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Gain the Edge!
Negotiating to Get What You Want
By Martin E. Latz
St. Martin's Press Copyright © 2004 Martin E. Latz
All rights reserved.
GOLDEN RULE ONE: INFORMATION IS POWER — SO GET IT
Tom is in his midforties and has been growing his software company for about fifteen years. He started as its marketing guru, gradually progressed to become a part owner, and took over its helm when its founders decided to become less involved. The company grew steadily for most of its existence and had recently experienced a real growth spurt that showed promise of substantially higher profits. This prompted the industry's leaders to take notice, and several contacted Tom to discuss buying his company.
Tom is married, has two young children under six, and is seriously considering selling. He has been working nonstop for twenty years and recently began to reevaluate his priorities. While he wants to continue working, he also wants to spend more time with his family.
He was thus excited to learn in his preliminary discussions on price and value with the two potential buyers that he could become financially comfortable for the rest of his life if he sold. However, the initial cash portion of the offers varied significantly. Each offer also required him to remain as the CEO for several years and to take a substantial portion of the company's value in relatively risky shares of the new venture. Unsure exactly how to maximize his company's value, he asked for advice as to how he should respond.
After finding out some basics and the status of the negotiations, I suggested the following, which applies to everyone engaged in any negotiation:
"Tom," I said, "back up. The first thing you must do in any negotiation is gather sufficient information to set your goals. Unless you have thoroughly explored both sides' personal and professional objectives, set your own specific, aggressive and achievable goals, and designed a strategy to accomplish them, you're destined to negotiate in a reactive mode. If you're reacting, you're far less likely to end up with what you want."
Overall, I told him, start by taking these three major steps:
Get information to set your goals
Develop an information-bargaining strategy — ways to get and share information
Reevaluate your goals
Get Information to Set Your Goals
The first step for Tom and for you is to figure out exactly what you want. Define your objectives, set your goals, and take the time to do it right at the start. Otherwise, your whole strategic mindset will be flawed.
Research in a variety of disciplines supports the value of goal-setting. You see it in the field of sports psychology, where studies have shown that setting goals improves performance. You see it in the political field, where some politicians set their sights from grade school on. And you see it in business and negotiation.
In each area, research shows that you increase the likelihood of achieving your goals if you start by systematically setting them. Goal-setting also provides the crucial first step to thinking strategically about the negotiation process. Almost anyone can jump into a negotiation and — if there's a large zone of possible agreement between the parties — reach a result both sides find acceptable. But only a skilled practitioner can go into that same negotiation and reach a result that truly maximizes what he or she wants. This may include creating more value for both sides, the traditional "win-win" scenario. Or it may mean maximizing their share of a pie that must be cut in a "zero-sum" way — where more for one side necessarily means less for the other.
Take the time to set your goals at the outset. It's essential, if you want to become a more effective negotiator.
That's what Tom did. Subsequently, he ended up in semiretirement with a seven-figure nest egg in the bank.
And if you think setting goals is simple, consider the following story about Akio Morita, the longtime leader of Sony Corporation.
In 1955, according to G. Richard Shell in Bargaining for Advantage, Akio Morita received an offer from Bulova to purchase 100,000 of Sony's new $29.95 transistor radios. This would have been Sony's biggest deal ever. Morita turned it down. In fact, he later called his turndown the "best decision" he ever made for his company. He even rejected it over his own board's objections.
Accepting it would have run contrary to one of Morita's fundamental long-term goals. The deal-breaker? The offer would have required Sony's radios to be sold under the Bulova name.
At first it seemed like a great deal. A "win-win." Sony had leading-edge technology but was relatively unknown in the United States. Bulova had the reputation and an extensive retail distribution network throughout the United States. While the deal involved some risk — no one knew the marketability of Sony's transistor radios — it seemed like an excellent opportunity that took advantage of Sony's and Bulova's strengths.
Critically, Morita focused on his true long-term goal: to make the Sony name synonymous with quality electronics throughout the world. This "great" deal, even though it would have generated substantial short-term profits, was inconsistent with his goal. Morita walked, shocking Bulova and Sony's board. Sony later sold a smaller number of radios to a different distributor and stamped the Sony name on them. The rest is business history.
The lesson? Start by focusing on what you really want to achieve. Setting goals sounds simple. It's not. Morita's board recommended that he accept the Bulova deal, even though it contrasted with his long-term branding goal. Defining your true goals takes time, effort, and thought. Spend the time to do it right. Your goals should establish your negotiation behavior, not the other way around.
