerably worsened when negotiators become overly focused on a single issue or dimension. The far superior approach is for all parties involved to work together to identify all of the issues that are relevant in the current negotiation, and then identify which issues are most important to each person (and which issues each person can concede on).

5. Negotiate over interests, not positions

Effective negotiators get past stated positions (what the party demands) and understand the underlying interests (why the party wants what it demands). Often, disputes over positions will be irreconcilable, whereas a focus on interests will lead to a mutually acceptable agreement. Some families are exceptional at encouraging family members to dream and explore their authentic interests and to express these interests within the family. These families have cultures where family members can talk openly about their goals, needs, and fears. If a family member doesn't know what his or her interests really are, a supportive family can encourage the family member to talk about possible scenarios and gradually uncover his or her true interests. This process requires patience and a nonjudgmental and positive attitude about the family member and his or her possible choices. In a trusting environment where an individual's true needs, goals, and fears can be expressed, a negotiation over interests rather than over positions is more likely.

Concluding thoughts

Negotiations between family members in family business systems are typically more complicated and difficult than those between non-related individuals in non-family business systems. Because family relationships have existed for many years, they have deeply ingrained tendencies, some of which can facilitate a constructive negotiation and some that can hinder it. But if some family members begin to leverage the 5 principles of effective negotiation we have outlined, they will increase their chances of successful dealmaking and dispute resolution. The likelihood of success increases further if others in the family business system learn to put into practice these principles.


About the authors

John A. Davis is a senior lecturer of business administration at Harvard Business School.

Deepak Malhotra is an assistant professor in the Negotiation, Organizations & Markets unit at Harvard Business School.

Four Strategies for Making Concessions

Published: March 6, 2006

Author: Deepak Malhotra

Most people understand that negotiation is a matter of give-and-take: You have to be willing to make concessions to get concessions in return. But the process of making concessions is easier said than done. Consider how events unfolded in the following management-union negotiation, adapted from Richard E. Walton and Robert B. McKersie's book A Behavioral Theory of Labor Negotiations: An Analysis of a Social Interaction System (ILR Press, 1991).

The head of a manufacturing firm was preparing to initiate talks with the leadership of the employees' union. The biggest issue on the table was a wage increase. The union was asking for a 4 percent increase, while management wanted to raise salaries by only 1 percent.

The executive considered the situation. During past negotiations, weeks were lost as each side jockeyed for position, feigned willingness to walk away, and eventually compromised on an unsurprising outcome. In this case, a deal at 2.5 percent, the midpoint of the two parties' opening positions, seemed likely to be agreeable to both sides.

This time things would be different, he resolved. He would save everyone hassle and delay by making concessions early. Against the advice of the mediator, he opened discussions by announcing that the eventual outcome was obvious and that he was prepared to make a final offer: 3 percent, the most he could have offered. The union's leadership was pleased by this offer—yet they did not accept it. If the firm could offer so much at the outset, they reasoned, perhaps they had set their sights too low. As the union's aspirations rose to unrealistic levels, a promising negotiation unraveled and culminated in a strike.

Concessions are often necessary in negotiation. But, as this story shows, they often go unappreciated and unreciprocated. In this article, I present four strategies to help you maximize the likelihood that others will acknowledge your gestures of goodwill and reciprocate in kind.

1. Label your concessions

In negotiation, don't assume that your actions will speak for themselves. Your counterparts will be motivated to overlook, ignore, or downplay your concessions. Why? To avoid the strong social obligation to reciprocate. As a result, it is your responsibility to label your concessions and make them salient to the other party—a responsibility that the manufacturer in the introductory example neglected.

Your concessions will be more powerful when your counterpart views your initial demands as serious and reasonable.


When it comes to labeling, there are a few rules to follow. First, let it be known that what you have given up (or what you have stopped demanding) is costly to you. By doing so, you clarify that a concession was, in fact, made. For example, the manufacturer could have explained the effect of a 3 percent wage increase on his firm's bottom line or discussed how difficult it would be for him to justify it to his board of directors.

Second, emphasize the benefits to the other side. My own research suggests that negotiators reciprocate concessions based on the benefits they receive, while tending to ignore how much others are sacrificing. One way for the manufacturer to highlight the benefits he was providing to the union would be to contrast his offer with those made by similar firms (assuming they were lower).

