Home            

Resume         

White Papers

Presentations

Preparation: What to do before Negotiation

By Arun Kottolli

The most important aspect of negotiation occurs before sitting at the negotiating table. Most people realize the importance of preparation, yet they do not prepare in an effective fashion. Often faulty preparation is due to the "Fixed Pie" perception. Negotiators who have a fixed pie perception tend to take one of the following three paths when preparing for negotiation:

Negotiations which follow a faulty preparation tend to become a battle of wills:

Ÿ Both parties are in attack mode,

Ÿ Both parties are ready for compromise

Ÿ A combination of attack & capitulation

Note that "Fixed Pie" perception is flawed, Alternatively one must adapt a mixed-motive decision making which is based on:

Ÿ Self-Assessment

Ÿ Assessment of the other party

Ÿ Assessment of the situation

Self assessment starts with asking the questions "What do I want?" "What are my alternatives?" etc.. Answering the first question may sound straight forward, but there are few major issues in deciding "What do I Want?"

Underaspiring negotiator asks for too less and the other party quickly agrees, this results in a regrettable situation known as Winner’s Curse. The immediate acceptance of one’s offer by an opponent signals that a negotiator did not ask for enough.

Every negotiator must determine his/her BATNA. A BATNA determines the point at which the negotiator is prepared to walk away from the negotiation table. In practice, this means that the negotiator must be willing to accept any set of terms that is superior to their BATNA and reject all outcomes that are worse than their BATNA. Here are some of the thumb rules:

Ÿ A BATNA is not what a negotiator wishes for; but it should be the worst case alternative!

Ÿ Aspirations or desire should not be confused for BATNA. The target point of what the negotiator aspires to get is not the BATNA

Ÿ BATNA should not be changed during the course of negotiations. Skillful negotiators often attempt to manipulate the other party’s perception of their own BATNA. Once BATNA is determined, a negotiator should not change his BATNA.

Ÿ Do not disclose your BATNA to your opponent!!

Ÿ BATNA represents his/her’s reservation point, as illustrated in the following example:

A student has a Job offer from company A for $90K/year, The student is negotiating with company B. In this negotiation, a salary of $90K/year is the reservation point & BATNA, i.e, the student can walk out of the negotiation if company B’s offer is less than $90K/Year

Ÿ Be aware of the focal points. Focal points are arbitrary in nature and has no real consequence on the negotiation. For example, Salary of your neighbor is a focal point, if the neighbor makes $120K a year, then that has not relevance with the student’s negotiations with company B. People often confuse focal points with BATNA

Sunk costs are just that, and has little bearing on the current negotiations. However people have a tendency to extract their sunk costs while negotiating to sell their house, car etc.. E.g.: If one paid $250K for a house or paid $300K for a house has no effect while trying to sell the house. The selling price of the house is determined by factors such as location, house size, quality etc.. The original purchase price has no impact on the selling price.

Negotiators must identify all the issues involved in the situation. Negotiating over a single issue while ignoring all others is a serious mistake (Which many are guilty of) Negotiating on a single issue makes negotiation very complex & frustrating. Often the single issue would be the price, people would bargain for hours or days on price while ignoring other terms such as payment methods, credit terms, warranty etc..

Identifying other issues involved in negotiations leads to identifying the alternative for each issue. For example in buying a house, the other issues are loan amounts, repayment terms, interest payments etc.. By identifying all issues and their alternatives, a negotiator can create a matrix of negotiating positions.

Once the other associated issues are identified, one must identify the packages of offers possible. In the student example above, a package offer of $90K/year + 10K signing bonus + 10 day vacation/year is a better package than $90K/Year + 15 day vacation & no signing bonus.

By identifying the other issues, negotiator can create several degrees of freedom to negotiate on and create an excellent position to identify a variety of terms in which both parties can be satisfied.

Negotiations involves risks, in the sense that there is uncertainty of the outcomes. However identifying ones BATNA makes negotiations risk neutral, i.e., if the negotiated outcome is worse than BATNA, one can walk away or if the negotiated outcome is better than BATNA, one stands to gain. In real life, negotiations are rarely risk neutral. This is best illustrated by the following example:

Most people would chose option A, which is incidentally their BATNA in this case, even when the expected value in both the options are identical. Choosing Option A over B reflects a Risk Averse attitude

Now in a situation like where one has to lose something:

Most people would chose option D over C, even when the expected value of the losses are identical. It is noted that in a losing situation, human behavior tends to take more risks & reflects a Risk Seeking attitude

Negotiations usually start with an uncertainty of the outcomes. Even after concluding the negotiations, there will be uncertainty called as contractual risk. Contractual Risk affects negotiations and forces a more risk averse attitude. This uncertainty is commonly seen in business acquisition. Where buyers will be more risk averse than the sellers when they know that the seller’s willingness to sell is a sure thing.

The fact who owns an object has an influence on the negotiations, irrespective of the value or the utility associated with the object. When someone who owns an object considers selling it , he or she may view the situation as a loss based on their reference point. The difference between the sellers demand & the buyers price is a manifestation of loss aversion, coupled with the rapid adaptation of a reference point. Therefore sellers will always demand more for the object than buyers are willing to pay. (Buyers are often willing to pay what the object is worth, and anything in excess of that value is to be considered as goodwill). Endowment effects are more prominent on items that are scarce or has significant emotional value (e.g.: Autographed baseball, cap etc..)

