Negotiations Final II

b. Tentative agreement; definition and when to use

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c. Uncertainty about whether you got a good deal

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8. Getting stuck on positions vs. getting to underlying interests; adding issues

1: DON'T JUST ASK WHAT—ASK WHY Many experienced negotiators believe that the purpose of listening to the other side is to find out what they want. This sounds reasonable. After all, unless you know what the other side wants, how can you structure a deal that they will be willing to accept? Similarly, negotiators tend to spend most of their own speaking time telling others what they themselves want or need. Unfortunately, this approach—finding out what each side wants—often derails negotiations. The reason: too much focus on what people want distracts your attention from discovering why they want it. In his negotiation with the supplier, Chris understood that for progress to be made both sides had to stop talking about what they wanted (exclusivity versus no exclusivity) and begin talking about why they wanted it. While there was no room for compromise on what they wanted, a clear solution emerged when the focus shifted to why. Once the supplier explained that he was resisting exclusivity because it would force him to renege on his promise to his cousin, Chris had the information he needed to structure a value-creating deal.

a. Contingent contract; definition and when to use

8-2 The Six Benefits of Contingency Contracts 1. Contingency contracts allow negotiators to build on their differences, rather than arguing about them. Do not argue over the future. Bet on it. 2. Contingency contracts allow negotiators to manage decision-making biases. Although overconfidence and egocentrism can be barriers to effective agreements, contingency contracts use these biases to create a bet. 3. Contingency contracts allow negotiators to solve problems of trust, when one side has information that the other side lacks. The less-informed party can create a contingency to protect itself against the unknown information possessed by the other side. 4. Contingency contracts allow negotiators to diagnose the honesty of the other side. When one party makes a claim that the other party does not believe, a bet can be created to protect a negotiator against the lie. 5. Contingency contracts allow negotiators to reduce risk through risk sharing. The sharing of upside gains and losses not only can reduce risk, but can also create goodwill by increasing the partnership between the parties. 6. Contingency contracts allow negotiators to increase the incentive of the parties to perform at or above contractually specified levels. Contingency contracts should be specifically considered when the motivation of one of the parties is in question. Although we believe contingency contracts can be valuable in many kinds of business negotiations, they are not always the right strategy to use. Bazerman and Gillespie suggest three key criteria for assessing the viability and usefulness of contingency contracts in negotiation: 1. Contingency contracts require some degree of continued interaction between the parties. Because the final terms of the contract will not be determined until sometime after the initial agreement is signed, some amount of future interaction between parties is necessary, thereby allowing them to assess the terms of their agreement. Therefore, if the future seems highly uncertain, or if one of the parties is suspected of preparing to leave the situation permanently, contingency contracts may not be wise. 2. Parties need to think about the enforceability of the contingency contract. Under a contingency contract, one or more of the parties will probably not be correct about the outcome because the contract often functions as a bet. This outcome creates a problem for the "loser" of the bet, who may be reluctant to reimburse the other party when things do not go his or her way. For this reason, the money in question might well be placed in escrow, thereby removing each party's temptation to defect. 3. Contingency contracts require a high degree of clarity and measurability. If an event is ambiguous, nonmeasurable, or of a subjective nature, overconfidence, egocentric bias, and a variety of other self-serving biases can make the objective appraisal of a contingency contract a matter of some opinion. Parties should agree up front on clear, specific measures concerning how the contract will be evaluated. For this reason, it is often wise to consult a third party.