What kind of goals should you set? Sometimes your goals appear clear-cut. Pay the least amount possible for that new car. Sell the house at the highest offered price. Maintain the long-term relationship with your children.
Other times, it's unclear. Morita gave up a huge deal-in-the-hand for the possibility that he would create a world-class brand. In retrospect, his decision appears obvious and brilliant. In 1955 it was controversial.
While getting the information and appropriately setting your goals may be difficult, it will be much clearer if you use this three-step strategic framework.
1. Set and prioritize your long-term strategic and short-term tactical goals
2. Determine and prioritize your counterpart's goals
3. Evaluate the power of the relationship
Set and Prioritize Your Long-Term Strategic and Short-Term Tactical Goals
Morita focused on Sony's long-term strategic goal. His board focused on its short-term tactical goal. There's a crucial difference. To most effectively get what you want in the long and short term, distinguish between strategic and tactical goals. Then set both.
Strategies focus on your long-term goals and impact how, in a global sense, you should try to accomplish them. Tactics, by contrast, are concerned with immediate, detailed maneuvers designed to accomplish your overall strategic goals.
Recognizing that Information Is Power, and focusing on it, is a strategic view. Deciding what kinds of questions to ask, which questions to ask, and when and where to ask them to get that information is tactical. Effective negotiators use strategies and tactics to achieve their goals.
In this book, as in real negotiations, we will sometimes move seamlessly between strategies and tactics. At times we will break out a strategy or tactic and discuss it. Other times the interrelationship between the two will be subtle. Overall, you will see the big picture — what you want to strategically achieve — and get practical, tactical advice as to how to achieve it.
Some negotiators excel at strategy. Others maneuver more effectively in a tactical sense. The best use both to achieve their ends.
To summarize, first gather sufficient information to set and prioritize your long-term strategic and short-term tactical goals. This will help you determine at the beginning what success will look like at the end. And while you may not definitively set specific goals at this preliminary stage, it will highlight the information you will need to get later to achieve these goals.
Determine and Prioritize Your Counterpart's Goals
"The most critical thing in a negotiation is to get inside your opponent's head and figure out what he really wants," former White House Office of Management and Budget (OMB) Director Jack Lew told me in August 2000. He should know. He managed the budget negotiations for the Clinton White House in the late 1990s, when they went up against the Republican-dominated congress. Most would agree — regardless of political preference — that President Clinton and his team achieved most of their budget goals during this time.
But what does this mean within the context of goal-setting? And why does it matter what the other side wants, if you know what you want?
It matters because negotiations always involve more than one individual or entity. Your ability to achieve your goals therefore often depends on whether the other side also can achieve its goals. Sometimes their goals conflict with yours. Other times their goals are consistent with yours. In all cases find out their goals earlier in the process, not later.
Also guard against the tendency to assume the other side shares your views. Many would naturally assume that a software developer selling the rights to his or her software wants the most possible money for it. This may not be true. Perhaps the developer inherited a great deal of wealth and is more interested in his or her reputation in the software community than any financial reward he or she might reap from the sale. If your company has a unique marketing ability to get this software into the mainstream markets, this may be far more valuable to him or her than the money.
Stepping into your counterparts' shoes and understanding their perspective — in the beginning and throughout the process — is also a critical part of the mindset shift necessary to negotiate strategically, not instinctively. Most of us instinctively focus on what we want and only haphazardly find out what the other side wants. Don't let this happen to you. Until you know what and how much your counterpart wants to achieve certain goals, you can't really know when to hold and when to fold. By contrast, if and when you learn this information you can maximize your ability to achieve your goals.
Consider the impact of the following exercise I use in some of my seminars. It's called the $20-Bill Auction, and the idea was devised by Yale Professor Martin Shubik. As you read, think about the goals you might set and the actions you might take in this situation. Then consider the possible goals and actions of others.
The $20-Bill Auction
"Here's a $20 bill," I start by announcing to the seminar participants. "I'm going to auction it off to the highest bidder. You are free to bid or not bid. The bidding will proceed in one-dollar increments until no further bidding occurs. At that time the highest bidder will pay me the amount bid and receive the $20 bill. But there's a catch: The second highest bidder at the end of the auction must also pay me the amount he or she bid. So, if Frank bid $5 and Sally bid $4 and the bidding ended, Frank would pay me $5 and I would give Frank the $20 bill. Frank thus "wins" and makes a net profit of $15. Sally, the second highest bidder, would then pay me $4. Sally thus incurs a loss of $4."