Third, don't give up on your original demands too hastily. If the other side considers your first offer to be frivolous, your willingness to move away from it will not be seen as concessionary behavior. By contrast, your concessions will be more powerful when your counterpart views your initial demands as serious and reasonable. Accordingly, spend time legitimating your original offer and then use it as a reference point when labeling your concession. The manufacturer, for example, would have been wise to make concessions slowly. Eventually, he could point out that his final offer was closer to the union's original demands than it was to his own.

2. Demand and define reciprocity

Labeling your concessions helps trigger an obligation to reciprocate, but sometimes your counterpart will be slow to act on that obligation. To increase the likelihood that you get something in return for your concession, try to explicitly—but diplomatically—demand reciprocity.

For example, consider the following negotiation between an IT services firm and a client. The client suggests that the IT firm's cost estimates are unreasonably high; the IT firm's project manager believes that the cost estimates are accurate (and perhaps conservative) given the complexity of the project and the short deadline. If the project manager is willing to make a concession, she might say: "This isn't easy for us, but we've made some adjustments on price to accommodate your concerns. We expect that you are now in a better position to make some changes to the project deadlines. An extra month for each milestone would help us immeasurably."

Notice that this statement achieves three goals. First, it labels the concession ("This isn't easy for us, but we've made some adjustments ..."). Second, it tactfully demands reciprocity ("We expect that you are now in a better position to make some changes ..."). Third, it also begins to define the precise form that reciprocity should take ("An extra month for each milestone... "). While each of these elements is critical, negotiators often overlook the need to define reciprocity. Remember that no one understands what you value better than you do. If you don't speak up, you're going to get what your counterpart thinks you value or, worse, what is most convenient for your counterpart to give.

The strategy of demanding and defining reciprocity plays out in a variety of contexts; those who understand how to use it can profit from it immensely. A great example is a tactic consultants and contractors use. When a client praises her work, a smart consultant will quickly point out that the person who would really love to hear this praise is her boss (or other potential customers). In this way, she defines for the appreciative customer how best to reciprocate.

3. Make contingent concessions

One hallmark of a good working relationship is that parties don't nickel-and-dime each other for concessions. Rather, each side learns about the interests and concerns of the other and makes good-faith efforts toward achieving joint gains.

Unfortunately, while fostering such norms is desirable, it is not always possible. Recently, one of my students in an executive education class explained that while he would be more than happy to engage in mutual give-and-take


during his negotiations, he often has trouble doing so with his contractors and customers. Some are clearly untrustworthy or entirely self-interested. Such negotiators are likely to exploit his goodwill by refusing to reciprocate at all, much less in the way he has defined.

The strategy of demanding and defining reciprocity plays out in a variety of contexts . . .

My advice to the executive: When trust is low or when you're engaged in a one-shot negotiation, consider making contingent concessions. A concession is contingent when you state that you can make it only if the other party agrees to make a specified concession in return. For example, if the executive was renegotiating a service contract with a customer, he might suggest that a requested concession is impossible given the current contract but possible under certain conditions. He might say, "We can provide additional support but only if you agree to purchase some of the following additional services," or, "This is literally the best we can do on price right now. But if you can adjust some of your demands, we might be able to reopen the price issue."

Contingent concessions are almost risk-free. They allow you to signal to the other party that while you have room to make more concessions, it may be impossible for you to budge if reciprocity is not guaranteed. Keep in mind, however, that an over-reliance on contingent concessions can interfere with building trust. If you demand immediate compensation every time you make a concession, your behavior will be seen as self-serving rather than oriented toward achieving mutual satisfaction.

4. Make concessions in installments

Which of these scenarios would make you happier?

Scenario A:

While walking down the street, you find a $20 bill.

Scenario B:

While walking down the street, you find a $10 bill. The next day, on a different street, you find another $10 bill.

The total amount of money found is the same in each scenario—yet the vast majority of people report that Scenario B would make them happier. More generally, extensive research (beginning with the work of the late Stanford University professor Amos Tversky and the Princeton University professor and Nobel laureate Daniel Kahneman in the 1970s) demonstrates that while most of us prefer to get bad news all at once, we prefer to get good news in installments.

When trust is low or when you're engaged in a one-shot negotiation, consider making contingent concessions.

