Improving the way you negotiate*

The road starts with determining your BATNA – your best alternative to a negotiated agreement

By Wallace M. Howick

* This is an expanded version of a summary that originally appeared in the October 2007 issue of CAmagazine.

Have you ever been stuck in negotiations by seemingly insurmountable differences? Have you ever been “had” by a hard bargainer or dirty tricks negotiator, or seen a deal imposed on you? Have you ever missed the opportunity to negotiate, tacitly accepting what is offered rather than using that offer to explore interests and alternatives?

Unfortunately, most of us would have to say yes. We all negotiate every day and often this takes place in informal settings where we don’t recognize the opportunity to negotiate. We wrongly await the crack of a starter gun to signal the beginning of negotiations, when we should be saying (or waiting to hear) “Got time for a coffee?” When we do negotiate, we often experience dissatisfaction, even failure, because we miss the need to develop and use the requisite process skills.

The seeds of failure are often sown very early, with either or both parties saying to themselves, “Let’s go to the meeting and see what happens.” Little constructive thought is given to our priorities, the other side’s perspective or possible alternatives. It’s not that we won’t prepare; it’s that we don’t know how to prepare.

Early in the preparation process, we need to evaluate our best alternative to a negotiated agreement, or BATNA. (This term was first widely used some 25 years ago by Roger Fisher and Bill Ury in Getting to Yes.) Our BATNA is the result we can unilaterally expect to achieve, even if there is no agreement with the other side. A very simple example: Let’s say I want to retire by the end of the year. If I do not sell my business within 5% of the offering price for cash to the current prospective purchaser before then, what will I do? I might (a) keep parts, (b) reprice and revise certain terms; for example, agree to an earnout or (c) sell the business to a key employee/successor even though that sale might involve taking significant promissory notes subordinated to the purchaser’s bank debt. The key is to formulate my BATNA and recognize that it is not static but rather will evolve over time.

The first estimate of our BATNA will shape several decisions: whether we negotiate, how we negotiate and the energy and resources we will dedicate to the effort.

Estimating our BATNA forces us to understand our interests – not our positions. Positions are to true interests what the top of an iceberg is to the part below the surface: a small, easily visible portion that understates the whole. It is essential to candidly ask, What do we really want? What are our interests? Our priorities? What are the most important issues? The least important? During preparation, good negotiators also ask these same questions a second time, through the eyes of the other side.

Few negotiators find circumstances hand them a great BATNA, let alone a good one. Some panic and settle too early. Good negotiators calmly define, update and refine their BATNA both before and during negotiations and thereby increase their power and psychological space.

Estimating our BATNA is not an easy task. First, it’s impossible to assign a dollar value to some things – for example, the treatment of employees by a prospective purchaser of the business. Second, this estimate needs to be risk adjusted because:

it is often impossible to implement and thereby test-drive our BATNA without closing or materially affecting other options;
developing a BATNA takes scarce resources – time, money and the goodwill of others, which cannot always be recouped.

For example, it is unlikely that if my BATNA is the sale of the business to a key employee, I could sell her the business on a trial basis, then successfully unwind the sale and sell to a third party without disrupting the business (and thereby impairing its value). To even discuss the potential sale with a key employee and then fail to reach an agreement would be costly in time and energy, and again would carry the costs of disruption -- even the potential loss of that key employee. Finally, the passage of time and the flow of events during the negotiations may render our first estimate of our BATNA less valuable or impossible to implement. For example, discussions with a third party may trigger the departure of that key employee.

Thoughtful preparation also requires gathering information about the other side – their interests (shared or not) and, if possible, some estimate of their BATNA.

Interests are the drivers that underlie stated positions. Consider the classic story of the two sisters, each of whom wanted the sole orange in the household (i.e., each had the position that she alone should have the orange). Their father said he would cut it in half and give half to each. Their mother invested a few moments to inquire why each wanted the orange. The older sister wanted the peel for a cake; the younger wanted the fruit as a snack.

Unlike a stated position, there is often more than one way to satisfy an interest. Focusing on underlying interests – the peel for one, the fruit for the other – is a solution that positional bargaining would never have uncovered.

To influence the other side, we need to understand their interests and how they perceive the issues. Many negotiators are wrongly reluctant to explore or acknowledge their counterparts’ views for fear that mere acknowledgement will somehow be seen as acceptance. For example, if the other side states its position, one of the best ways to explore their interests is to make a straightforward open-ended request: “Help me to understand why that’s your position.” Then we must discipline ourselves to listen – not build our counter argument or formulate a counterpoint. Until we make the investment both in asking and listening, we are mired in the trenches of positional bargaining.

Listening to the other side’s views not only provides needed information but engenders reciprocity. Most negotiators, having been accorded a fair hearing, will give us the same.

