Please Ensure That All Parties Have Sufficient L to Finalize a Partnership and Try Again

Idea in Brief

The Problem

Some of the costliest mistakes in negotiations take place before anyone sits down at the bargaining table. That's because deal makers tend to focus too much on substance—offers, counteroffers, concessions—and not plenty on procedure.

The Solution

Four strategies can assistance gear up the stage for a successful negotiation.

• Negotiators need to address matters of procedure at the outset.
• They must ready realistic expectations.
• They demand to conspicuously identify all players that will influence or be influenced by the deal.
• And they must ready the psychological frame through which the deal volition be viewed.

Countless books and articles offer advice that can help deal makers avoid missteps at the bargaining table. But some of the costliest mistakes take place before negotiators even sit downward to hash out the substance of the bargain. That'southward because people autumn casualty to a seemingly reasonable—but ultimately faulty—assumption about deal making. Negotiators often take information technology for granted that if they bring a lot of value to the table and take sufficient leverage, they'll be able to strike a great deal. While those things are certainly important, many other factors influence where each political party ends upwardly.

In this article I depict on my experience advising scores of companies on deals worth millions or billions of dollars to nowadays four factors that can have a tremendous impact on negotiation outcomes. In each case, I provide guidance on what negotiators should exercise before either side starts making offers or counteroffers.

1. Negotiate Process Before Substance

A couple of years ago, two cofounders of a tech venture walked into a meeting with the CEO of a Fortune 100 company who had agreed to invest $10 1000000 with them. A calendar week earlier, the parties had hammered out the investment corporeality and valuation, so the coming together was supposed to exist celebratory more than anything else. When the cofounders entered the room, they were surprised to see a team of lawyers and bankers. The CEO was besides at that place, but it soon became articulate that he was non going to actively participate.

As before long as the cofounders sat down, the bankers on the other side started to renegotiate the deal. The $10 meg investment was still on the table, only now they demanded a much lower valuation; in other words, the cofounders would have to requite up significantly more equity. Their attempts to explain that an agreement had already been reached were to no avail.

What was going on? Had the cofounders misunderstood the level of commitment in the previous coming together? Had they overlooked steps involved in finalizing the bargain? Had the CEO intended to renege all forth—or had his team convinced him that the bargain could be sweetened?

Upset and dislocated, the cofounders quickly assessed their options. Accepting the new bargain would injure financially (and psychologically), but they'd get the $ten million in needed funds. On the other hand, doing so would significantly undervalue what they brought to the table. They decided to walk out without a deal. Before they left, they emphasized their strong desire to do a deal on the initial terms and explained that this was a matter of principle besides as economic science. Within hours, they were on a plane, not knowing what would happen. A few days afterward, the CEO called and accepted the original bargain.

The gutsy move worked out for the cofounders, but information technology would have been improve not to let things become wrong in the showtime place. Their fault was a common i: focusing too much on the substance of the bargain and not plenty on the procedure. Substance is the terms that make upward the final understanding. Process is how you will get from where you are today to that agreement. My advice to deal makers: Negotiate process before substance.

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Consider another scenario. You've been negotiating with someone for months. You accept a few final concessions that you've been belongings back—they're costly but worth making if it will close the deal. With the stop line in sight, you make the concessions, and the other side responds: "This is great. I appreciate your flexibility on these issues. Let me share this with my boss to see what she thinks." Unfortunately for yous, you had no idea your counterpart even had a boss—you idea he was the concluding decision maker. The negotiations are clearly non over, and you lot have nada left to requite.

The more clarity and commitment you have regarding the process, the less likely yous are to make mistakes on substance. Negotiating process entails discussing and influencing a range of factors that will affect the outcome of the bargain. Ask the other party: How much fourth dimension does your visitor need to close the deal? Who must exist on board? What factors might slow downward or speed upward the process? Are there primal milestones or dates we should be aware of? Remember to observe out elementary things such every bit, Who will be in the coming together tomorrow? What will the agenda exist? Since we are non going to hash out the problems of importance to us in the next meeting, when will nosotros address them?