This finding suggests that the same concession will be more positively received if it is broken into installments. For example, imagine that you are negotiating the purchase of a house and that a wide gap exists between your initial offer and the seller's asking price. You are willing to increase your offer by a maximum of $40,000. You will be more effective if you make two smaller concessions, such as $30,000 followed by $10,000, than if you make one $40,000 concession.

There are other reasons to make concessions in installments. First, most negotiators expect that they will trade offers back and forth several times, with each side making multiple concessions before the deal is done. If you give away everything in your first offer, the other party may think that you're holding back even though you've been as generous as you can be. The manufacturer who offered a 3 percent wage increase to the employees' union up front faced exactly this problem.


Installments may also lead you to discover that you don't have to make as large a concession as you thought. When you give away a little at a time, you might get everything you want in return before using up your entire concession-making capacity. Whatever is left over is yours to keep—or to use to induce further reciprocity. In the real estate example, you might discover that the initial $30,000 increase in your offer was all that you needed to sign the deal!

Finally, making multiple, small concessions tells the other party that you are flexible and willing to listen to his needs. Each time you make a concession, you have the opportunity to label it and extract goodwill in return.

All of the above strategies are aimed at guaranteeing that the concessions you make are not ignored or exploited. It is important to note, however, that when someone refuses to reciprocate, the refusal often hurts her as much as the party who made the concession. Nonreciprocity sours the relationship, making it difficult for negotiators to trust each other or risk further concessions. Thus, effective negotiators ensure not only that their own concessions are reciprocated but also that they acknowledge and reciprocate the concessions of others.

Wheelers and Dealers

by Deepak Malhotra

Car salespeople truly understand how to use modest concessions to extract much larger ones. First, they spend a long time legitimating the sticker price and suggesting that it's not only fair, but nonnegotiable. When they do make concessions, they make sure these are salient to the buyer through techniques such as these: (1) seeming apprehensive as they drop the price, (2) making a show of speaking to the "boss" to get special permission, and (3) suggesting that they rarely, if ever, make such concessions.

Car salespeople are also careful never to give up all their potential concessions in one shot. Typically, a salesperson will drop the price a few hundred dollars at a time while demanding much greater incremental price increases from the buyer. Many salespeople will use contingent concessions as well, ratifying price reductions only if a buyer agrees to purchase accessories and add-ons. Dealers typically make huge profit margins on accessories and would prefer that you spend your money on these rather than on the car itself. Smart buyers can use this knowledge to their advantage. If you offer to purchase a $250 accessory in exchange for a $300 drop in overall price, the salesperson is quite likely to agree.


Dealing with the 'Irrational' Negotiator

Published: October 3, 2007

Authors: Deepak Malhotra and Max H. Bazerman

Editor's Note: What do you do when the people with whom you are negotiating act in ways that can best be called counterproductive? Before throwing up your hands, take a deep breath and ask yourself 3 questions. Do these people lack good information? Are they operating with constraints you don't know about? Are they holding onto hidden interests?

According to Deepak Malhotra and Max H. Bazerman, chances are the main hurdle to smooth negotiation is behind 1 of these 3 questions. When you label someone "irrational," you limit your own options, as they write in Negotiation Genius: How to Overcome Obstacles and Achieve Brilliant Results at the Bargaining Table and

Beyond. The following excerpt describes strategies and tactics to overcome another party's counterproductive behavior and keep the deal on track.

These are ideas that anyone can put to use in multiple settings of business. As Malhotra and Bazerman observe, negotiation geniuses are made, not born. "What appears to be genius actually reflects careful preparation, an understanding of the conceptual framework of negotiation, insight into how one can avoid the errors and biases that plague even experienced negotiators, and the ability to structure and execute negotiations strategically and systematically."

"All of the strategies you have described work when you're dealing with people who will listen to reason," an exasperated executive student remarked recently. "But the people I deal with are completely irrational. How can you possibly negotiate with someone who is irrational?" As the executive's question reveals, negotiators often struggle with the task of trying to negotiate with those who behave recklessly, strategize poorly, and act in ways that seem to contradict their own self-interests, and any would-be negotiation genius needs to understand how to deal with these obstacles.