9. Anchoring and adjustment; Re-anchoring

Job candidates are often asked by recruiters to state their salary range. The job candidate, wanting to maximize his or her salary but at the same time not remove himself or herself from consideration because of unrealistic demands, faces a quandary. Similarly, the prospective home buyer struggles with what to make as an opening offer. What factors determine how we make such assessments of value? People use a reference point as an anchor and then adjust that value up or down as deemed appropriate. For example, a prospective job recruit may have a roommate who just landed a job with a salary of $80,000. The candidate decides to use $80,000 as a starting point. Two fundamental concerns arise with the anchoring-and-adjustment process. First, the anchors we use to make such judgments are often arbitrary. Oftentimes, anchors are selected on the basis of their temporal proximity, not their relevance to the judgment in question. Second, we tend to make insufficient adjustments away from the anchor; we are weighed down by the anchor. (Remember how people's estimates of the number of doctors in Manhattan were affected by their Social Security number!) The message for the negotiator is clear: Carefully select anchors, and be wary if the counterparty attempts to anchor you.

12. Post-settlement settlement; definition and when to use

Negotiation geniuses do not stop after having created value during the negotiation; they continue to seek out Pareto improvements even after the deal is signed. A powerful tool for value creation is the use of post-settlement settlements (PSS), settlements that are reached after the initial agreement is signed.4 Imagine the following: After weeks of negotiation, you have just signed a complex deal with the CEO of Firm X. You are satisfied with the deal and so is the other party. You want nothing more than to go home, take a shower, and pop open some champagne. But you reconsider, deciding to try something a little different. You ask the CEO of Firm X whether she would be willing to take another look at the agreement and see if it can be improved. She is surprised by the suggestion and asks if you're having second thoughts about the deal. Often, the last thing you want to do after a long negotiation is to open up a can of worms and potentially derail the agreement. You do not want to appear to be reneging on the deal you just signed, nor do you want to suggest that you held back in your ability to make concessions earlier. You are also unwilling to give away any more ground to the other party. Why, then, might you propose a post-settlement settlement? Because, for a variety of reasons, a PSS can lead to Pareto improvements. First, the already-signed agreement confirms the parties' ability to work together to reach value-creating deals and creates an environment of optimism. Second, once a signed agreement exists, parties feel less anxious and are often more willing to share information. Third, if presented correctly, both sides will understand that they will only accept a PSS if it improves both of their outcomes. In other words, the recently signed agreement becomes the new BATNA for both parties. This is a crucial point: you don't want the other side to perceive the PSS as your attempt to renege or squeeze last-minute concessions out of them. On the contrary, you should present the idea of a PSS as an opportunity for both parties to benefit. Indeed, state this ground rule explicitly at the outset: either we both benefit, or we stick with what we have agreed to already. Consider the following story, recounted by one of our former executive students, the CEO of a small firm in the pharmaceutical industry: "I had agreed...to sell the rights to eight different drugs I have in development...I had negotiated for five straight days on this deal and it closed...before the Harvard course. After your classes I call up the pharmaceutical company that is buying the rights and said that I needed more money up-front. The company was taken aback by my call. However...I used this opportunity to explain exactly why I wanted different terms. Once they heard my rationale—that I wanted the money to start more projects, that I wanted the money to help me with cash flow, and that I wanted the money to be able to go to some angel investors to raise even more money—they understood. All they wanted in return was a right of first refusal on any future projects I develop with the additional cash flow in the next two years. Now instead of using a line of credit to support all these development programs, I have three or four more projects that I will start this summer versus end of '04. And both sides have a better value under these terms..." As the story suggests, the pharmaceutical company was initially surprised (and not particularly thrilled) by the executive's request to reopen negotiations. This was largely due to the perception that the executive was simply coming back for more money without concern for the other side's interests. The situation improved once the executive shared more information regarding his interests and communicated a willingness to give the pharmaceutical company something in return. PSSs not only facilitate logrolling, they can also help to identify and add issues that were not even part of the initial negotiation; in the above example, the parties had never discussed a right of first refusal in the formal negotiations that preceded the PSS. It is easy to see how a PSS might have improved the outcome in the Moms.com negotiation. Had the parties continued to negotiate and share information after the initial agreement was signed, they might have discovered the value of shifting to eight runs, making a deal on Juniors, and/or including a contingency clause that leveraged different ratings expectations. Despite these potential benefits, post-settlement settlements are a severely underutilized tool. Many people have never heard of PSS, others are wary of the risks associated with renegotiating, others doubt that a PSS can really be of benefit, and still others do not know how to propose a PSS. We have addressed the first three issues. Now let's consider how you might propose a PSS: Step 1: Start by acknowledging the progress that was already made in reaching the initial agreement. Step 2: Suggest that there are aspects of the deal that you wish could be improved; acknowledge that they probably feel similarly. Step 3: Suggest that you may have already conceded everything that you can afford, but that you are willing to try to think "outside the box" if that will help the other party. Step 4: State that it is important for both of you to realize that you are not looking for a new agreement, but for an improved agreement that both parties prefer to the current agreement.

