The negotiating table is a metaphorical (and literal place) where deals go down. By doing appropriate planning before you get to the table, you can increase your outcomes significantly.
Below is a 5-step planning template you can follow for any negotiation. We’re going to follow a hypothetical software license negotiation, however you could just as easily adapt it to an agreement between internal teams – or your next salary review.
1. Goals & Strategy
Goals can be categorised into tangible & intangibles.
- Tangibles are quantifiable things you can measure; price per license, uptime, storage, etc.
- Intangibles are often more qualitative in nature, such as how you’ll respond to roadmap requests, etc.
Start by mapping out your own goals for the negotiation. What do you want from the other party?
Example: Sam the Product Manager wants her corporate customer to sign an enterprise deal, at an SLA they can deliver, as well as gaining commitment for being a reference site.
Negotiating strategies come in two flavours: collaborative & competitive. These in turn are driven by two questions:
- How important is it that you hit your goal(s)?
- How important is the relationship with the other party to you?
Use this simple matrix to inform your initial strategy:
Note that any one negotiation may involve both strategies; first growing the pie (collaborate), then dividing the pie (compete).
2. Define the Economic contract
List all the tangible & intangible issues up for negotiation
Sam lists the following issues:
- Enterprise licensing
- Responsiveness to roadmap requests
- Rollout plan
Define the issue importance by priority ranking, resistance point (worst acceptable outcome), and target point (best possible outcome).
Targets points tell us where to pitch our opening offer. Resistance points tell us when to stop conceding.
Tip: Negotiators who focus on their resistance point obtain poorer outcomes than negotiators who focus on their target pointSource: Assoc. Prof. Dashani, Melbourne Business School
Sam prepares the below:
|Issue||Priority||Resistance Point||Target Point|
|Testimonial||1||Permission to use logo||Public reference site, co-authored white paper|
|Enterprise Licensing||3||$30 per seat||$50 per seat|
|Roadmap requests||4||1 per quarter||Assessed case-by-case|
|Rollout Plan||5||1 site a month||4 sites a month|
|Training||6||3 days face to face||3 days remote training|
|Storage||7||100Gb per site||10Gb per site|
3. Define the social contract
Whilst many people have experience creating business cases and hammering out commercial terms, the underlying social contract has unraveled many a good deal on paper. After all, it is people (not robots) that have to sign the terms and work together.
These ‘social’ contract assumptions capture the ‘spirit of the deal’. A common misconception is that they shouldn’t be included on paper; they can and should be.
These questions can be categorised into two groups: underlying (the what) and the ongoing (the how) (Sebenius, Fortgang and Lax, 2003).
Ask yourself and the other party these questions and embed them into the contract where appropriate:
- What is the nature and purpose of this agreement?
- Is it short-term or long-term?
- Is it a series of discrete transactions (e.g. vendor-client) or a problem-solving partnership?
- What decisions will each party make?
- How we will we work together?
- What formal and informal communication channels will be used?
- What is expected scope of communications? What is expected to be discussed, and what isn’t?
- How will we resolve disputes?
Social contract issues should also consider risk factors. Misunderstandings where assumptions were not made explicit are common but can be avoided. Others risks include a clash of cultures, 3rd parties driving the deal, or having too few parties involved.
Misunderstandings can easily occur between partners. For example, if a party engages with a competitor of the other. It may not be in the contract that it was an exclusive partnership. However as part of the ongoing social contract, the partner may have assumed something like this would be discussed prior. As it wasn’t made explicit, the partnership may sour from that point.
Knowing this, Sam adds a ongoing social clause to the contract (she’ll have her law team ensure it conforms to proper legalese):
This agreement is non-exclusive, and either party may engage in work with the others’ competitors. In doing so, a courtesy note in writing should be provided prior, and all decisions and communications between the parties of this contract should remain confidential and not disclosed elsewhere.
How to design contracts for success
To boost the chances of success, make economic and social contracts mutually reinforcing. This is called dovetailing.
Dovetailing is about aligning the social and economic incentives,
Telling a partner up front you plan to buy them out if they hit X milestones, or that you’ll increase spend or hold price if they hit Y delivery dates, increases the chances of the deal holding up longer.
4. Size up the other party
It’s time to step into the other parties’ shoes. The more information you can get on the below, either before or at the table, the better your chances are to find something in the bargaining zone.
- What would they do if there was no deal with you? This is their BATNA.
- If you don’t give them a better deal than they’d have without you, the negotiations won’t last long!
- What would they really want out the deal?
- How much better than their BATNA would it have to be?
- How will they sell this deal to their own boss and make them look good?
- How could you solve their problem as a means of solving yours?
- How important is each issue to them?
- This helps in deciding issues on which each party can compromise. What are the issues that are non-negotiable?
- What is their resistance point?
- What is a realistic target?
- Do background research so as to avoid the winner’s curse.
- Can you trust the other party? Does the other party trust you?
- What signals could you send early on to establish this trust? Once trust is broken, it is almost impossible to repair during negotiations.
- What do you know about the other party’s style and tactics? (i.e., accommodation, collaboration, or competition)
- What are the limits to the other party’s authority?
- Don’t concede all your hand, particularly if you’re not sure you’re dealing with the decision marker. If they have to go back to their boss to get sign-off and come back with more requests, you’ll have nothing left.
“Most deals are 50% emotions and 50% economics”Felix Rohatyn
Positions vs. underlying interests
Often deals can reach an impasse when parties’ have different positions. The position is the ‘what’ and not the ‘why’. This will be familiar to anyone familiar with the ‘Five Whys’ approach.
In Sam’s case, this may be that her Client wants their own privately hosted server (the ‘what’). Sam’s company does not offer this.
Diving deeper than positions, we explore their underlying interests (the ‘why’). The customer had a bad experience in the past whereby they could not control software updates going out to Users, which caused support and training issues. Sam’s company avoids private solutions to due high maintenance costs.
Knowing the underlying interests, they brainstorm on a new approach. Although the system is multi-tenanted, as Product Manager, Sam can design new features behind ‘feature flags’, enabling the customer to control which new features are ‘turned on’ and thus limit the rate of change on the users.
Rather than dance on positions, seek to reconcile underlying interests through joint problem solving.
5. The Situation
Finally, assess the situation both parties are in. It will give another lens through which to view the target and resistance points of both parties’. This is particularly useful when push comes to shove at the pointy end of negotiations.
What deadlines exist? Who is more impatient? Whoever feels a greater sense of urgency will make greater concessions.
What fairness norms (i.e., equity, equality or need-based), frames, or reference points apply? Most negotiations involve a discussion on what might constitute a “fair deal.”
What topics or questions do you want to avoid? How will you respond if they ask anyway? Prepare an answer that is in no way dishonest but does not expose your weaknesses.
Will negotiations be repetitive? If so, what are the future consequences of each strategy, tactic, or action?
Who will be implicated by the outcomes of the negotiation?
When negotiating with anyone, you need to build trust. Don’t jump in start trusting immediately, but be open to a trusting interaction. Remember to ask for and share info about interests & priorities, but watch out for unilateral information exchange.
You are dealing with humans. Humans are more likely to cooperate if they perceive the process as personal, respectful, straightforward and fair.
Ganegoda, D 2019, Class 2: Planning For Negotiation, lecture notes, Negotiations, Melbourne Business School, delivered 23 Feb 2019
Sebenius, J., Fortgang, R. and Lax, D. (2003). Negotiating the Spirit of the Deal. Harvard Business Review.