When and how to make an offer, when and how much to collaborate or compete, and when and how to listen or speak in negotiations are the top three dilemmas negotiators wrestle with from time to time. Skilful negotiators consider conflicting thoughts, remind themselves of the key principles, and then go on to execute and achieve a majority of their goals.
Here are ways to resolve these dilemmas and negotiate in any facet of business:
Should we make the first offer (propose) or let the other party make the first offer (respond)?
I used to sit tight and wait in the belief the other party's offer would shed light on their goals, preferences, and alternatives and better equip me to handle the negotiation. Then I found experiments showing the anchoring effect. It means the first offer can drop an anchor, impact the other party's idea of the bargaining zone, and set the tone for further exchange.
By making an aggressive first offer, you may increase the other side's sense of satisfaction by giving them opportunities to get you to lower your demands. Also, when the other party lacks information, it is possible they use your first offer to draw conclusions about the value of an item.
Your response to an extreme first offer from the other party might go like this (refer to the assessment process outlined in the graphic "First Offer Strategies"):
Thanks for sharing your first offer with us. We know your side has put thought into this.
As you might imagine, we too spent time prior to today's meeting on what might meet our interests and, I am afraid, that represents a very different viewpoint on value than what you have offered.
Rather than zeroing in on a number this early, shall we discuss and agree on the various standards and methodologies that might be appropriate in arriving at the valuation that might work for both of us? Does that sound reasonable?
What if the other party makes an extreme first offer with a view to anchor?
- Don't feel obligated to promptly counteroffer. Diagnose their offer's legitimacy and demonstrate why it is not acceptable.
- If the relationship is important, keep them engaged and maintain rapport even as you cast off the anchor.
- This may be the time to make a counteroffer that is nonpositional and backed with justification.
When should we claim value (compete) and when do we create value (collaborate)? How much?
Creating value means enlarging, to the optimal extent possible, the total value to be divided between the parties. Claiming value means making sure that the final agreement generates an acceptable amount of value for your side, and you leave something for the other party.
Creating new value improves both parties' outcomes. However, having created new value, negotiators must still claim their share of the resulting larger pie. The primary tools to create value include:
- Building trust and sharing information.
- Asking questions and listening well.
- Disclosing information incrementally, back and forth, with reciprocity. This minimises your own risks. If the other party is still reluctant to discuss, you can decide to hold back as well.
- Focusing on the underlying interests of the parties. Why do they want what they want? I've repeatedly (in varied circumstances, in business and in life) realised that when we dig beneath seemingly incompatible positions, we can discover reconcilable underlying interests and pave the way to resolve conflicts and create value.
- Negotiating multiple issues simultaneously. Multiple issues allow for creative options to concede things that you do not value highly but are valued highly by the other side and vice-versa (called negotiating tradeables). Say receiving early payment is important for the seller, while the buyer, who has a good cash flow, is more focused on lower price. This is a chance to dovetail opposing interests and create value.
- Making multiple package offers of equivalent value simultaneously. The other party's response will help you understand how they value different elements of the offers.
- Leveraging the power of contingent contracts. With a contingent contract, differences of opinion about future events don't have to be bridged. They become the core of the agreement. Parties bet on the future rather than argue about it. In an M&A deal, payment by way of earnout is a contingent consideration (a potential future payment) promised to the seller upon the achievement of specific milestones (say achieving specific profitability or turnover targets). The purpose of the earnout is to bridge the valuation gap.
There are two things to be careful about during the process of creating value:
- As far as is possible, do not reveal your reservation point (bottom line) since the other party has no incentive to offer you anything beyond that.
- Never precisely specify your trade-offs among issues, while being truthful about discussing the relative importance of issues.
To claim value in a negotiation, you use competitive tactics to try to convince the other side:
- Start high, ie, high initial demand (not absurdly high, though).
- Concede slowly and make progressively smaller concessions to signal increasing resistance.
- Exaggerate the value of your concessions and minimise the value of the other's concessions.
- Frame your terms of offer, highlighting what is in it for them.
- Set deadlines (that you intend to keep) and use decisive language to move things forward.
- Research and estimate their best alternative to a negotiated agreement (BATNA) and reservation terms (also called a walkaway point). These are not static and will keep evolving.
- Be willing to outwait your opponent.
Should we listen or should we talk?
Negotiation is not about talking. Successful negotiators listen well and listen more than they talk.
- Have a genuine interest in the other person and their problems.
- Listen and ask good questions. Experienced sales trainers have said that a good salesperson talks no more than 30% of the sales process.
- Listen not just for what is being said but also for what is left unsaid, and what might be behind the words.
- Calm down any team member who talks too much and tries to fill in silence.
Training, such as role-playing, helps people gain negotiation skills and strategies and acquire the right conceptual framework and practice to conduct successful negotiations more consistently.
Raju Venkataraman, FCMA, CGMA, is a negotiation skills trainer and credentialed leadership and career coach (PCC) based in Singapore, serving clients worldwide. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.