Our advice is this: be very careful before labeling someone "irrational." Whenever our students or clients tell us about their "irrational" or "crazy" counterparts, we work with them to carefully consider whether the other side is


truly irrational. Almost always, the answer is no. In most cases, behavior that appears to be irrational has a rational—albeit hidden—cause. Here, we will share the 3 most common reasons that negotiators erroneously judge others as irrational.We will also describe the dangers of doing so and explain how to avoid making such mistakes.

Mistake 1: They Are Not Irrational; They Are Uninformed

An executive (who is one of Deepak's students) was recently involved in a dispute with an ex-employee. The employee claimed that he was owed $130,000 in sales commissions for the work he had done prior to being fired from the firm a few months earlier. The executive, on the other hand, claimed the employee was owed nothing—in fact, he insisted the employee had been overpaid by $25,000.

What was the reason for the discrepancy? At the time the employee was fired, the company's accounts were a mess; records had been kept poorly. Since then, the firm had hired a new accountant and updated all of the records. These records now clearly revealed that the employee's claim was entirely illegitimate; if anyone had a claim to make, it was the firm. The executive was uninterested in going to court to recoup the $25,000 that the firm was owed and wanted to drop the matter entirely.

The executive called the employee and told him what the accounting records revealed; he also offered to send a copy of the records. He then made it clear that his case was airtight, but offered to forgive the $25,000 overpayment if the employee agreed to forgo his groundless suit as well. The employee's response: "No way. I don't need to see the records. I'll see you in court!"

The CEO was very confused. There was no way for the employee to win in court. Why was he behaving so irrationally?

Deepak suggested to the executive that the problem was probably not that the employee was behaving irrationally, but that he lacked credible information. The executive was convinced that the employee would lose the court battle, but it was possible that the employee was still confident that he would win the case because he did not trust the executive or the firm's record keeping. How could the executive educate the employee regarding his prospects for winning in court? Deepak advised him to have an objective third party, specifically a professional accounting firm, conduct an audit of the records pertinent to this dispute and to mail the results to the employee. (This would be far less expensive than going to court.) Having this information would diminish the employee's perceived likelihood of winning in court and make litigation a less attractive option. What was the result? The employee dropped the suit.

When Deepak was in graduate school, an economics professor began his first day of class with the following statement: "I want you all to remember something—you are not stupid, you are just ignorant. If you were stupid, we could not do much about it. But ignorance we can fix." This insight is as relevant to negotiators as it is to graduate students. Often, when the other side appears irrational, they are in fact uninformed. If you can help educate or inform them—about their true interests, the consequences of their actions, the strength of your BATNA (Best Alternative to a Negotiated Agreement), and so on—there is a strong likelihood they will make better decisions. For example, if someone says "no" to an offer that you know is in her best interest, do not assume she is irrational. Instead, work to ensure that she understands why the offer is in her best interest. She may simply have misunderstood or ignored a crucial piece of information.

Mistake 2: They Are Not Irrational; They Have Hidden Constraints

In 2005, the U.S. government passed legislation to increase food aid to countries that were in dire need of such assistance. There was much support among politicians and activists for this initiative. Not surprisingly, however, there were also certain special-interest groups that opposed this legislation. Here's what was surprising: One of the groups that voiced opposition was a consortium of nonprofit organizations whose mission it was to lobby for an


increase in food aid to disadvantaged countries! What explains such seemingly irrational and self-defeating behavior? Why would this group oppose legislation that achieves precisely what it purports to want?

The answer lies not in understanding the group's interests but in understanding its constraints. In order to increase the amount of food sent to disadvantaged countries, the consortium had in the past partnered with American farmers to lobby the U.S. government jointly for greater aid. Why did the farmers join in this campaign? Because when the U.S. government increased food aid, it bought more food from American farmers. As a result, both the farmers and the nonprofits got what they wanted.

"The problem was probably not that the employee was behaving irrationally, but that he lacked credible information."

This case, however, was different. Mindful of escalating budget deficits, Congress had decided that the only way to increase foreign food aid was to purchase the food more cheaply—not from American farmers but from developing countries. What would appear to be a double win for the nonprofits (increased food aid and increased support for poor farmers in developing countries) instead created a predicament. If the nonprofits supported the legislation, they would be severing ties with their long-standing coalition partner, the American farmer. Instead, the nonprofits decided that their long-term interests were best served by opposing legislation. This may still seem like a questionable decision on moral, ethical, or other grounds, but it seems irrational only when we overlook the hidden constraints facing the nonprofits.

