Breakthrough Business Negotiation: A Toolbox for Managers / Edition 1

by Michael Watkins

Overview

Breakthrough Business Negotiation is a definitive guide to negotiating in any business situation. This smart and practical book by Michael Watkins, a leading expert in negotiation at Harvard Business School, presents principles that apply to any negotiation situation and tools to achieve breakthrough results. Step by step, Breakthrough Business Negotiation demonstrates how to diagnose a situation, build coalitions, manage internal decision making, persuade others, organize a deal cycle, and create strategic alliances. Watkins also explains how to prevent disputes from poisoning deals.

Product Details

ISBN-13:	9780470631409
Publisher:	Wiley
Publication date:	04/22/2002
Pages:	316
Product dimensions:	6.10(w) x 9.10(h) x 0.80(d)

About the Author

Michael Watkins is associate professor of business administration at Harvard Business School, where he teaches negotiation and corporate diplomacy. He also has taught at Harvard's Kennedy School of Government. He is the coauthor of Breakthrough International Negotiation (Jossey-Bass, 2001), Right from the Start (1999), and Winning the Influence Game (John Wiley & Sons, 2001). He is also an associate and frequent participant in the Program on Negotiation at Harvard Law School.

Read an Excerpt

Breakthrough Business Negotiation

A Toolbox for Managers

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By Michael Watkins

JOSSEY-BASS

Copyright © 2002 John Wiley & Sons, Inc.
All right reserved.
ISBN: 0787960128

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Chapter One

In late 1997, Daniel Riley, the thirty-seven-year-old director of Alpha Microsystems' Technology Center in Austin, Texas, received a call from a headhunter. She told Daniel that a Colorado-based entrepreneur wanted to talk to him and members of his team about joining a new software venture.

Barely a month earlier, Alpha Micro had announced its decision to close the Austin facility and transfer its personnel elsewhere. The move was intended to consolidate Alpha's programming staff. Daniel, recruited by Alpha five years earlier to build the Austin center, had successfully assembled and led a respected forty-member team of skilled programmers. Nevertheless, he had learned of Alpha's decision only one day before the formal announcement. Because the Austin center had a very low attrition rate, Alpha management expected most of its engineers to agree to move. But Daniel knew otherwise:

The executive team at Alpha mistook the low attrition rate for an indication of pure love of Alpha. And that was certainly a factor, because we had a lot of dedicated Alpha employees. But I think a very significant reason was that people were very rooted in the community. They were motivated to stay here if they could. I conveyed this to management. I said that there are lots of high-tech opportunities here in Austin, and I think people will elect to stay.

Daniel himself had long toyed with launching his own business in Austin, and now he began to think seriously about doing so. He had been with a start-up before joining Alpha and had found it exhilarating to build an enterprise from the ground up. His top people all expressed interest in joining him. By year's end, Daniel's warning to Alpha had been borne out: few of his colleagues were planning to leave Austin.

When the headhunter heard that a team of experienced software engineers was scouting opportunities, she had told Ken Gourlay, an accomplished forty-five-year-old Colorado entrepreneur with a Stanford M.B.A. and solid experience in the software industry. Ken envisioned Omega Systems, his new start-up, as a provider of turnkey systems solutions to managed care organizations. Ken immediately flew from Colorado to Austin to meet with Daniel and four of his top engineers.

Daniel and the other engineers knew little about managed care, but Ken's vision and the strength of his business plan excited them all. They were confident they could deliver the core technology rapidly and reliably. For all five, the main issue was that the company be located in Austin. For his part, Ken was delighted to come across the core of an experienced engineering team whose proven ability to work together was likely to have a positive impact on time to market. Potential competitors were sure to be eyeing the same opportunity, and it was essential to get there first.

Ken made simultaneous written offers to Daniel and the four other engineers. His offers were all well in line with what they thought they could get elsewhere. Daniel was offered the position of vice president of engineering, a competitive salary, and 2 percent of the equity in the company. The other four engineers would be team leaders; each would get 0.5 percent of equity. The options would vest at 25 percent per year for four years. Ken expressed reluctance to move the company to Austin but left the question open. The key to making the move, he said, was that the five engineers would have to take the lead in recruiting the rest of a thirty- to forty-member engineering team from among their group at Alpha. Ken also said that he was negotiating with venture capitalists for early financing and wanted to tell them that he had engineers on board. He needed their decisions within a week.

What would you advise Daniel to do?

