Summary of Negotiation Analysis: An Introduction

For sucessful negotiation it is important to be well prepared and to develop a coherent strategic framework analyzing a very different sets of issues. There are seven basic questions that anyone should ask before entering a negotiation:

1. BATNAs: What will the respective parties do if they don’t come to agreement?

The BATNA is your Best Alternative To a Negotiated Agreement, it is what one will do if agreement is not reached. The concept sounds simple but its application can be difficult. Your BATNA is your preferred course of action which does not only depend on what you could get from a competing bidder but also it depends on other factors such as ease of consummating the deal, time pressure, relationships etc. Walkaways should thus take into account all of your various interests.

A rigid bottom line can be dangerous. Firstly because it could lead you to a result close to your minimum and secondly it can blind you to creative solutions (for example favorable interest rates). The power of creative alternatives and weighing their relative value should not be underestimated. Common failure when evaluating BATNAs include over-optimism, particularly in in lawsuits when both parties feel they are in the right.

Only by considering the perceived BATNAs of both the potential buyer and seller one can see if agreement is really possible. The bargaining range is then called the zone of possible agreement, short ZOPA. Any price within the ZOPA leaves both parties better off than to walkaway. However, there is no correct figure or equilibrium. Single-issue negotiations (such as those over price) are often called „distributive“ because the gain of one party is a corresponding loss for the other.

In practice it is hard to know the other party’s BATNA. Such information is almost always incomplete and subject to interpretation. The familiar dance of offers and counteroffers is a way of simultaneously testing the true dimensions of the ZOPA.

Determining BATNAs and walkaways is a cornerstone of negotiation analysis.

2. PARTIES: Who are the real parties in the negotiation?

This might seem evident, however, there may be influential players who are not immediately visible at the bargaining table. A familiar example is the case of buying a new car. Consumer negotiate with the salesman who will have to have the deal approved by the manager. The manager is distant and intimidating which leads to an asymmetry in favor of the dealer.

Identifying the real parties is very important as it can redefine the whole endeavour. It might rise other important questions and can expose potential pitfalls and opportunities. For example: Are we talking to the right person? Would getting the support of party A increase or decrease the subsequent chances of getting party B on board? Instead of passively reacting to whatever deals happen to arise, negotiators can instead shape the environment in order to foster opportunities that best serve their needs.

3. INTERESTS: What are their fundamental needs and priorities?

Even if the only interest was financial, getting the highest nominal price might not net the most money. Careful deal structuring might for example legitimately reduce tax obligations. Moreover, balancing near-term needs for liquidity for example against long-term capital appreciation might be wise. Another important point for the buyer for instance might be timing.

Identify underlying interests therefore is crucial. If negotiators lose sight of their interests or misstate them, they have little chance of maximizing the potential value of their deals. On needs to keep in mind to focus on interest, not position.

Assessing interests is important before and during negotiation and even at the end when agreements are being redefined and implemented. Interests can evolve and strategy should therefore adapt to changing goals and circumstances.

4. VALUE: How can value be created - and who il likely to get it?

The potential for value-creation ultimately depends on how the other paries’ interests compare with your own. While the difference in valuation sometimes foreclose one particular deal, it can open the opportunity for another. Differences are the core for value creation in negotiation and often there are more issues at stake than simply price. That means more dimensions on which the parties can differ, and hence, enhance value. Value is generated in negotiations by capitalizing on differences, not necessarily by finding common ground.

Some key negotiation lessons from the two-dimensional ZOPA:

• It is possible to reach agreements that create gain for both parties
• The creation of mutual gains does not necessarily mean that they will be evenly divided. Most or all of the gain may go to one party
• Expanding the pie and dividing it are part of the same process

Managers must „manage the tension between creating and claiming value“. If they are too stubborn, they may forfeit potential gain and even jeopardize the entire agreement. Creating value usually requires revelation of information and brainstorming, however such disclosure can sometimes be exploited. Therefore it is important to establish the right problem-solving atmosphere and that both parties have a good intuition about each other’s priority.