I then start the auction. Invariably, the bidding quickly gets up to the $15 range. Most participants figure any bid up to $19 makes sense. After all, if you're the winning bid at $19, you have made a one-dollar profit. And even if you push and pay $20 for the $20 bill, you probably got some enjoyment value out of the auction, so you might find that acceptable, too.
The rub occurs, however, when bids reach the $15 range. It's here — in the heat of the negotiation — that bidders start to think through how their goal of getting a profit interacts with their opponent's apparent goal of getting a profit. Wait a second, the bidders say to themselves, what if I end up second? Then I lose whatever I bid.
When this thought occurs — and bidders start to explicitly consider other bidders' actions — the number of bidders precipitously declines until only two remain. Quite quickly, these two feel stuck. Why? They've fallen into the trap. One will surely lose — and neither wants to lose.
Each remaining bidder's focus then switches from figuring out: a) the amount they would pay for the $20 bill (as noted above, they initially figured they would pay up to $19 and still make a profit); to b) the amount the other bidder might pay. In other words, both bidders now increasingly focus on the other bidder's goals and actions. Each bidder's goal also appears to subtly change from making a profit to avoiding a loss — which the second-highest bidder will inevitably suffer.
The dynamic has completely changed. Assume Frank bid $17 and Sally bid $16. Sally now can bid $18 and potentially get a $2 profit. Or she can suffer a sure loss of $16. It's logical, isn't it, for her to bid $18? In isolation, it's logical. But now factor in what she believes Frank wants and what he will do. If it's logical for her to bid up to $19, it's also logical for Frank. And if he will bid up to $19 and so will she, what then?
As you think through both sides' goals and potential actions, it becomes clear that Frank and Sally, at around the $19 mark, have moved from an allegedly rational decision-making process to an arguably irrational one. What do I mean?
Let's say Sally bid $18 and then Frank bid $19. Both bids are perfectly rational, right? Wrong. Why? Because they're perfectly rational if one only considers one's own goal and actions in deciding whether and what to bid. What happens next explains this.
In most cases, Sally bids $20. Then Frank bids $21. Frank figures it's better to possibly suffer a $l loss than a certain loss of $19. This seems rational. And so it goes on.
True, they're both now acting "irrationally" — bidding more than the $20 bill is worth. But their logic, based only on their individual goals, appears unassailable.
Interestingly, final bids often end up in the $30 to $70 range. A colleague has even reported selling the $20 bill for $204 — a tidy profit of $387 for the auctioneer. (He collected $204 from the "winning" bidder and $203 from the second highest bidder. He then subtracted the $20 bill he sold to the "winner" and profited by $387.) My highest sale was in a seminar for about one hundred New York City lawyers. I sold my $20 bill for $83, and the "winning" bidder insisted I sign the $20 bill. He told me he was going to frame it to illustrate to his law partners the importance of thinking through your counterparts' goals along with your own.
What should we learn from this?
First, explicitly evaluating both sides' goals and the dynamics of the exercise before this auction began would have highlighted the trap. A simple mock auction would have illustrated the bidders' dilemma. Understanding that the last two bidders will almost always lose leads to the conclusion that it makes little sense to bid in the first place.
Second, the goal "not to lose" only became obvious to most when the bidding reached around $15. Each party's short-term goal appeared clear: make a profit and/or win. But in the longer-term — at the $15-bid mark — their "not to lose" goal became apparent. At that point, when it was likely down to around two bidders, it was probably too late to pull out. This underscores the importance of analyzing and prioritizing the other side's goals — to the extent possible — at the start of the negotiation. Analyzing them for the first time in the middle may be too late.
Third, watch out for egos. Paying $204 for a $20 bill had everything to do with ego and winning, and nothing to do with rationality. Ego can undermine rational decision making. It's okay if your goal is to pump up your ego. But if your true goal is unrelated to ego, beware of ego's often stealthy impact.
To summarize, get into your counterpart's mind and ascertain his or her goals. What does he or she want? Then actively consider what strategies and tactics he or she might use to try to accomplish those goals.
Here's a rule of thumb to help you remember this: Know thyself and thy counterpart!
Evaluate the Power of the Relationship
The third and final strategic element in goal-setting involves the value of your relationship with the other side. As we will explore in depth in Part Two, effective negotiation strategies and tactics often revolve around the extent and type of your relationship with your counterpart. And while some say they always value having a relationship with their counterparts, vice-versa, it's usually not an :always-never" proposition. It's a question of degree.
Excerpted from Gain the Edge! by Martin E. Latz. Copyright © 2004 Martin E. Latz. Excerpted by permission of St. Martin's Press.
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