In reality, Daniel and the four other engineers accepted Ken's offers. Ken's willingness to move the company was easily implemented, because he was its sole employee at the time. To Daniel's delight, all but three members of his forty-person Alpha team decided to follow him to Omega Systems, giving the company a running start in developing its core systems. Three years later, Omega Systems went public, with a market capitalization of over $350 million. The company's ultimate success was still uncertain, but Omega Systems had a dozen major accounts. Daniel was worth several million dollars on paper, but he had been replaced as vice president of engineering once development of the system was complete; he was languishing in a special-projects assignment waiting for his options to vest. His four team leaders remained in their positions, but many other team members had departed once the bulk of the software development was complete. This was far from a disastrous outcome, of course-but suppose Daniel had it to do over. What could he have done differently?

The first step in preparing to negotiate from a position of strength is to diagnose the particulars of the situation thoroughly. For Daniel, this would have meant taking a hard-headed look at each of the seven key structural elements of his negotiation with Ken:

Parties: Who will participate, or could participate, in the negotiation?

Rules: What are the rules of the game?

Issues: What agenda of issues will be, or could be, negotiated?

Interests: What goals are you and others pursuing?

Alternatives: What will you do if you don't reach agreement?

Agreements: Are there potential agreements that would be acceptable to all sides?

Linkages: Are your current negotiations linked to other negotiations?

The purpose of exploring these questions is to identify barriers to achieving your goals and ways to overcome them. Naturally, there are constraints on your ability to gather all the information you might like to have. But as Louis Pasteur so aptly put it, "Chance favors the prepared mind." It's essential to do this kind of analysis in order to gain the informational high ground. Daniel should undertake an information-gathering blitz: he should talk to colleagues in the industry, recruiters, and venture capitalists, and he should do some background research on the managed care industry and on Ken. And because diagnosis is never a one-time event, he should continue to invest in learning and update his assessments as the negotiation proceeds.

PARTIES: WHO WILL PARTICIPATE, OR COULD PARTICIPATE, IN THE NEGOTIATION?

The key parties to a negotiation may appear self-evident, and sometimes they are exactly as they appear to be. Often, however, particularly in a nominally two-party negotiation, other less conspicuous players are already involved. Sometimes other parties unexpectedly enter the negotiation and change it in unforeseen ways. And sometimes you would gain by pulling in other parties yourself. It is essential to take the time to identify the active and potential parties to the negotiation and ask yourself whether you would benefit from the participation of others.

Identify All the Players (and Potential Players)

First, Daniel should try to find out who else Ken is negotiating with. What venture capitalists is he talking to, and what are they offering? Has Ken interviewed other candidates for the vice president of engineering position? Are there key technologies that are not yet under Ken's control? Is he talking to anyone about situating the company somewhere other than Austin? These are questions that Daniel can legitimately put to Ken and expect to get accurate information. By asking such questions, gauging Ken's responses, and cross-checking his answers, Daniel could also gain insight into the character of his negotiating partner. Other information (such as what terms Ken is being offered by the venture capitalists) he will have to pursue by more indirect methods, such as consulting another venture capitalist or friends who have launched companies.

Daniel should then ask himself whether it would be advantageous to try to shape the game by pulling in other parties. Should he try to cultivate offers from other potential employers? Negotiate jointly with the other engineers? Talk to venture capitalists about other companies in need of engineering talent? If so, how should he go about it? In what order should he undertake such discussions?

Analyze Coalitions

In negotiations involving more than two parties, outcomes are almost always strongly shaped by coalitions. So one of the first orders of business is to look for existing and potential alliances, both supportive and antagonistic.

The other engineers on Daniel's team are potential allies. Ken is clearly trying to deal with Daniel and his colleagues separately rather than as a group, perhaps as an intentional divide-and-conquer strategy to prevent them from coalescing. But if Daniel and his team negotiated collectively, they could substantially increase their bargaining power. Their value as an intact team is far greater than their value as a collection of individuals.

Alone or with his colleagues, Daniel should explore questions about other coalitions. What alliances might Ken try to create? Whose support is necessary to achieve his objectives? Who wields influence over other key players? If they learn that Ken is talking to another group of engineers, that changes the equation. And if they conclude that Ken needs a team in place before the venture capitalists will fund the company, the venture capitalists are de facto allies.