Only then parties can identify a range of items and issues that can be crafted into a package that maximises benefit. This process should be continued until a point is reached where one party’s well-being cannot be further improved without hurting the other’s. Such a point is called „Pareto optimal“.

5. BARRIERS: What obstacles might prevent agreement (or the maximization of joint value) and how can they be overcome?

The existence of ZOPA and the opportunities for joint gain do not guarantee agreement. There are several barriers standing in the way:

• Strategic behaviour: too hard bargaining which in the end make both parties lose a potentially desirable deal. The same can occur for value-creating opportunities. Drawing a firm line on what is acceptable may increase your chances of getting a fair share of value, but involves the risk that your demand will exceed what the other party is willing to accept.
• Psychological or interpersonal barriers: Parties can lack trust or have trouble communicating. Also, emotions can run high in negotiations and issues of perceived power and status may come into play. Feelings can easily escalate to a point where people lose sight of their substantive objectives. These obstacles can largely addressed through skillful management of the negotiation process itself. 
• Institutional obstacles: such as need for policy back at corporate headquarters or legal constraints. Overcoming these barriers may require crafting new policies which turn out to be the catalyst for broader innovations in deal making and dispute resolution.
 

6. POWER: How can the various parties influence the negotiation process and its outcome?

The bargaining power is not simply the strength or weakness of your BATNA. Power sometimes turns upside down in negotiation  and people in a position where they have little to lose can be hard to negotiate with.

It is useful to identify ways in which you can favorably change the basic architecture of a negotiation. That could involve redefining the set of parties or setting deadlines. Another way could be to attack the other party’s BATNA and trying to worsen the consequences of refusing your offer. Caution however, because such attacks invite retaliation, especially if the other party would lose face by backing down publicly.

Bargaining power is a manifestation of complex situational factors, but it also is a matter of perception. Moreover it is a reflection of both knowledge and skill. Skillful negotiations make the very best of whatever hand they are dealt.

7. ETHICS: What is the right thing to do?

Negotiation involves other people and organizations and thus principles to guide how to behave towards them. There are five categories that negotiations should address in order to act responsibly.

1. Candor: What do negotiators owe the other parties in the way of candor? When for example asked what your walkaway price is, there are morally valid reasons to evade answering such a question directly. There may be a valid distinction between overt misstatements and mere silence.
2. Fairness: A set of moral questions relate to the equity of agreements that are reached, about distributional fairness. There exist different points of view from „buyer beware“ over „everyone looks after his or her own wellbeing“ to „no one should get rich ont other people’s expense“.
3. Force: Another set of moral issues include the potential use of force in negotiation. While it is commonly accepted that the use of physical force is wrong, what about economic pressure? Popular opinion is very inconsistent on such issues. It is helpful to consider whether the parties have plausible alternatives. Another factor my be what responsibility a person bears for putting himself or herself in a apposition of need. 
4. Impact on bystanders: This argument is close to the fairness issue, but with the difference that not all of the impacted parties are at the table. 
5. Principal-agents conflict: Difficult moral issues might arise when one is negotiation on behalf of others. Must individuals abandon their own personal values and standards when they accept corporate jobs?

Given that these moral issues are not easy it is important not to improvise one’s moral standards at the bargaining tables. Negotiation strategy and tactics must be based on carefully considered principles.

RECAP

• Effective negotiation requires a coherent framework linking means and ends
• Identify BATNAs and fundamental interests as the source of potential value-creating trades
• Recognizing possible barriers and rearrange them in advance if possible
• Develop a conceptual framework
• Strategy must be implemented with skill and insight
• The ability to listen and persuade as well as patience are highly valuable
• Success also contingent on your counterparts’ attitudes and creativity ability.
• Your own negotiation strategy should encourage constructive behavior from other people with whom you will deal