When we advise our clients on
negotiations, we often ask them how they intend to
formulate a negotiation strategy. Most reply that they’ll do some planning
before engaging with their counterparts—for instance, by identifying each
side’s best alternative to a negotiated agreement (BATNA) or by researching the
other party’s key interests. But beyond that, they feel limited in how well
they can prepare. What we hear most often is “It depends on what the other side
does.”
Fair enough. For most
routine negotiations, a reactive approach is sufficient. When the stakes are
low, skilled negotiators can pivot with relative ease from one tactic to
another as the opposite side makes moves, and often that’s enough to ensure
that the final deal fully captures value for them. But from time to time
dealmakers find themselves in complex negotiations with higher stakes. In those
situations they require a much more robust approach. Just like business,
political, and military leaders, negotiators need a strategic framework that
illuminates the key choices they must make to achieve their ultimate
objectives.
In the 30 years we’ve spent
as advisers on hundreds of negotiations, ranging from agreements to resolve
armed conflict to multibillion-dollar commercial deals, we have codified what
makes negotiation strategies effective. Negotiators should start developing
them well before the initiation of talks, but the process is dynamic and
iterative and should continue until the final deal is inked—and in some cases
beyond. With well-thought-out strategies, negotiators can suppress the urge to
react to counterparts or to make preemptive moves that are based on fears about
the other side’s intentions. They’ll be able to prepare for the worst but not
trigger it—and to identify the actions most likely to have a significant impact
on deal outcomes.
Here are the key strategic
principles negotiators should apply to their next complex deal.
Rethink
Counterparts
People tend to pursue deals
with the obvious parties. If we’re sellers, we search for a buyer; if we’re
borrowers, we search for a lender. But we often overlook many others in the
ecosystem surrounding the negotiation: our competitors, suppliers, and
customers—and their competitors, suppliers, and customers. We need an approach
that encompasses all the parties that can and will help us fulfill our
objectives.
To devise one, negotiators
should answer the following questions:
- What business outcomes do we seek through this negotiation?
- Who cares about those outcomes?
- Who can do something to bring about those outcomes?
- How can we engage, directly or indirectly, with parties that share
some of our interest in achieving those outcomes?
Consider how the holder of
key patents necessary to play movies and music on DVDs sought to prevent
low-cost manufacturers in China from infringing on its intellectual property
(and competing unfairly with its duly licensed partners). Initially, it tried
to negotiate with those manufacturers, but in most cases it was simply ignored.
And even when the Chinese manufacturers were successfully challenged and subjected
to a legal process, they would simply close shop and then reopen under a
different name.
Working backward from the
desired outcome (halting sales of infringing products in significant markets),
the patent holder realized that although it couldn’t dissuade manufacturers
from making unlicensed DVD players, it could persuade large importers and
distributors to stop buying and selling those products. By helping the
importers and distributors recognize the infringement and intellectual property
issues, the patent owner got them on the same side of what would otherwise have
been a steep uphill negotiation with the unauthorized manufacturers.
Analyze
Counterparts’ Constituencies
In high-stakes
negotiations, dealmakers tend to talk about how much power and leverage the
other side has, what the other side will or won’t agree to, and how to
influence its behavior. While viewing counterparts as if they were one
monolithic entity is convenient, that attitude regularly leads to analytical
and strategic missteps. (In the realm of international diplomacy, negotiators
have traditionally been somewhat more attuned to thinking about how to
influence multiple constituencies when forging deals—be it with the Taliban or
the old Soviet Union.)
There are often opportunities to change a deal’s scope and achieve
better results.
For example, a customer
might perceive itself to be at a disadvantage in a negotiation with an
important supplier because it represents only a small piece of that supplier’s
overall business. A closer look, however, might reveal that it accounts for a
fairly large percentage of the business at one of that supplier’s plants or in
a specific geographic market for a particular unit. Though the supplier’s
corporate leaders might view the customer as insignificant, the plant manager
or unit head who depends on it would see it as critical. A corporation isn’t
one uniform organization; it’s a federation of businesses. Most often, profits
and losses are assessed not only at the enterprise level but by unit,
geography, product, and plant. The authority to negotiate contracts is usually
(though not always) delegated accordingly. Carefully parsing a counterpart’s
constituencies is essential to understanding negotiation leverage.
The supply chain team at a
large hospitality and entertainment company took that lesson to heart in
negotiations with major beverage suppliers. The team members recognized that
bargaining with their sales counterparts over volume discounts would achieve
limited value. It was only by broadening the discussion well beyond discounts
and the purview of sales that they learned that other stakeholders within their
suppliers had much more value to contribute. There were also opportunities to
discuss promotional sponsorships at the entertainment company’s venues and
events, the strong relationships the beverage suppliers had with performers who
could fill those venues, marketing events that the suppliers could host at the
entertainment company’s hospitality properties, and more.