Of course, you tin't always go clear answers to every question at the starting time—and sometimes information technology is premature to ask certain questions. But you should seek to clarify and reach agreement on equally many process elements as possible—and equally early as is appropriate—to avoid stumbling on substance later.

2. Normalize the Process

A man of affairs who owns multiple manufacturing facilities in Asia in one case told me that he no longer does business organization with companies from the Westward unless their top managers are willing to showtime fly into his urban center to meet with him. My initial thoughts were: Is this about ego? Is it nigh building relationships? Is it a cultural norm or ritual of some sort? Actually, none of those had anything to do with his precondition to signing a contract.

Here's how he explained it to me: "Until they have flown into my city and then driven to our manufacturing plants—which are located twenty kilometers from the airport but take almost three hours to reach—until they have experienced that, they simply don't understand how things work around here. And if they don't understand, we come across serious problems. Because the first time there is a filibuster or disruption, or if we need to renegotiate something, they will immediately assume we are either incompetent or stealing from them. In one case they've seen how things actually work, we can have a more productive relationship."

Unless business organization partners sympathise what is "normal" in a given context or culture, they are likely to misunderstand or overreact to agin events. The same is true in negotiations of all kinds: It is important to normalize the process. If you've ever been involved in an ugly conflict that went into arbitration, y'all may have seen this in action. When a good mediator sits down with parties who are in a bitter dispute, she might say something similar, "You think you lot hate each other today? I can assure you, about 3 days into this process, you lot're going to hate each other fifty-fifty more. And when that happens, I want you to recall something: That's normal."

Tell counterparts what to wait and then they don't overreact to bumps in the road.

If the mediator does non give this alert, the parties are much more than likely to abandon the procedure when emotions enhance and things seem to be falling apart. Simply if she explains at the get-go that information technology's normal for things to become worse before they get better, the parties are more than likely to keep at it. By normalizing the process, she finer manages their expectations.

The same principle applies to any negotiation where there'due south a run a risk that things will not go perfectly smoothly. If you anticipate delays or disruptions on your side, tell your counterparts. This allows you to shape how they will translate a negative upshot should one occur and to ensure that they practice not overweight its significance. Y'all'll have a much harder fourth dimension trying to influence their perceptions or win back their trust after something goes wrong that they did not expect.

Normalizing the process entails discussing, in advance, any factors that might cause the other side to question your intentions or power or to doubt the likelihood of a successful outcome. Y'all might explain typical barriers that need to be overcome, moments during the procedure when information technology'south common for parties to experience anxious or pessimistic, events that might delay progress, and the deviation betwixt disruptions that are commonplace and easy to resolve and ones that are more serious.

Encourage the other side to practise the aforementioned for you. People oft hesitate to talk over "what might go incorrect," because they're focused on presenting themselves and the merits of the bargain in the all-time possible lite. This is especially true in certain cultures and in contexts where competition is fierce. Your analogue might exist thinking, "Why should I talk about bug if my rivals are pretending things will be great?"

That's understandable. If other parties think that mentioning a potential disruption could price them the business, or that you'll utilize it as a lever to extract greater concessions, they're unlikely to exist truthful. To encourage people to be open near problems, make it safe for them. Explain that you are experienced enough to know that every deal and relationship is likely to encounter difficulties and disruptions, and that you want to larn more virtually the specific risk factors that might play a role in this case. And if you can signal (or commit to) having no intention of holding those factors against them, you lot have a meliorate chance of reaching an understanding that works for both sides.

iii. Map Out the Negotiation Infinite

Some years ago, a customer of mine was preparing to sell his stake in a company that was jointly endemic by 4 entities. The owners had been squabbling for many years; it was articulate that the nugget would need to be consolidated nether one political party (or possibly two who could get along). Information technology was likewise articulate that no ane wanted to sell. However, there was fiddling choice in the affair, because one of the owners—Company Ten—was a much larger company with the power and the clout to button people out. It announced that it would purchase out the other 3.

