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Negotiating in Three Dimensions
Negotiators sometimes can discover hidden sources of value and then craft agreements to unlock that value and overcome barriers created by poor deal design.
Tactics, deal design, and set-up are three crucial components of the most effective negotiations. Yet many negotiators focus only on the tactical part, running the risk of undermining their own best interests. How can you negotiate more skillfully and confidently with clients, partners, and adversaries as well as with colleagues within your organization?
Negotiation is a core competence for life, "not merely an important skill to be wheeled out for special occasions," they argue.
Martha Lagace: 3-D Negotiation presents a multi-dimensional approach for people who thought negotiation was only about what happens at the bargaining table. What common mistakes do you see and what typical assumptions about negotiation are you challenging?
James Sebenius and David Lax: Even experienced negotiators make mistakes in all three dimensions. Let us start with the least familiar kind of mistake. Flaws in our third dimension, the set-up of a negotiation, can take many forms: wrong parties, wrong issues, wrong walkaways, wrong sequence, wrong basic process choices. Here's one common set-up error (among many): It is easy to make one kind of mistake in your choice of negotiating agents. You know the importance of using a skilled and knowledgeable negotiating agent as well as crafting a contract that aligns your agent's incentives with your own. Yet a well-structured contract with your agent may not be enough.
For example, top executive pay attorney Joe Bachelder once took his client aside after the first negotiating session. The board had selected his client to be its next CEO and was working out his compensation package. Bachelder informed his client that he would end up with everything he wanted from the negotiation. Why was Bachelder so confident of total victory? Because, he explained, the board had put the firm's well-regarded general counsel in charge of the negotiations. Why was this a mistake? It was not an issue of effectiveness: The general counsel was undoubtedly a skilled negotiator. Yet, as Bachelder happily informed his client, "When this is over, you're going to be that guy's boss. He knows that. He can't fight you too hard on anything."
In retrospect, the board made a simple set-up error; it got the parties wrong in this negotiation. For its representative in these critical talks, the board should have hired an outside specialist, with properly aligned interests and incentives. More generally, you should look hard at a potential agent's other interests and relationships to determine whether he or she is part of the right negotiating set-up.
Now let's move to some errors in our most familiar first dimension, face-to-face tactics "at the table." Negotiators listen and communicate poorly, make cross-cultural gaffes, fail to respond effectively to hardball styles, and so on. One of the most common tactical errors arises when people become fixated on their bargaining "positions" rather than probing for the full set of underlying "interests," or what each side really cares about. Failure to uncover interests often leads to mistakes in our second dimension, deal design, such as treating potentially more cooperative agreements as pure price deals in which the interests of the parties are strictly opposed.
Consider an example of both kinds of mistakes from the U.S. Midwest. In this case, environmentalists and farmers opposed a power company's plans to build a dam. On the surface, the parties appeared to have deep, irreconcilable positions, which had resulted in a long stalemate. Yet a superior deal could be designed if the parties looked past their stubborn bargaining positions to their underlying interests.
By stepping back and mapping the parties' real interests, it emerged that the farmers were worried about reduced water flow below the dam, the environmentalists were focused on the downstream habitat of the endangered whooping crane, and the power company urgently needed new generating capacity and a greener image. After a costly legal impasse that threatened to last for years, the three groups designed a better deal that included a smaller dam built on a fast track, water-flow guarantees, downstream habitat protection, and a trust fund to enhance whooping crane habitats elsewhere.
Working solo or jointly at the drawing board, negotiators sometimes can discover hidden sources of value and then craft agreements to unlock that value and overcome barriers created by poor deal design. Here are some questions to ask the next time your talks seem stalled for deal-related reasons:
• Is price truly the only issue?
• Can we unbundle different aspects of what looks like a single issue and give each side what it values most—at low cost to the other side? Are there other high-benefit, low-cost trades?
• Should we add value-creating contingencies and risk-sharing provisions to the contract?
• Can the contract cope not only with economic issues but also with the egos involved?
These are but a few of the many common negotiating errors we see in practice.