Look into the Other Side

It's always a mistake to treat the other side as a monolithic block. You don't negotiate with an organization; you negotiate with the people who make the decisions, only some of whom are typically at the table. Daniel should probe how decisions are made within Omega Systems. Has Ken recruited a board of directors? Have "angel" investors already committed funding to the company, and, if so, what say do they have in deals with Daniel and the other engineers? What about other key management positions? Who is in place, and who isn't?

Daniel should clarify Ken's authority to commit to a deal. If he has full authority, fine. If not, Daniel should expect him to use the need for others' approval to veto deals particularly favorable to Daniel and his team-a ratification tactic that car salesmen and their managers often use.

In negotiations with large organizations, the crucial questions about decision-making authority within the other side are:

Who has the authority to make which decisions? Does the other side's representative have the authority to make a deal, or do others have to ratify it?

How is the performance of the people at the table measured and rewarded?

Are there any differences between the interests of the ultimate decision makers and those of their representatives at the table?

These questions often arise in commercial negotiations in which the authority of the salesperson or purchasing agent is restricted. Business development representatives in alliance negotiations often need sign-offs from higher-ups. Salespeople are typically rewarded for meeting quotas and hence may become more flexible as their deadlines draw near.

Draw Up a Party Map

Sketching a party map can help clarify who the participants and potential players are. Daniel's party map for his negotiation with Ken, shown on page 12, includes possible participants whom he hasn't even contacted yet, such as other venture capitalists and other potential employers. He could consider extending the analysis even further by including parties whom Ken might involve, such as other job candidates.

PRACTICAL APPLICATION: DIAGNOSING THE PARTIES

This is the first of a series of boxes that will help you to apply key concepts to your own negotiations. Choose a negotiation you know well-past, ongoing, or upcoming-and want to understand better. Apply these questions to that negotiation, making an effort to think inventively and broadly.

Are the right parties at the table?

Are there too many parties? Too few?

Could other parties get involved and change the game?

Could opposing coalitions form?

Could you build supportive coalitions?

RULES: WHAT ARE THE RULES OF THE GAME?

At this point, Daniel and Ken are feeling their way into a negotiation, inventing it as they go along, but they aren't making up all the rules from scratch. Their interactions are unavoidably subject to certain established codes of conduct, or rules of the game. The nature of these rules and conventions varies with the circumstances, making it particularly important for Daniel to ask himself which set of rules governs his negotiation with Ken. The rules of business negotiations, for example, are quite different from those of personal injury lawsuit settlement talks or international trade negotiations. And even within business, the logic of merger negotiations is very different from that of union-management bargaining. What we are calling rules here can consist of laws and regulations, social conventions, and professional codes of conduct.

For Daniel, the rules that matter most flow from intellectual property law and employment law. Omega Systems is not a direct competitor to Alpha Micro, Daniel's current employer, but if Alpha considers the tools and techniques that Daniel developed under its aegis as trade secrets, he may not be allowed to take them with him to a new employer. Failure to understand these constraints could trigger litigation that would cripple Omega.

Soliciting other Alpha employees to work for Omega could also pose problems. Fortunately, Daniel isn't explicitly prohibited from doing so by his employment contract, but Alpha may sue him and Omega anyway in order to delay or deter a hemorrhaging of talent. Daniel should discuss these issues with an employment lawyer before he makes any decisions about Ken's employment offer.

A thorough understanding of the rules of the game can be a source of advantage because other players may not fully understand their implications. If Daniel doesn't hire a good lawyer and doesn't understand the employment law issues, he may inadvertently make serious errors. For example, suppose Ken asks him to sign a restrictive noncompete agreement, and Daniel does so without fully understanding the consequences. Or suppose he fails to realize that Ken can unilaterally change his job responsibilities later.
Continues...

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Excerpted from Breakthrough Business Negotiation by Michael Watkins Copyright © 2002 by John Wiley & Sons, Inc.
Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

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Table of Contents

PREFACE.

INTRODUCTION.

PART ONE: FOUNDATIONS OF THE BREAKTHROUGH APPROACH.

CHAPTER 1. DIAGNOSING THE SITUATION.

CHAPTER 2. SHAPING THE STRUCTURE.

CHAPTER 3. MANAGING THE PROCESS.

CHAPTER 4. ASSESSING THE RESULTS.

PART TWO: BUILDING THE BREAKTHROUGH TOOLBOX.

CHAPTER 5. OVERCOMING POWER IMBALANCES .

CHAPTER 6. BUILDING COALITIONS.

CHAPTER 7. MANAGING CONFLICT.

CHAPTER 8. LEADING NEGOTIATIONS.