My client wanted to wait until Visitor X had bought out the other two owners earlier negotiating the auction of his shares. He figured that by being "the last piece of the puzzle," he would be able to hold out for more money.

When nosotros met to discuss his strategy, I asked him to stride back and "map out the negotiation space." This consists of every party that can affect the negotiation, along with any party that volition be affected by the negotiation. In my experience, a strategy that makes perfect sense when yous're thinking bilaterally—that is, nearly the relationship between any ii parties in the negotiation—can suddenly become ineffective or even disastrous when you accept a multilateral perspective. I encouraged my client to evaluate the interests, constraints, alternatives, and perspective of all the relevant parties. One of the things we looked at was how much equity each party had and how much of the board each one controlled:

We and then focused on the interests of each company: What exactly are their interests in this deal? How would yous rank their priorities? The 4 parties had known one another a long time, and my client did not have any problem identifying what mattered most to each. Company 10, for example, was concerned about iii things, and its priorities were as follows: (1) Reputation: It did non desire ties with whatever arrangement that could hurt its reputation. (ii) Control: It wanted buying only in businesses where information technology had a majority of board seats, and (three) Coin: It would want to pay as little every bit possible, but this was not as big a concern every bit reputation and control.

Later on delving into the perspectives of all parties, nosotros unearthed i more of import flake of information: Company A was the to the lowest degree interested in selling and was already putting up a fight that could drag things out.

When we put all these details together, it became clear that the "last piece of the puzzle" strategy would be unwise. Why?

For Company X, control was a higher priority than money. To get control, information technology needed to buy either my customer or Company A—every bit soon every bit it made either purchase, information technology would control more than 50% of the board seats and hence the company (for most decisions). Therefore, if my client were the terminal to sell, he would be negotiating with Company X afterwards it had control. At that time, my client would be able to get paid simply for his 1/6 share of the firm's equity. Just if he were to sell first, at a time when Company A was refusing to sell and was making things hard for Visitor X, he could monetize 2 assets: his shares and his lath seat. In other words, the final party to negotiate would have the least leverage and limited opportunities to monetize its avails.

Make certain to consider the perspective of every party that can impact the deal.

In the real world, yous'll never have as complete a motion picture as yous'd like, but y'all put yourself at further disadvantage if you lot focus too narrowly on the party on the other side of the table. You have to assess the perspective of all the parties that can influence or are influenced past the deal: Who has the ability to influence the person on the other side of the table? How might the strategy or actions of other parties change your alternatives, for better or worse? How does the deal affect the interests of those who are not at the table? How will this negotiation affect your leverage with hereafter negotiation partners? If multiple parties are involved in the bargain, does it make sense to negotiate with them simultaneously or in sequence, together or separately?

Your analysis might propose a modify of strategy—that you should negotiate with a different party first, filibuster the deal or speed information technology up, bring others into the room, expand or contract the scope of the deal, and so on.

4. Control the Frame

The result of a negotiation depends a great bargain on each side'south leverage—the better your outside options are and the more ways you accept to reward or coerce the other side, the more than likely y'all are to attain your objectives. But the psychology of the deal can exist just as of import.

In my experience, the frame, or psychological lens, through which the parties view the negotiation has a significant effect on where they end up. Are the parties treating the interaction every bit a trouble-solving practice or equally a battle to be won? Are they looking at information technology as a meeting of equals, or practice they perceive a difference in status? Are they focused on the long term or the short term? Are concessions expected, or are they seen equally signs of weakness?

Effective negotiators will seek to control or conform the frame early on in the process—ideally, before the substance of the deal is even discussed. Here are three elements of framing that negotiators would exist wise to consider.

Value versus cost.