Rethink the Deal’s
Scope
The vast majority of
negotiators take the fundamental scope of a deal as a given. They may consider
a limited set of choices—for instance, shorter- versus longer-term deals—but by
and large their tactics are guided by a comparison between their BATNA and how
close to some preferred outcome they think they can get. As the entertainment
company’s example illustrates, however, there are often significant
opportunities to change the scope of negotiations and achieve much better
results.
Consider a health care firm
that was seeking to renegotiate the terms of a major supply contract with a
pharmaceutical company. The health care firm needed much more manufacturing
capacity from a major plant owned and operated by the pharma company. The
pharma company was loath to offer more capacity than the original contract
specified, because it anticipated needing to make more of its own products at
the same facility in the future. Many creative options were explored, including
shared capital investments to increase the plant’s efficiency and output,
altered financial terms, and the possibility of a “plant within a plant”
operating model. Nonetheless, no solution appeared to meet both sides’ needs.
However, when the scope of
the negotiation was increased beyond altering the existing agreement, and both
sides stepped back to reevaluate (and share information on) their respective
global operations (including plans for building new plants) and growth
objectives (and associated capital investment needs), they were able to reach
an agreement. The new contract rebalanced production and supply across multiple
plants and delivered substantially more value to both parties. The negotiators
didn’t expand just the pie; they expanded the entire menu.
Or take the financial
services firm that was seeking to renew a contract with a company that owned
proprietary data assets and was demanding a hefty price increase. An analysis
of the annual report and earnings calls of the data company showed that it was
focused on increasing revenue from other products and services—ones the
financial services firm was purchasing from several other suppliers. While some
of those current suppliers were highly valued partners, and it didn’t make
sense to contemplate shifting business away from them, in other cases the
financial firm could give the data provider an increase in business in the
areas it wanted to build. The firm’s negotiating team offered to do
that—but only if the provider agreed to more-reasonable terms
on the data it enjoyed a de facto monopoly on.
It’s worth noting how
counterintuitive this approach is. When confronted with opposing parties who
seem to have more leverage, the natural tendency is to look for ways to weaken
that leverage—to find walkaway alternatives and issue threats. Such attempts
often come up short or undermine deal success. The lesson here is to offer the
other side new opportunities instead of focusing just on the
needs that only it can meet for you.
Think about how precedents a deal sets may create anchors in future
negotiations.
Sometimes the right
strategy is even to reduce the scope of the deal. A classic
piece of negotiation advice is to carefully evaluate (and seek to improve) your
BATNA. The problem is, in most high-stakes negotiations, there’s really no
viable alternative to some deal with the other party. Digging deeper into BATNA
analysis is vital in such scenarios. The key is not to simply consider
wholesale alternatives to any agreement with a powerful counterpart but rather
to explore alternatives to some elements of what you’re seeking through that
deal.
About the art:
Photographer Jeff Minton captured the salespeople at a car dealership in
Levittown, New York, hustling to meet their monthly quotas.
Here’s how that approach
worked for a medical device company that felt powerless in its negotiations
with a distributor that dominated an important regional market. No other
distributor had comparable coverage in the region. After considering expanding
the scope of the deal, the device maker instead opted to narrow it. It
identified alternative distribution channels for some of its products in some
segments of the regional market. Bringing its products to market with a
portfolio of smaller distributors would have been prohibitively complex and
would have increased costs and reduced revenue. But once the device maker had
defined a strategy to narrow the scope of the deal with the incumbent
distributor, the negotiations moved to a considerably more even footing.
In fact, the distributor
stopped making demands and threats and became willing to engage in a
collaborative process. The two sides jointly evaluated where it was especially
costly for the distributor to service the device maker (business the
distributor was actually happy to give up) and where it would have been most
difficult for the device maker to move to alternative distributors. The
narrower scope made the distributor willing to reduce some of its requirements
(meant to cover the costs of distributing low-margin products in
expensive-to-service segments). For the device maker, the cost of agreeing to
much of what the distributor was requesting dropped significantly.
Rethink the Nature
of Leverage
All too often dealmakers
conflate negotiation power with a strong BATNA and the concomitant ability to
hurt the other party. Essentially, the message they send is: We don’t need a
deal with you, and you need a deal with us, so we get to dictate the terms.
Such a mindset leads to pressure tactics. It also makes negotiators who lack
attractive walkaway alternatives conclude that they have no power, which in
turn causes miscalculations and unwarranted concessions. Moreover, their sense
of powerlessness can breed fear and resentment—negative emotions that hamper
creative thinking about potential avenues to an optimal outcome.
The solution is think
beyond walkaway alternatives and consider multiple sources of not only coercive
leverage but also positive leverage. By positive leverage, we
mean things negotiators can uniquely offer to make the other side desire a
deal rather than fear the absence of one.