Q: Your 3-D alternative draws on three dimensions: tactics, deal design, and set-up. In a nutshell, what do these elements mean individually and together? Should a negotiator weigh them equally, especially under time pressure?
A: Whether your focus should be on one or a combination of tactics at the table, deal design, or set-up moves away from the table depends directly on the nature of the barriers that you face. When you have a potential deal in mind, we have developed a set of tools to quickly perform what we call a "3-D barriers audit" to determine what barriers stand between you and your desired agreement. While there are many specifics, the broad diagnostic questions follow our three-dimensional scheme.
First, you should ask whether it is a tactical or people-related barrier like communication, trust, misperceptions, or the like. Second, you should ask whether the problem is deal-related: Does the proposed agreement offer sufficient value to the parties to be more attractive than no deal? Does it accomplish their objectives? Third, are there set-up problems such as wrong parties, interests, no-deal options, sequence, or basic process choices?
When talks stall, it's tempting to jump to conclusions: "It's purely a price gap." "They're being unreasonable." "We're not communicating well." "We're in a weak position." Instead of focusing on the first explanation that leaps to mind, you should critically diagnose the key barriers to the kind of agreement you have in mind; this will then allow you to devise the most promising approach to overcoming them. Without an accurate barriers assessment, the strategy and tactics you craft may address the wrong problems.
Imagine that a supplier is negotiating with an important but difficult client who adamantly refuses to budge on certain contract terms. Assuming that they face an interpersonal or tactical barrier, suppliers often seek training on the principles of persuasion, joint brainstorming, how to make advantageous initial offers, body language, and so on.
Yet apparent tactical or interpersonal barriers may actually be another type of problem. More broadly, the best response to a barrier in one dimension may be moves within other dimensions. As the purchasing agent calms down a bit, for example, he mentions that cash is very tight, "especially this quarter." Is this a deal-design barrier? Perhaps a delayed payment schedule would do the trick, with the bulk of the payment due when procurement budgets are replenished.
The frustrated supplier also may be overlooking a fundamental set-up barrier. While top management from both firms might speak of the importance of "partnership" and "quality," the purchasing agent may be motivated by monthly targets and pennies ground out of suppliers. To succeed, the supplier may need to create a more promising set-up with more sympathetic parties involved in the negotiation.
This can mean finding and nurturing an influential internal champion on the other side who would truly benefit from added quality and service. The supplier might induce such an advocate to persuade the agent on her behalf, directly or via links to senior management. Beyond a good proposal and the effective interpersonal skills needed in the initial two-party negotiation, a three- or four-party set-up—internal champion plus senior management in addition to the supplier and agent—can maximize the odds of the supplier's success at the ground level.
The broader point is to do a 3-D barriers audit, then craft a 3-D strategy to overcome those specific barriers. A 3-D strategy is an aligned combination of set-up moves away from the table, deal design moves "on the drawing board," and tactics "at the table" all tailored to overcome the barriers you've identified.
Q: One-on-one negotiations are often tough, but the complexity is magnified during multiparty negotiations, especially when some of the interested parties are not obvious. How do you advise flagging all key influencers?
A: To get the set-up of a negotiation right, you need to get the parties right. You might think that the parties are simply you and the person on the other side of the table, but it is often much more complex, requiring an act of disciplined imagination rather than a mechanical list. In our new book, we systematically work through ways to get the right "all-party map." In a nutshell, you need to take a disciplined look beyond the usual suspects to figure out who might really matter: potential and actual parties, internal and external players, principals and agents, decision makers and influencers, allies and blockers, and high- and low-value parties, as well as those who must approve and implement the deal. Map the relationships among those on your all-party map by assessing the informal as well as the formal decision and governance processes.
For example, to improve the odds of your ultimate target saying "yes," we often use a process called "backward mapping." Start by trying to discern who influences the target player and to whom that player defers. For example, when we were advising a client who was eager to sell his company, we counseled him against his instincts to quickly open serious negotiations with a potential acquirer's CEO. Instead, we researched whom the CEO would turn to regarding acquisitions. Of course, his CFO would be pivotal. Continuing to map backwards from the CFO, we turned up an analyst in the finance department whom the CFO deeply respected and who would almost certainly do the valuation work on this somewhat unorthodox deal. After initial contact with the CEO, we spent a great deal of time ensuring that the key analyst bought into the deal. When intensive negotiations finally began with the CEO, the groundwork had been laid. The CEO turned to his CFO, who turned to his key analyst, who made our case from the inside.