Often times buyers or negotiators agree on something and still have a distinctly less satisfaction. This is best illustrated in sports such as Olympics, One would expect the three medal winners would have the same level of satisfaction, Gold medal winner the highest, Silver medal winner is also satisfied but his/her satisfaction is lower than that of the gold medal winner. Finally Bronze medal winner must be least satisfied compared to the other two winners. The reality is quite different. The bronze medalist is very happy with the outcome as his/her reference point was no medal and he/she now has a medal. But the silver medalist emerges as dissatisfied as he/she regrets not getting the gold. It is observed that indeed bronze medalist are more happy than the silver medal winners.

This type of thinking is called Counterfactual thinking. That is thinking of what could have happened but it did not. People often set a higher reference point than what could be achieved during the negotiations, so irrespective of the outcome, there will be a remorse.

Preference reversals are inconsistencies in choice arising from their risk averse and risk seeking attitudes. Note that in the earlier example, how the risk aversion attitude in a positive situation changed to a risk seeking attitude in a negative situation.

To understand this phenomenon, consider the following example:

Two companies are for sale;

Majority would chose Company X, displaying a risk averse attitude

In an other situation 2 more companies are for sale;

Majority would chose Company B, displaying a risk seeking attitude.

Note that both the situations were identical, the difference in risk & pay off was identical, yet people made different decisions based on their attitude towards uncertainty. This inconsistency in choice leads to preference reversals.

The reason for preference reversal has to do with the aspects if the alternative that are salient to the decision maker. The prices of gambles are expressed in terms of dollars and therefore, when evaluating the value of the gamble, people focus on the money they could win. In contrast when gamblers choose between two gambles, the likelihood of winning is salient.

A skilled negotiator can present the same situation in two different ways and can skillfully manipulate the outcome is the opposing party tends to show his/her preference reversal behavior.

Decision making is difficult because often one does not know how to value the tradeoff of one attribute over the other. The decision is even more tougher when dealing with intangible factors such as "Quality of Life" Vs "Future Opportunities".

In such situation people often tend to make decisions by rejecting an offer and then settling for what ever that remains.

Consider a child custody battle between parents:

When the jury was asked to award the child custody to a parent, they chose Parent A, but when the other set of jury was asked which parent to deny the custody, they chose Parent A. All the situation being identical, just changing the nature of the question changed the result.

The implications of this behavior on negotiations are extremely important, During negotiations the opponent’s response may be dramatically different if they are choosing the options or if they are rejecting them. Therefore one must be cognizant of how to present the choices and how you would make a choice if you were to choose or reject an offer.

When faced with uncertainty about some event occurring, people are often reluctant to make a decisions and will even pay money to delay the decisions until the uncertain event is known.

E.g.: People will put off their vacation until the exam results are known, and irrespective of the final result, they take the vacation. Alternatively they could have taken the vacation earlier as the final result had no effect on them making the decision to take the vacation or not.

In a similar way, companies pay a consultant a fee to advise them on a business matter and then make a decision irrespective of what the consultant has to say.

These are called as violation of the sure thing principle. People are sure of making the decision in a particular way irrespective of the outcome of the uncertainty, but wait till the result of that uncertainty in known.

Negotiators often have a higher level of confidence that the final outcome will be in their favor if the final decision maker happens to be a third party arbiter. Typically both the parties will be overconfident that the third party arbiter will decide on their favor.

This overconfidence effect often is exploited or misused by opting for a third party arbiter in a negotiation instead of negotiating the issues themselves. Typically Labor union Vs Management disputes, International trade disputes etc. tend to use a neutral third party arbiter because both the parties think that the final decision will be in their favor.

Once the negotiator has evaluated his/her side needs or situation, its time to access the opponent. Start with asking following questions:

Ÿ "Who are the opponent?" : Who is being represented by whom? Who are present in the negotiation and who are not present but have a big say in the negotiation. Sometimes the most important & influential parties are not the ones who appear at the negotiation table; A part of their power comes from being away from the table.

Ÿ "Are the parties monolithic?": That is are all the members on the other negotiating side are in agreement, have a single voice, have the same interests? It makes sense to present a unified voice, but often difference exist which can be exploited by a skilled negotiator.

Issue Mix: Do the other side have the same set of issues as we have? If both the parties have a different set of issues, negotiations reduces to a comparison of apples & oranges

Interests and Positions of Others: A negotiator should do his homework and know the interests and positions of the other party

Other party’s BATNA: This is probably the most important information and should be the one closely guarded. It is highly unlikely that the other party will revel their BATNA, so the negotiator must do a good research to identify their BATNA

After self assessment and assessing the opponent, one must assess the situation by asking:

Effective preparation gives the negotiator a strategic advantage at the bargaining table. First step of preparation is self assessment and identification of BATNA. One must be willing to walk away from the negotiations when the outcome is worse than their BATNA. Good preparation also involves knowing as much as possible about the opponent and the negotiating situation.