Rather than settle for distributive or zero-sum agreements, good negotiators work toward higher-value integrative agreements. They seek to enlarge the “pie” of resources to be shared, to the parties’ mutual gain. The key is not only to listen for and find shared interests, but also to listen for, recognize and capitalize on differences that can lead to trade-offs. Finding trade-offs is more constructive and productive than simply making concessions in a grinding power struggle entrenched in the myopia of “If it’s good for them, it must be bad for us.”

Differences are ubiquitous. Negotiators have differences in attitudes, preferences and expectations. These differences can be a source of conflict. But if recognized and constructively explored they can be signposts along the road to resolution. Ask questions, then listen for what is said, how it is said … and what is not said.

For example, if there are four issues on the table – A, B, C and D – we might see the issues in order of importance as B, C, D and A. They may see the issues in order of importance as A, C, B and D. If the differences in the relative priority of the issues are recognized, resolution might involve a “package” where we give them substantially what they need regarding issue A while they would give us substantially what we need regarding issue B.

Negotiators often have differences of opinion about the future. For example, a retiring vendor of a business might be quite confident about the future maintainable earnings of that business, whereas the prospective purchaser might be less certain. To reconcile this difference in views (or more precisely confidence) about the future, the vendor might consider an “earnout” provision in the agreement calling for additional payments predicated on future performance of the business. Similarly, professional athletes and owners will often negotiate performance bonuses to reconcile differences in views about future performance.

Earnouts and performance bonuses are contingency-based agreements and as such require significant effort to define terms and benchmarks. More important, they require an especially high degree of trust between the parties because it is simply not possible to foresee all relevant factors or circumstances.

Every integrative agreement has a distributive element: how to allocate, share and claim the value generated by that integrative process. A shared sense of what is fair is key to whether there is an agreement and shapes its substantive components. In order to preserve the relationship, the question is not whether to be fair but how to be fair.

What is fair?

How we develop and apply fair standards is a function of how we see justice. Fair, just and equitable are each used to define the other in most dictionaries. This fact reflects their interchangeability in our daily lexicon.

Fairness is neither universal nor absolute. We may each want fairness but we may each define it differently and each strongly believe our definition to be correct. What we believe is fair is often influenced by self-serving biases so embedded that we are not aware of them. For example, we are more intimately aware of our contributions to a professional partnership and are able to retrieve more of that “knowledge” than we can for others. This gap influences how we each see a fair allocation of partnership profits.

Fairness has several dimensions. Our sense of distributive fairness speaks to what we believe to be a fair allocation of resources or outcomes. Closely related is our sense of comparative fairness by which we evaluate outcomes from any negotiation against our expectations, previous outcomes or those achieved by others.

Distributive fairness is a function of the context of each negotiation (i.e., goals, pre-existing relationships, what is being allocated). If in a particular context, we place the greatest emphasis on equality, fair would be an allocation where each receives an equal share or entitlement; if equity, each receives in proportion to his or her contribution.

We might even co-mingle equality, equity and need in a single negotiation. For example, three accountants establishing a professional services firm agree to share profit primarily on the basis of “you eat what you bring in” (equity in that your income is proportional to your contribution). However, each would pay one-third of all common costs, such as rent (equality). Further, in the event that one of them becomes ill, each of the other two would allocate one-quarter of her profits to the sick partner until the start of her disability benefits (need).

Equally important is procedural fairness: the ways and methods by which those resources or outcomes are determined. So, if distributive fairness is about “what” each receives, procedural fairness is about “how” we arrive at the “what.” How we feel about procedural fairness influences our willingness to abide by the terms of the agreement and complete its implementation.

If motivated solely by self-interest, we would be concerned only about outcomes and not about procedural fairness – how that allocation was reached. If we have a longer-term, better-informed perspective about self-interest, we would recognize the need to maintain relationships. For example, if “they” feel we have imposed an agreement on them (procedural unfairness), their willingness to abide by and implement that agreement will be weak. Getting the agreement signed is but a mid-point in the process – the hurdles of implementation remain. Successful negotiation requires successful implementation and that depends on a shared sense of both distributive and procedural fairness.

Ultimately, successful negotiation matters because fairness matters, process matters and relationships matter. Rather than live with missed opportunities; rather than choose between the distasteful tactics of the hard bargainer and the feeling of being a pushover; rather than take part of a positional bargaining exchange yielding suboptimal outcomes, we can all adopt perspectives that will help us improve the efficiency of the process and the quality of the outcome.

Wallace M. Howick, MBA, FCA, is an adviser and teacher with 35 years of international experience. Contact: wallacehowick@hotmail.com; (905) 639-4267.