Q: You've asserted that negotiation should be a core skill for virtually all managers. Why? How can managers who are not directly involved with deal making assess and hone their own skills on a regular basis?
A: Most important managerial problems involve people whose interests and perceptions are in some conflict. Effective management and leadership often depend on the capacity to envision and bring about sustainable agreements among these parties. This is true with respect to discrete transactions such as mergers, labor contracts, and out-of-court settlements. It is true when working out new supplier and customer relationships, dealing with large shareholders and creditors, as well as initiating and managing cross-border strategic alliances. It is true inside the firm where people from different functional areas and divisions need to reach and implement new cooperative arrangements in response to change. It is true with respect to conflicts arising from the interaction of businesses with governments as well as with environmental and other nongovernmental organizations. It is true as workforces become more diverse and business increasingly crosses borders and cultures. And it is endlessly true for entrepreneurs who must come to productive terms with investors, potential employees and board members, technology partners, distributors, and possible acquisitions as well as would-be acquirers.
Yet beyond such formal deals, negotiation is increasingly a way of life for effective managers for at least three sets of reasons.
First, formal authority, hierarchy, and command are less and less able by themselves to ensure productive cooperation and genuine commitment. This is the case internally where cross-functional and inter-unit coordination is crucial and where greater professionalization means that key employees and colleagues both have and value more autonomy. It is also true externally with an increasing number of influential stakeholders outside the traditional chain of command. Newer and flatter organizational forms—strategic alliances, joint ventures, tightly-knit supply chains across different firms, virtual corporations, network entities, as well as team-based processes—generally require almost continuous negotiation to function effectively.
Second, the sheer pace of change in markets, technologies, and competition puts a sharply increased premium on the capacity of organizations to flexibly respond by devising new arrangements and renegotiating the old ones. Salient examples requiring some truly complex negotiations include the convergence of computing, telecommunications, and information/entertainment sectors as well as a steady flow of restructurings, especially in heavily leveraged parts of the corporate, financial, and real estate sectors. Operationally, "flexibility" in the face of a faster pace of change—combined with an increasing number of influential stakeholders—means that yesterday's arrangements must be reworked into today's, and that today's will have to be altered to meet the needs of tomorrow. Persuading key stakeholders to abandon familiar practices and perceived entitlements can severely test a manager's negotiation skills.
Third, increasing demographic diversity of the work force and genuine globalization of business raise the risks of unproductive cultural misunderstandings and costly conflict. These outcomes can often be prevented or mitigated by effective negotiation. In short, negotiation has always been a useful skill for managers to deal with disputes and to make deals. But with more influential stakeholders, with authority and hierarchy necessary but decreasingly sufficient, with looser organizational forms, with an increased pace of change, and with greater diversity and global reach, negotiation assumes greater importance. For effective managers, it is a way of life, a new core competence, not merely an important skill to be wheeled out for special occasions.
To hone their negotiation skills, the first requirement is to recognize the prevalence of formal and informal negotiating situations. Then, naturally, we suggest becoming familiar with the framework of 3-D negotiation. Much like the job of a manager, 3-D negotiation is not merely an interpersonal task, but also a substantive one (designing value-creating arrangements), and an architectural one (getting the set-up right to induce maximally productive cooperation).
Q: Given geopolitical tensions today, what are the complexities of the challenges facing professional negotiators whose work is very high-stakes? If it's possible to generalize, how do you view the skills and practices of most negotiators working on high-stakes issues? Are there large or different "skill issues" compared to previous periods of time you've witnessed?
A: There is a fruitful dialogue underway between people negotiating business, legal, and financial deals and their international counterparts faced with life-and-death negotiating challenges. Each group can learn important lessons from the other since there are remarkably many similarities.