I've worked with many technology companies whose innovative products provide tremendous value for customers merely are priced significantly college than what their competitors are charging—or what customers are paying for their legacy systems. While the high price is justified by the value proposition, salespeople often face up immediate resistance when a potential client learns that the price will be five or 10 times the amount he is currently paying. Besides often, the salesperson will hear something similar: "You lot are charging five times what others charge. No 1 pays that much for this kind of matter!"

From the beginning, control the lens through which parties view the negotiation.

Ane of the nearly common mistakes salespeople make in those situations—without even realizing it—is to repent for having a loftier toll. They do this when they say "I understand information technology'southward pricey, but…" or when they hastily betoken a willingness to adjust the price. My advice: E'er justify your offer, but never apologize for it. When you lot apologize, you point that fifty-fifty you don't think the price is advisable, and you lot give the other side license to haggle. The entire frame of the negotiation becomes almost toll, when what you really desire to talk over is value.

A better response would be, "What you lot seem to be request is, How is it that despite a college price, we still have a long and growing listing of customers? We both know that no one will pay more for something than information technology'south worth, then let's hash out the value we bring and so that you tin make up one's mind what's all-time for yous."

In negotiations of all kinds, the sooner you can shift the discussion away from the cost to your counterpart and focus on the value yous bring to the tabular array, the more likely it is that you lot volition exist able to monetize that value.

Your alternatives versus theirs.

Research and feel suggest that people who walk into a negotiation consumed by the question "what volition happen to me if there is no deal?" become worse outcomes than those who focus on what would happen to the other side if there'south no bargain. When y'all are overly concerned with your own alternatives, and especially when your outside options are weak, you think in terms of "what volition it take (at a minimum) to get them to say yes?" When you lot brand the negotiation nigh what happens to them if at that place is no deal, you shift the frame to the unique value y'all offer, and it becomes easier to justify why y'all deserve a skilful deal.

Equality versus authority.

Not then long ago I was consulting on a strategic deal in which our side was a small, early-stage company and the other was a large multinational. One of the virtually important things we did throughout the procedure—and particularly at the outset—was brand sure the difference in company size did not frame the negotiation. I told our team, "These folks negotiate with two kinds of companies—those they consider their equals and those they think should feel lucky just to exist at the table with them. And they treat the two kinds very differently, regardless of what they bring to the table." Over the years, I've seen many big organizations impose demands on their perceived inferiors that they'd never require from those they considered equals. In this negotiation, I wanted to make sure our analogue treated the states similar equals.

To go along the dominance frame from taking hold, we started shaping expectations and perceptions at the very beginning, before nosotros even considered the economics of the deal. For example, whatsoever time our counterpart fabricated a procedural demand—however small—that we felt they would not accept made of an equal, we respectfully pushed back on it. Any fourth dimension they included a provision in the term sail that seemed one-sided, fifty-fifty if it would non have been a costly concession, we redrafted information technology to be symmetrical. And throughout the negotiation, we fabricated sure they understood that although our house was much smaller, nosotros were equals in this negotiation considering of the tremendous value we offered. While I am not an advocate of nitpicking on minor issues, in this case we did and then intentionally to assist ready the correct frame.

Negotiators can shape the frame in countless other ways and on many other dimensions. At the very least, you desire to ensure that the psychological lens that takes hold respects the value yous bring to the table.

In The Art Of War, Lord's day Tzu posits that every war is won or lost before it fifty-fifty begins. At that place is truth to this sentiment in most strategic interactions. While it would be unwise for negotiators to minimize the importance of carefully managing the substance of a bargain, they should brand every effort to avert the mistakes that can occur before anyone has even formulated an offer. Past paying attention to the four factors discussed here, y'all increase your chances of creating more-productive interactions and achieving more-profitable outcomes.

A version of this article appeared in the December 2015 issue (pp.66–72) of Harvard Concern Review.

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Source: https://hbr.org/2015/12/control-the-negotiation-before-it-begins

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