Many technology firms have
IP teams that seek to persuade consumer electronics companies such as Apple,
Sony, and LG to pay for licenses. The negotiation of IP rights in this market
is dauntingly complex. Patent infringement is pervasive—though often
unintentional. Legitimate efforts to collect royalties are vastly complicated
by the well-known phenomenon of patent trolls. As a result, most IP licensing
teams struggle to “move up in the queue” for simple consideration by
underresourced in-licensing teams, who feel besieged by all the parties
claiming the right to royalties—and offering little in return except an
agreement not to sue.
The IP licensing team at
one well-known tech firm had a strong claims portfolio and compelling market
data about the rights that other companies were infringing. The team tried to
be creative and flexible, offering to blend payments for past infringement,
ongoing royalties, and cross-licenses. However, its BATNA—filing lawsuits
against infringers that ignored it—wasn’t strong, because the ability to
enforce patent rights and collect damages had been hampered in recent years in
many jurisdictions around the world. The firm didn’t have a particularly good
track record in court, either. To various consumer electronics companies, it
made sense to rebuff the team’s demands. And so they did.
Thinking in binary terms is almost always counterproductive.
By researching the business
models and strategies of the electronics companies, the team was able to
pinpoint which of its firm’s patented technologies were complementary to
important initiatives at each target licensee. Working with the firm’s tech and
sales departments, the team then defined value propositions showing each target
licensee how it could use the firm’s IP to generate new products or revenue
streams. One electronics company, for example, could leverage the tech firm’s
sound and imaging IP in elder-care offerings, and another could enhance its
device with the firm’s virtual reality expertise. Those opportunities made it
worthwhile for the electronics companies to engage in meaningful negotiations
with the team. Though this strategy required a lot of time and effort, the
payoff was worth it.
Look for Links
Across Negotiations
Most negotiators focus
exclusively on maximizing the value of the deal at hand. In doing so, they
often undermine the success of future negotiations—their own and those of their
colleagues. A strategic approach requires considering success beyond the current
deal and, in particular, how the precedents it sets will create anchors and
shape dynamics in future negotiations. After all, except with pure sales and
purchases of assets, most high-stakes business negotiations are repeat
transactions undertaken in the context of long-term relationships.
Analyzing links across
multiple negotiations can unearth hidden forms of leverage. Consider the case
of a global semiconductor company that felt continually squeezed by
unreasonable price increases from OEM component suppliers. A major problem was
that negotiations over initial licensing or codevelopment of technology for new
products were conducted by one group, whereas subsequent contract negotiations
(with the same suppliers, but occurring years later) were handled by another
group, with relatively little coordination between the two. Meanwhile,
negotiations with those suppliers and other third parties for maintenance and
repair services and spare parts were handled by yet another group, and all
three kinds of negotiations occurred on different timetables.
How to
Pressure-Test Your Strategy
One key to negotiation strategy is putting yourself in the shoes of your
counterparts and truly understanding their ...
By looking at these
separate but related negotiations holistically, the semiconductor company was
able to alter the power dynamics. Teams negotiating supply agreements
acknowledged that they had little choice but to accept an incumbent supplier’s
pricing and terms but were able to point to upcoming product introductions and
warn that unreasonable positions held now would most likely exclude suppliers
from being considered for next-generation products—and all associated
downstream revenue. They also shared data about maintenance and repair revenue
streams and their growing ability to redirect such business to partners who
demonstrated reasonableness and good faith.
Threats and promises about
future business had been made in the past by the company’s negotiators, but
they weren’t specific and lacked credibility. Now the benefits of increased
cooperation and the potential loss of opportunities were tangible to
suppliers—and hence persuasive.
Consider the Impact
of Timing and Sequencing
Many people seek to speed
up or slow down negotiations to put pressure on the other side and extract
concessions. But pressure tactics often backfire. Careful consideration of how
the other side is likely to respond should guide when to accelerate, slow down,
or pause a negotiation.
Several years ago a small
technology company was in negotiations to renew a critical deal with an
internet behemoth. The small company depended a lot on the revenue the deal
produced, and the thought of going without it for even a short time was
frightening. Seeking to pressure the small firm, the behemoth showed little
urgency to complete the deal and signaled that it wasn’t sure the contract was
worth renewing.
That turned out to be a
major miscalculation. Recognizing that it could do little to get the other side
to go faster, the small company’s negotiation team decided to make use of the
time to build support within the firm’s ecosystem of customers and business
partners for the possibility of partnering with one of the behemoth’s giant
competitors instead. That time was well spent. As such an alternative went from
unimaginable to conceivable to plausible, the smaller firm’s leverage grew. In
the end the contract with the behemoth was renewed for a nine-figure value that
represented a nearly five-fold increase over the expiring deal. While the
passage of time did make the small firm nervous about its dwindling cash
reserves, it also gave it the opportunity to substantially alter the landscape
in which the negotiation took place.