10. Difficulty of guessing (and learning) prioritization of issues; Diagnostic questions, "investigative bargaining", logrolling

Negotiators who ask the counterparty about their preferences are much more likely to reach integrative agreements than negotiators who do not ask the other party about his or her priorities. However, left to their own devices, negotiators fail to ask diagnostic questions. For example, only about 7% of negotiators seek information about the other party's preferences during negotiation, even though it would be dramatically helpful to know such information. Why are these questions diagnostic with respect to increasing the likelihood of win-win agreements? Two reasons: First, such questions help negotiators discover where the value is. Second, diagnostic questions do not tempt the other party to lie or to misrepresent himself or herself. Asking the other party about his or her BATNA or reservation price might induce him or her to exaggerate or lie, but it is not immediately clear why or how a negotiator would lie about his or her underlying needs. Thus, diagnostic questions are effective because they do not put negotiators on the defensive. 1: BUILD TRUST AND SHARE INFORMATION 2: ASK QUESTIONS—ESPECIALLY IF YOU ARE SURPRISED OR SKEPTICAL STRATEGY 3: GIVE AWAY SOME INFORMATION

11. Disagreements about future events

Structuring Contingencies A major obstacle to reaching negotiated agreements often concerns negotiators' beliefs about some future event or outcome. Impasses often result from conflicting beliefs that are difficult to surmount, especially when each side is confident about the accuracy of his or her prediction and consequently suspicious of the other side's forecasts. Often, compromise is not a viable solution, and each party may be reluctant to change his or her point of view. Contingent contracts can provide a way out of the mire. With a contingency (or contract, differences of opinion among negotiators concerning future events do not have to be bridged; instead, they become the core of the agreement. Negotiators can bet on the future rather than argue about it. In some areas of business, contingency contracts are commonplace. For example, some CEOs agree to tie their salary to a company's stock price. However, in many business negotiations, contingency contracts are either ignored or rejected for several reasons. First, people are unaware of how to construct contingency contracts. Second, contingency contracts are often seen as a form of gambling. Third, no systematic way of thinking about the formulation of such contracts is usually available, meaning that they appear to be a good idea, but how to formalize and act upon them remains an enigma. Fourth, many negotiators have a "getting to yes" bias, meaning they focus on reaching common ground with the other party and are reluctant to accept differences of interest, even when this might create viable options for joint gain. The paradoxical view suggested by the contingency contract strategy states that differences are often constructive. With a contingency contract, negotiators can focus on their real mutual interests, not on their speculative disagreements. When companies fail to find their way out of differences in beliefs, they often go to court, creating expensive delays, litigation costs, loss of control by both parties, and deteriorating BATNAs. Consider how a contingent contract might have changed the course of one of the century's most famous and most fruitless antitrust cases. In 1969, the U.S. Department of Justice [DOJ] filed a suit against IBM, alleging monopolistic behavior. More than a decade later, the case was still bogged down in litigation. Some 65 million pages of documents had been produced, and each side had spent millions of dollars in legal expenses. The DOJ finally dropped the case in 1982, when it had become clear that IBM's once-dominant share of the computer market was eroding rapidly.