The problem of hidden constraints is present in many negotiations. When a firm loses a star employee because it refuses to raise her salary to match a competitor's higher offer, the firm is not necessarily behaving irrationally; it may instead be constrained by an HR policy that restricts it from creating huge pay differentials in the firm.

Similarly, when your counterpart seems unwilling to make even small, reasonable concessions that could seal the deal, you might tell yourself he's a fool, or you might try to discover how much authority he has to negotiate a comprehensive, value-maximizing deal. If he is heavily constrained, you might try to negotiate with someone who has greater dealmaking authority.

In negotiation, a wide variety of possible constraints exist. The other side may be constrained by advice from her lawyers, by the fear of setting a dangerous precedent, by promises she has made to other parties, by time pressure, and so on. Negotiation geniuses try to discover these constraints—and to help other parties overcome them—rather than dismissing others as irrational.

Mistake 3: They Are Not Irrational; They Have Hidden Interests

Some years ago, a group of managers decided to promote Leslie, one of the firm's administrative assistants. Leslie had worked for the firm for 30 years and was only 2 years away from retirement. She had performed well throughout her career and received salary increases commensurate with her performance. Because she was already at the top of her salary bracket, it was not possible for the managers to pay her more money; nor was she scheduled for a formal performance appraisal. Rather, the managers simply wanted to do something nice for Leslie, so they decided to surprise her with a promotion. Her job responsibilities would not change, but the new title would give her greater status and prestige.

When she heard of the promotion, Leslie was delighted. She understood that her salary or job responsibilities would not increase, but that was fine with her.

Soon after receiving the promotion, however, Leslie learned that she was among the lowest paid employees with her job title. She also began to feel uneasy about having a "fake" job promotion—she was doing no more work and


receiving no more pay than she used to, and this made her feel self-conscious with her coworkers. She asked for a raise and voiced her willingness to accept more responsibilities, but was quickly denied.

"In negotiation, a wide variety of possible constraints exist."

Within a few weeks of her promotion, Leslie decided that she would rather quit her job than be treated this poorly. By doing so, she lost 2 years of compensation and also took a hit in her retirement benefits. The managers, who had only the best of intentions, were left asking themselves, "Why did she behave so irrationally?"

What the managers failed to appreciate was that money and status were not the only issues of interest to Leslie. She also cared about perceptions of fairness and equity. The managers felt they had given her more than she even deserved. But in failing to see how their decision would play out in the future, they created a situation in which Leslie felt undervalued, phony, and embarrassed.

More generally, people will sometimes reject your offer because they think it is unfair, because they don't like you, or for other reasons that have nothing to do with the obvious merits of your proposal. These people are not irrational; they are simply fulfilling needs and interests that you may not fully appreciate. When others appear irrational, negotiation geniuses do not write them off as crazy. Instead, they investigate: "What might be motivating her to act this way? What are all of her interests?"

But What If They Really Are Irrational?

If your counterpart truly is irrational—in other words, he is determined to work against what is in his best interest—then your options will be fewer. You can try to push through an agreement despite his irrationality, you can try to "go around him" by negotiating with someone else with authority who seems more willing to listen to reason (such as his boss or colleague), or you may decide to pursue your BATNA because his irrationality has eliminated all hope of creating value. You might also leverage the various strategies for confronting your counterpart's biases that we have outlined in Chapters 4-6.

But we suggest—again—that you reconsider your assessment. Negotiators who are quick to label the other party as "irrational" do so at greater potential cost to themselves. When you use the "irrational" label, you limit your options, because there is not much you can say to someone who you truly believe is unable to reason, uninterested in fulfilling her own interests, and incapable of negotiating effectively. Your options greatly increase when you recognize that the other party is not irrational, but simply uninformed, constrained, or focused on interests that you did not anticipate. And as you know, the more options you have, the more effectively you will negotiate.

2. Malhotra, Deepak. (2006). Is Your Counterpart Irrational . . . Really? Negotiation 9 (3).

Excerpted with permission from Random House, Inc. Copyright © 2007 by Deepak Malhotra and Max Bazerman.

Negotiations - the art of getting things done

Business

gordon donaldson

harvard law

lacked credible

harvard business

defining reciprocity

family business

nhl general

family business