You've held your own while negotiating dozens of successful deals. Even so, you want to take your game to the next level. What's the next step?
There are plenty of guides that offer tips on negotiation strategies. As useful as these are for a grounding in the fundamentals, they don't always fit the complex, ever-changing deal situations that occur in today's business environment. Harvard Business School professor Guhan Subramanian fills that gap by examining complex deals where negotiators are fighting on multiple fronts—across the table for sure, but also on the same side of the table with known, unknown, and potential competitors.
In February 2010, Subramanian will publish Negotiauctions: New Dealmaking Strategies for a Competitive Marketplace, a book that draws on his experience studying and advising on complex corporate transactions and high-stakes personal transactions such as buying a home or car. The first Harvard faculty member to hold tenured appointments at both Harvard Business School and Harvard Law School, Subramanian is the faculty chair for the new HBS Executive Education course Managing Negotiators and the Deal Process (November 8−13, 2009).
Julia Hanna: Talk a little about what you mean by "negotiauctions."
Guhan Subramanian: If you put aside fixed-price mechanisms, such as buying lettuce at the grocery store, negotiations and auctions are the only two ways in which assets get sold in any market economy. There's a deep literature on each of these mechanisms but very little on the interplay between the two—that messy, murky middle ground where most deals happen in today's world. The term itself, negotiauction, is just a term—you can take it or leave it. But the phenomenon of across-the-table competition, as exists in a negotiation, and also same-side-of- the-table competition, as exists in an auction, is pretty ubiquitous in our increasingly competitive marketplace.
Q: How did you come to this insight?
A: Back in 2001, I wanted to test some theoretical predictions about negotiations versus auctions. At the time I was co-course head for the first-year required course on Negotiation at HBS, so I designed an elaborate experiment that used all 900 first-year MBAs as my subjects.
Each team of three to four students was given four assets to sell to classmates, and I constrained the deal process so that they would have to either auction or negotiate. But despite my efforts to keep the two mechanisms pure, auctions regularly devolved into private negotiations with the top two or three buyers, and negotiations regularly culminated with the seller going from buyer to buyer extracting successively higher prices. The students adhered to the letter of my rules, but the auctions looked a lot like negotiations, and the negotiations looked a lot like auctions.
At around the same time, I started teaching a course called Deal Setup, Design & Implementation, first at the Law School and then across HLS and HBS with my HBS colleague Jim Sebenius. In each class, we studied a different real-world deal in considerable detail, and brought in a practitioner who was centrally involved to comment on our analysis. Over five years of teaching the course, I realized that what I was seeing in my experiment back in 2001 wasn't just an artifact of the classroom setting. Many high-stakes negotiations have significant auction elements to them, and many auctions have important negotiation elements.
So my thinking started to change. Rather than trying to shoehorn the world into these separate buckets, why not think about the proper buckets that would be useful in analyzing what I was seeing?
Q: What are some of the defining characteristics of a negotiauction?
A: An example might help illustrate what I'm talking about. Imagine that you are looking to replace the fence around your backyard, as my wife and I were a couple of years ago. What do you do? You talk to several fence contractors, and you get bids from a few who you think would do a reasonable job. Then you might go back and forth a bit among them to try to get a better price. So it's a negotiauction.
One defining feature is that there are only a few "process takers" (the fence contractors, in my example). If there are more than three to five process takers, it's hard to have meaningful negotiations with each, and it starts to look more like a full-blown auction.
Another defining feature is that there are multiple interests—in the fence example, price is important but so are quality and timeliness. A third feature of a negotiauction, and maybe the most important, is that the process is unclear. Are you going to go back and forth five times among the contractors to get the best possible price? Or does each contractor get just one chance to put a best offer on the table?
In a typical auction, like what you might see at Christie's or Sotheby's, the rules are very precise. But in a negotiauction, the rules are never perfectly pinned down, which creates both opportunities and challenges. Sophisticated dealmakers are able to take advantage of the ambiguity to shape the game to their advantage.
Q: How do sophisticated dealmakers shape the game to their advantage in negotiauction situations?
A: What's interesting to me is that when you look across hundreds of negotiauction situations—across industries, across countries, across cultures—you start to see common patterns.
In my analysis I find that there are three kinds of moves that repeatedly appear: set-up moves, which establish terms of entry into a negotiauction situation; rearranging moves, which reconfigure the assets or the parties or both; and shut-down moves, which prematurely cut off same-side-of-the-table competition.
When I was a consultant at McKinsey in the early 1990s, we used the term MECE—"mutually exclusive and collectively exhaustive." Is our framework for thinking about a problem MECE? The taxonomy of set-up moves, rearranging moves, and shut-down moves is a MECE framework. It's a helpful roadmap that tells you where to look to shape the game to your advantage.
Q: In what situations is your framework useful?
A: Most of my technical and academic writing over the past decade has focused on mergers and acquisitions, which are typically negotiauction situations. But one of the main messages in the book is that the deal strategies and structures that have developed in M&A are applicable to virtually all high-stakes, complex deals.
Take buying a house, which for many people is the most important transaction in their lives. In the United States, a house purchase is a very "tight" deal—once the seller commits to a particular buyer, the seller can't (legally) sell the house to someone else, even if the person offers a substantially higher price. In many cases, that's the right deal structure, because the buyer needs certainty in order to arrange the financing, prepare for the move, etc. But in some cases both the buyer and the seller might prefer a "looser" deal—for example, a deal in which the seller can back out at any time between the signing and the closing by paying the buyer a "breakup fee," which might compensate the buyer for out-of-pocket expenses. The seller gets the ability to shop around. The buyer might not mind renting for another year, or buying the house down the street instead, particularly if he gets a big breakup fee out of it.
If all this sounds too crazy to work, it's actually the default in the British system. In the United Kingdom, the seller has the right to sell the house to someone else up to the moment of closing. So it's an incredibly "loose" deal, in which the buyer engages in a mad dash from signing to closing in order to avoid getting "jumped." The British even have a term when someone else jumps your deal—it's called "gazumping." You can even buy gazumping insurance against getting gazumped.
[This article was provided with permission from Harvard Business School Working Knowledge.]