Here at Harvard, we have initiated and hosted an annual Great Negotiator Award series over the past six years, sponsored by an inter-university consortium of Harvard, MIT, and Tufts through the Program on Negotiation. Honorees have included such figures as George Mitchell, Charlene Barshefsky, Richard Holbrooke, Lakdhar Brahimi, Stuart Eizenstadt, and Sadako Ogata. We've written detailed cases on the most challenging negotiations faced by these remarkable men and women—whether ending the war in Bosnia, creating an interim government in Afghanistan, crafting a U.S.-Chinese trade deal over intellectual property, or getting Protestants and Catholics in Northern Ireland to come to terms. By spending intensive time with these great negotiators, writing cases on their most challenging deals, and relentlessly probing their thought processes and approaches to some of the world's most difficult negotiations, we are able to add even more valuable source material to our intellectual and practical treasury.
For example, when you asked above about how to get the right parties involved to set up the most promising negotiation, we might have drawn on the experience of one of our awardees, veteran U.N. diplomat Lakdhar Brahimi. Prior to his recent efforts negotiating interim governments in Afghanistan and Iraq, he took the lead in ending the bloody, seventeen-year civil war in Lebanon. Should the negotiating set-up simply include the leaders of the warring factions? No. As Brahimi recalls:
…we met in Jedda [Saudi Arabia] to discuss our plan. We needed the Americans with us. We needed the United Nations with us. We needed France with us because France was very close to the Christians and we needed the Vatican, which is a very important player there. So we went to Beirut, Damascus, Baghdad, Paris, Rome, Washington, New York, London, Moscow, and Beijing. That is the first step to make sure that all the people who carry some influence are really on board.
You'll find the counterpart of Brahimi's thought process in many complex private-sector deals. And this is but one relatively straightforward example.
Q: You have a chapter coming out in the new book Advances in Decision Analysis called "Negotiation Analysis: Between Decisions and Games." Please tell us more about the emerging field of negotiation analysis and what it could mean for managers. Where do you see this field going in the future?
A: This fairly technical chapter, mainly written for scholars and specialists, is Jim's current take on the field increasingly referred to as "negotiation analysis" that was pioneered by HBS emeritus professor Howard Raiffa, to whom both of us owe a great deal.
Raiffa's approach essentially joins two initially separated intellectual traditions, the descriptive and the prescriptive. For many years, cognitive and social scientists performed careful laboratory experiments to determine what subjects actually do in negotiating situations, typically where better performance is rewarded with good money. This work led to many insights, but was fundamentally descriptive in nature. Meanwhile, largely in parallel, decision and game theorists typically analyzed what ultra-rational people would (or should) optimally do when interacting with other similar beings in negotiations. Of course, real people do not typically act in the ultra-rational manner assumed by such "symmetrically prescriptive" models.
Howard Raiffa's intellectual innovation, since furthered by others such as HBS professor Max Bazerman, was to make his highly rational prescriptive advice conditional on the most empirically accurate description of what people actually do, often as studied by behavioral scientists. In a nutshell, this is the intellectual approach of negotiation analysis: to generate the best possible advice to one side given the most faithful possible descriptions of likely behavior of the other side or sides.
We have contributed to all aspects of this negotiation analytic quest, both theoretical and empirical, but especially by extensive fieldwork studying great negotiators and challenging negotiations. We've also spent years, as part of each of our nonacademic careers—as investment bankers, entrepreneurs, and in government agencies such as the State Department—both doing deals directly and advising on them. This long-term engagement with deals and dealmakers has left us increasingly dissatisfied with the "one dimensional" model that dominates most current thinking about negotiation. This model is primarily focused on the face-to-face tactical interplay "at the table." Extensive field observation and analysis has led us to codify the 3-D approach in which moves away from the table set up the most promising situation.
Of course we are hardly alone. Exceedingly popular negotiation courses for MBAs and executives abound at major business schools. Negotiation analysis, in all its three dimensions—tactics, deal design, and set up—is the province of a wide range of scholars. We're very bullish on the field.
To know more: read the Excerpt
[This article was provided with permission from Harvard Business School Working Knowledge.]
