Monday, May 23, 2011

Negotiating with a bad BATNA

It's wonderful to have a strong BATNA.  Knowing you have a great walk-away option takes all the stress out of negotiating and puts you in the driver's seat both for process and value creation.  When your BATNA is strong you can often have the negotiation go the way you would like, capture most of the created value and have the other parties thank you for it at the end.

But what about when your BATNA is terrible?  What if you need a deal and the alternative is unacceptable?  Under these circumstances it's easy to feel helpless and to set a goal of just getting something rather than nothing.  Often, however, a bad BATNA doesn't have to mean a bad deal.  Here are some tangible steps you can take to get good results from a bad BATNA:

1. Focus on the other side's BATNA.

Negotiators love a story out of Teddy Roosevelt's presidential campaign.  Shortly before embarking on a whistle-stop train trip, the campaign discovered a serious problem.  They had printed three million copies of a pamphlet with Roosevelt's picture and speech only to realize that they had not secured permission from Moffet Studios, the holder of the copyright on the picture.  Some quick research showed that if they went ahead and distributed the pamphlets they could be liable for $1 in damages per picture.  Some more research revealed that Moffet was very focused on money and would be unlikely to show much sympathy to their predicament.

The campaign had a horrible BATNA -- neither destroying the pamphlets nor risking scandal and millions in liability were acceptable.  Campaign manager George Perkins contacted Moffet with the following cable:

We are planning to distribute millions of pamphlets with Roosevelt’s picture on the cover. It will be great publicity for the studio whose photograph we use. How much will you pay us to use yours? Respond immediately.
Moffet replied that although he'd never done something like that before he'd be willing to pay $250.

If Perkins had thought only of his own BATNA he might have approached Moffet with an appeal for fairness and ended up paying a fortune.  Recognizing that Moffet didn't actually know his BATNA was so bad let him frame the negotiation so it was about Moffet's BATNA (forego the publicity) which wasn't good either.  Note that by ending with, "Respond immediately" he emphasized that Moffet was at risk for losing the deal and didn't give him time to make phone calls and perhaps find out that the pamphlets were already printed.

It's a fun story but not really that unusual.  Just because you don't have good alternatives to a deal doesn't mean the other party does.  If they don't know what your BATNA is and you know (or can reasonably guess) theirs you may be able to control the negotiation and arise at a good result.

2. Improve your BATNA.

Your BATNA generally isn't fixed.  Change it!  If you're negotiating price with the only vendor who can supply your needs, try to develop an alternative supplier.  If you only have one offer for your house, see if you can postpone negotiations and secure another bidder.  Not only is an improved BATNA useful, but if the other parties can see that your BATNA has improved (and may continue to improve) they may see you in a stronger position.

You can also improve the other parties' perception of your BATNA.  In his (excellent) book, Negotiauctions, Guhan Subramanian relates a case of the sale of a business which was off to a bad start.  In was was intended to be an auction, only one qualified party had shown interest.  The investment bankers continued as though all was well and informed the potential buyer that due diligence would be conducted over a weekend, with bids to be submitted at the end.  The buyer requested the Saturday morning "slot" and was told it was already taken.  The next two slots requested were also taken.  When the buyer came in on Sunday morning they found the garbage cans were overflowing with containers of Chinese takeout.  All this gave the impression that the seller's BATNA was another bidder which led to the buyer bidding based on a full valuation.

This example skates close to the law and in my opinion goes beyond what is ethical.  I offer it here not as a blueprint but to illustrate the principle -- even the perception that your BATNA is strong can be very valuable in a negotiation.

I applied these two principles in a more mundane fashion when negotiating insurance reimbursement increases on behalf of a healthcare provider.  The provider's balance sheet wasn't strong enough to afford a loss in business, so our BATNA was very weak.  Nonetheless, we were able to show that our insurance partners had a lot to lose as well if we didn't agree on a deal as we were the low cost provider.  I also played up the Board of Director's and CEO's insistence that rates had to improve to suggest that we were ready to go to our BATNA if necessary.  This played a key role in keeping the discussions about how large an increase was acceptable rather than on whether they had to offer an increase at all.  (This was at a time when rate increases were generally very hard to get and decreases were being pushed on many providers.)

As these negotiations were going I also discussed with the Board and CEO the constraints the organization's weak balance sheet placed on their ability to push for rate increases -- in short, that the balance sheet was hurting profitability.  The organization agreed to slow down on growth in order to strengthen the balance sheet so that future negotiations would be less vulnerable.

3. Focus on creating value.

Imagine that instead of a real-world deal you are negotiating over how to split $10,000 that is sitting on a table.  If you can't make a deal you get nothing but your counterpart gets $9,900 -- and she knows it.  This is the essence of a bad deal; you can hope to get $50 out of the deal and perhaps more if the other party feels generous but essentially you're negotiating over $100 and the rest is already hers.

What would happen if you could magically increase the amount of money sitting on the table to $15,000?  Now things aren't so bad; your BATNA is still weak and you're still going to get much less than half of the money but now she really wants to make a deal.  By increasing the size of the pie you've dramatically improved your prospects.

This approach can be particularly effective if the value creation comes in the form of something that costs the other side nothing but is valuable to you.  Suppose you are seeking secretarial work with a firm that provides software training?  Instead of trying to negotiate a higher salary you might ask to be able to join training classes that aren't full.  The cost to the firm of letting you sit in an otherwise empty seat is near-zero but could be valuable to you.

Value creation is something you should prioritize in all negotiations, but normally it must be balanced with value capture.  When your BATNA is weak (and the other party knows it) value capture is often impractical until new value has been created, so the balance (and prioritization) shifts.

4. Focus on the relationship.

You may have no leverage on this deal, but that doesn't mean you have no leverage at all.  If the current deal is part of a relationship (or if the other party would like it to be) then they have a vested interest in you being happy with the result.  Even if there's no particular relationship an appeal to fairness or reputation can help.

Harvard's PON (Project on Negotiation) newsletter offered a good example.  A homeowner had gotten some work done on his house that required the contractor to develop some custom moulding.  A year or so later he wanted a bit more work done but quickly realized he was in a tough negotiating position.  His contractor was the only one who had the moulding, which meant that any other contractor would be prohibitively expensive.  Indeed, the initial estimate was very high relative to the scope of work and normal negotiation methods only reduced the price marginally.  Ultimately the homeowner acknowledged the tough position but pointed out that he was both a past and potential future customer and that he needed the contractor to be fair with him now.

5. Don't negotiate!

Sometimes it's an error to try to negotiate, at least in the classic sense.  Suppose you're applying for a job out of college or grad school.  It's quite likely that your employer knows that they're either your only or your clearly preferred position, especially since you're unlikely to lie about it.  Rather than try to haggle you may be better off asking for fair treatment -- perhaps a salary review after six months (so you can show how well you're performing) or for the employer to do a salary comparison if you think the offer is a bit low.

Taking a step back, what really matters in your new job?  Wrangling an extra 3% on your starting salary, or having your new boss see you as an excited new member of his or her team?

In other cases it may just not be worth negotiating if your BATNA is weak.  Negotiation can carry costs, in time, in resources and sometimes in goodwill.   You should always weigh those costs against the potential benefits.  If you don't stand to gain much you may be better off not negotiating and moving on to the next opportunity.

3 comments:

  1. Excellent Article, the ideas synthesized above makes practical sense.

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  2. This is great. What's a BATNA?

    First rule of journalism, recap everything for people who don't live and breathe your industry's jargon. I got the idea, but I still don't know what it stands for...

    ReplyDelete
    Replies
    1. Best Alternative To a Negotiated Agreement

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