Choreographing the sequence
in which you address issues or engage different players is also important.
Resolving some issues may reset the stakes or reframe the remainder of the
negotiation.
A good example of
strategically rethinking sequence in a negotiation comes from the oil and gas
industry. As part of a joint venture deal with a national oil company, one
large multinational had agreed that if a particular competitor wanted to add
itself to the deal later, it could do so by paying its share of the capital
plus interest for the time it hadn’t participated. A few years later that
second multinational indeed triggered its option and sought to open
negotiations on the rate of interest. Instead of discussing how many points
above or below LIBOR would be appropriate, the multinational decided to go back
to the oil company and negotiate what further terms should apply to the revised
deal. The multinational proposed the principle that a later entrant shouldn’t
earn a higher rate of return than the original partners, who had taken a
greater risk before the project had proved its value. The oil company readily
agreed.
With that matter settled,
the multinational turned to the new partner-to-be and demonstrated, using the
recently audited books for the joint venture, that the interest owed by an
incoming partner would have to be 60% a year, not anything like LIBOR. After
some initial shock, the incoming partner agreed.
Five questions can help
negotiators strategically manage timing and sequencing:
- What changes in the external marketplace might increase or decrease
the value or importance of the deal for each party?
- To what extent can we use additional time to strengthen our
walkaway alternatives?
- To what extent can the other side use additional time to strengthen
its walkaway alternatives?
- How might deals negotiated with other parties affect the scope of
the negotiation or create precedents that influence the way we resolve key
issues?
- What events or changes in the external marketplace might adversely
affect the strength of our walkaway alternatives—and the other side’s—or
create mutually beneficial opportunities?
Be Creative About
the Process and Framing
When approaching a
high-stakes deal with a powerful counterpart, many negotiators debate whether
to start by issuing their own proposal or by asking the other side to do so.
They also often wonder whether they should project
strength by asking for aggressive terms in their first offer or counteroffer,
or signal a desire for a win-win outcome through more-balanced and reasonable
terms. But such binary thinking blinds us to the many ways we might shape the negotiation
process to reduce risk and increase the likelihood of a great outcome.
Let’s look at a global
health care company that depended on a single supplier to make one of its
biggest revenue-generating products. The supplier held numerous patents essential
to the manufacturing process, so switching to a different one would have taken
years and major investments in redesign. But for many years the supplier had
been unwilling to collaborate on improving quality and manufacturing
efficiency. As the contract with it neared expiration, the health care company
pondered how to open the negotiation for a renewal. Should it demand big price
reductions and other improvements? Or should it begin with more-reasonable
terms and hope that the supplier responded in kind?
After much debate about the
trade-offs, the health care company developed a third approach. Rather than
beginning by sending an initial term sheet, it invited the supplier to a
prenegotiation summit—a joint discussion of what had worked well, and what hadn’t,
for each side under the prior contract and of how the market and each side’s
business objectives had changed. This was deemed a low-risk move. The supplier
might well decline the offer, but so what? The health care company’s
negotiation team would then simply revert to sending an opening term sheet.
How Reactive and
Strategic Approaches to Negotiation Differ
Reactive Strategic Focus on the deal terms Focus on shaping the
negotiation context and process Look for ...
To the surprise of some on
the team, the supplier accepted the invitation. During the summit the health
care company’s team shared an analysis of the economics and evolving market
position of the company’s product. It showed that unless the product’s price
fell significantly, new competitive offerings would take substantial market
share away from it. That would reduce not only the health care company’s
revenue but also the supplier’s. The analysis triggered an animated discussion
focused not on bargaining but on joint problem-solving. That in turn led to
thinking about how to creatively restructure the way the companies worked
together and to a set of principles for negotiating commercial terms in the new
contract, including a framework for sharing risks and rewards. The ultimate
deal saved the manufacturer tens of millions of dollars but was viewed by the
supplier as more favorable than the earlier contract. Both sides agreed that a
traditional “offer-counteroffer” negotiation process would at best have yielded
a significantly less valuable deal for both—and could easily have resulted in
no deal at all.
CONCLUSION
High-stakes negotiations
tend to produce a lot of anxiety. This leads dealmakers to focus on (perceived)
threats rather than identify all possible forms of leverage and think
expansively about options. When that happens, negotiators are more likely to
make poor tactical choices, either giving in to pressure from the other side or
inadvertently causing their own worst fears to come to pass.
A strategic negotiation
approach involves more than choosing a cooperative or competitive posture, and
thinking in such binary terms is almost always counterproductive. Assessing
connections between one negotiation and others with the same party over time
(and even with other parties), taking a hard look at whether they’re
negotiating about the right things, and focusing on when and how to most
effectively engage with the other side will unlock far more value for
dealmakers.