CHAPTER 9. NEGOTIATING CRISES.

CONCLUSION.

SUGGESTED READINGS.

ENDNOTES.

CONCEPTUAL GLOSSARY.

INDEX.

What People are Saying About This

From the Publisher

"As a venture capitalist, I negotiate every day. Michael Watkins's book is the first I have found that truly grapples with the complications of real-world negotiations. I am struck by how often its tools and techniques apply to my past and current experiences in negotiation. This book is a powerful tool for anybody who wants to take control and come out on top. I wish I had read it twenty years ago."
—John F. Eckert, founder and managing partner, McLean Watson Capital Inc., and president, Canadian Venture Capital Association

"The best negotiators often seem to be guided by instinct, but Michael Watkins reveals powerful principles that can increase anyone's effectiveness in negotiation. He lays out a clear framework for conducting complex negotiations so you can ask the right questions and focus on the right issues. He then demonstrates how the framework applies to a variety of real-world dynamic situations. I highly recommend this book."
—Steven Cohen, partner and specialist in mergers and acquisitions, Wachtell, Lipton, Rosen & Katz

"Breakthrough Business Negotiation deserves a spot on every negotiator's bookshelf. Watkins has written a comprehensive guide that makes the daunting task of negotiation approachable for everyone. It is a rare gem that brings academic rigor to the real world. Even the most experienced negotiator will find much that is fresh and enjoyable here."
—Rob Aiello, managing director, Updata Capital

Editorial Reviews

Negotiating is much more complicated than making an offer and fielding a counter-offer. It's a complex process that can affect the future of individuals and organizations. A "breakthrough negotiator" must analyze, plan, sell, organize and motivate. The best negotiators are also leaders. They bring together a team of players and guide them in all-out battle against the opposition. Top negotiators don't obtain their skills by accident — they learn from experience and studying the art of negotiating.

In Breakthrough Business Negotiation, Michael Watkins takes you through the negotiation process, from initial preparation to closing the deal. Watkins, an associate professor of business administration at Harvard Business School, provides step-by-step guidance on winning consistently at the negotiating table.

However complicated a negotiation is, it can be understood by breaking it down into its key parts and actions. Every negotiation has a structure: It involves certain people and issues that produce predictable interactions. More complex negotiation systems can be seen as related sets of negotiations.

On face value, these negotiations have nothing in common. But closer examination shows they all share an underlying structure: All are negotiations that involve more than two parties and no one holds veto power.

Thorough analysis of a situation and its structure is an essential negotiating skill and a hallmark of breakthrough negotiators.

Breakthrough negotiators never treat the structure of a negotiation as preordained or fixed. In other words, the hand can be played as it is dealt, but it can also be changed.

These are four tasks negotiators embark on at and away from the table:

• Diagnosing the situation. Systematically assess the components of the negotiation and identify potential barriers to agreement.
• Shaping the structure. Influence who participates, what the issues are, and what the alternatives are, so you don't end up playing someone else's game.
• Managing the process. Prepare for and conduct face-to-face interactions to build momentum.
• Assessing the results. Set goals and periodically evaluate how you're doing to adjust your plans and manage the process.

The first step in preparing to negotiate from strength is to diagnose the particulars of the situation thoroughly. This means taking a hard-headed look at the seven key structural elements of any negotiation: parties, rules, issues, interests, alternatives, agreements and linkages.

A potent way to shape the game is to influence who plays. One method of doing this is to invite other players into the negotiation. Another way is to try to exclude parties. And sometimes it is advantageous to try to prevent parties from participating or to remove them from the game.

It is crucial to have an impact early, when the agenda for what will and won't be negotiated is being set. This establishes boundaries before momentum builds in the wrong direction, or irreversible commitments are made, or too much time passes. Breakthrough negotiators don't view the agenda as fixed, but as something that can be shaped.

Framing is using argument, analogy and metaphor to define the problem to be solved and the set of potential solutions. Skillful framing reaches the target audience by evoking mental images and emotional reactions that influence their behavior. Efforts to frame (or reframe) often involve coordinated actions at the negotiating table (by means of argument) and away from the table (through use of the media).

Negotiators often compete in a "frame game" in which they try to define the dominant frame for the negotiation.

Power comes to those who control other parties' access to information. Information-control techniques are especially potent when you have private access to valuable information and when negotiations involve multiple parties and shared decision-making.

Managing the process is the third major element of the breakthrough negotiation framework. Whoever controls the process can powerfully influence the substance and results of negotiations.

If agreement is your objective, the basic goals at the table are twofold: to learn about your counterpart's interests, alternatives and bottom lines; and to shape your counterpart's perceptions of what is attainable.

Once a negotiation is under way, you should step back periodically to evaluate how it is going. A natural point to step back is between negotiating sessions, but it can (and should) also be done in the heat of battle. Part of appraising an ongoing negotiation is deciding whether you are meeting the specific goals you set for yourself.

The following principles provide ways that smaller players can shape the structure and manage the process when facing an opponent of greater size or power:

• Principle 1: Never do all-or-nothing deals. The biggest mistake a small player can make is to enter into a single make-or-break negotiation with a larger partner. Doing so just reinforces the larger party's perception of its own strength and inevitably leads to poor deals.
• Principal 2: Make them smaller. Do not treat a larger partner as a single unified entity. The notion of big-company-as-powerful-monolith fails to recognize that large companies are made up of smaller units led by people with their own incentives and interests.
• Principle 3: Make yourself bigger. There is strength in numbers. A smaller player dealing with a larger one should build coalitions to fortify its bargaining power. It is essential to diagnose the situation carefully, identify promising allies, and build alliances with them.
• Principal 4: Build momentum through a sequence of deals. Negotiating the right deals early makes it easier to negotiate subsequent deals at better terms. But early deals with the wrong partners can make everything that follows an uphill battle.
• Principal 5: Harness the power of competition. Spreading the word that you might do a deal with someone else sets the stage for judicious use of competition in negotiating the terms of deals.
• Principal 6: Constrain yourself. By entering into binding prior agreements, smaller negotiators can buttress their bargaining power with larger counterparts.
• Principal 7: Hold the informational high ground. The right information, processed and organized for easy access, is a potent source of strength in negotiations with larger counterparts. It is essential to be better prepared than the larger player and gain and hold the informational high ground.
• Principal 8: Take control of the process. Articulating the reasons that both parties came to the table in the first place establishes a sense of momentum. Flesh out the offer thoroughly and work out the basic structure of the deal before raising the subject of money.
• Principal 9: Negotiate with implementation in mind. Try not to burn your bridges, and try to preserve the strength of your alternatives in case serious problems arise during implementation.
• Principle 10: Build superior organizational capabilities. It is essential to forge relationships with skilled external advisers, such as lawyers and investment bankers.

Teams are valuable because they bring together people with varied expertise. The full cast of participants in an acquisition, including external advisors, can be very large. The goal is to identify and obtain interest from attractive potential partners. The trick is to assemble a critical mass of expertise without creating too large a team: The larger the team, the more difficult and expensive it is to coordinate. Copyright © 2003 Soundview Executive Book Summaries

Soundview Executive Book Summaries

Watkins (business administration, Harvard Business School) presents principles and tools that apply to any negotiation situation, demonstrating how to diagnose a situation, build coalitions, deal with disputes, manage internal decision making, persuade others, and create strategic alliances. His emphasis is on identifying fundamentals and analyzing their interactions. A glossary is included. The author also teaches in the Program on Negotiation at Harvard Law School. Annotation c. Book News, Inc., Portland, OR (booknews.com)

Booknews

"As a venture capitalist, I negotiate every day. Michael Watkins'sbook is the first I have found that truly grapples with thecomplications of real-world negotiations. I am struck by how oftenits tools and techniques apply to my past and current experiencesin negotiation. This book is a powerful tool for anybody who wantsto take control and come out on top. I wish I had read it twentyyears ago."
—John F. Eckert, founder and managing partner, McLean WatsonCapital Inc., and president, Canadian Venture Capital Association

"The best negotiators often seem to be guided by instinct, butMichael Watkins reveals powerful principles that can increaseanyone's effectiveness in negotiation. He lays out a clearframework for conducting complex negotiations so you can ask theright questions and focus on the right issues. He then demonstrateshow the framework applies to a variety of real-world dynamicsituations. I highly recommend this book."
—Steven Cohen, partner and specialist in mergers andacquisitions, Wachtell, Lipton, Rosen & Katz

"Breakthrough Business Negotiation deserves a spot on everynegotiator's bookshelf. Watkins has written a comprehensive guidethat makes the daunting task of negotiation approachable foreveryone. It is a rare gem that brings academic rigor to the realworld. Even the most experienced negotiator will find much that isfresh and enjoyable here."
—Rob Aiello, managing director, Updata Capital

From the Publisher