tag:blogger.com,1999:blog-56286547397659502012024-03-12T16:09:53.161-07:00Negotiation Theory and PracticeA blog about negotiation, touching on academic theory as well as practical examples ranging from big business to government to family and community.Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.comBlogger58125tag:blogger.com,1999:blog-5628654739765950201.post-54003382877527175232015-01-28T08:48:00.000-08:002015-01-28T08:48:24.212-08:00Context is Critical<div class="MsoNormal">
<i>Note: I'd like to start by thanking the people -- many of them relative strangers -- who have expressed enjoyment with this blog and asked me to start writing again. A large part of my absence has been due to the fact that I've been heavily involved in negotiating a major business agreement that has been confidential. As you can imagine, it's hard to find inspiration to talk about negotiation while being unable to discuss the specifics you're focusing all your energy on.</i><br />
<i><br /></i>
<i>That deal has come together and we will have a big announcement coming in about a month, after which I'll be able to share some of the fascinating experiences and lessons of the past years. But in the meantime, I've lifted my head up out of the weeds long enough to work on some other topics that I'd like to discuss. Today's post is the first.</i><br />
<br />
Negotiation analysis often focuses on the parties and their
interests & tactics. In many cases, however, the decisive factor in how a
negotiation plays out is the context or environment in which it happens. This
is particularly important to note because we can often affect that context,
either during a negotiation or before it even begins.</div>
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To illustrate a harmful context, let’s look at a case I
mediated a couple of years back. A young woman had worked as a live-in nanny
for a professional couple, watching their child and helping out around the
house in exchange for room & board plus a modest salary. The relationship
had been good for a couple of years but had ended abruptly for reasons that
weren’t entirely clear, and there was a dispute over whether the nanny was
given sufficient notice or should be paid a couple of weeks of extra money (around a thousand dollars).</div>
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The nanny wrote to her consulate who wrote to the couple
asking that they consider her viewpoint on the monies owed; as an afterthought
the consulate suggested to the young woman that she consult with a labor lawyer
and referred her to a non-profit organization that takes low-income labor cases
pro-bono.</div>
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And so we ended up in small claims with her demanding over
$5,000 and no interest in settling for less. A dispute that should probably
have been settled fairly easily with a good chance of the parties leaving on
good terms instead went to court and left both parties hating each other.<br />
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So what happened?</div>
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The biggest contributory factor was probably a Massachusetts
law designed to protect workers from abusive employers. It states that if a
court finds that an employer has improperly held back wages, even for $1, the
employer is liable for triple damages and must pay all reasonable court costs.</div>
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The arguments in favor of such a law are easy to see.
Employers often have an advantage in both power and knowledge over employees,
and cynical employers might choose to cheat employees of small amounts on a
systematic basis, counting on the amounts being too small to chase. (There is a similar law in place for landlords that improperly withhold security deposits, although I don't remember if that adds court costs to the triple damages.)</div>
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I imagine the law is supposed to work as follows. Worker is
owed $1,000. Worker sues in small claims court. Employer (knowing the claim is
legit) realizes that fighting it will cost them $3,000 plus attorney fees for
both sides and agree to pay the full amount -- and, ideally, invents a time machine and goes back to tell him or herself not to cheat in the first place. Deliberate bad behavior is made
riskier and small claims are more likely to be settled than tie up court
resources. And maybe, just maybe, we get a time machine.</div>
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Now, let’s do some analysis. You have a legitimate claim for
$1,000. If I give in to your claim, that’s what you get. If I fight your claim,
you get $3,000. Are you looking for me to settle or are you looking for a fight? Your incentive is to fight.<br />
<br />
Now, what might
you do in such a circumstance? Inflate your claim.</div>
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Let’s say you add $4,000 of nonsense to
your legitimate $1,000. Now the other party can’t just agree to your claim and
pay $1,000 – they have to pay $5,000 or else go to court. Add to that the fact
that they have to pay attorney costs and they might well choose to pay the
whole five grand. (In this case the lawyer was only pro-bono if they lost or
settled the case; if it went to court and won she would charge the defendants a
full hourly rate.)</div>
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Under her lawyer’s guidance, the nanny brought much more to
court than just some end-of-employment hours. Her lawyer went back over her
entire employment history with her looking for any area they could argue she
was owed money. Some of her claims were reasonable; in particular the lawyer
identified that their contract wasn’t consistent with MA law and that she was
owed small amounts of overtime for most of her employment. </div>
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Others were less reasonable. My favorite was the invitation
to spend Thanksgiving dinners with the family; her lawyer argued (without evidence) that she
couldn’t refuse these without jeopardizing her employment, that by being at the
table she was watching the children (i.e. working) and that after dinner she
helped clean up. (To her credit, the nanny looked embarrassed when her lawyer
made this particular argument.)</div>
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The bottom line is that the law created an incentive for
plaintiffs to be aggressive and less than honest. This then compounded with the
emotional side of the dispute since naturally the employers were furious to
hear that their former nanny was demanding overtime compensation for being
invited to dinner. During private sessions the couple said they would rather go
to court, lose and pay $15,000 than just give in to unfair demands.</div>
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Laws that (arguably) <i>over</i>-protect the little guy aren’t the
only way that legal context can sour negotiations. I spoke recently with a
professor of Mediation at Harvard Law School who described the failures the
“Alternative Dispute Resolution” movement had had in trying to bring mediation
to poor nations. They hoped to provide a venue for poor individuals to resolve
claims but found that without a working legal system as a fallback the more
powerful parties had no incentive to negotiate in good faith. Whereas in my mediated case the law had created "too good" a <a href="http://www.negotiatewithchad.blogspot.com/2011/03/batna-and-zopa-quick-introduction.html">BATNA</a> for the plaintiff, in countries with little rule of law their BATNA was too weak, meaning they had no leverage to bring the other party to the table for a serious discussion.</div>
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What can we learn from this in our own negotiations? Simply
put, the environment and context matter – and we need to be aware of them. <span style="mso-spacerun: yes;"> </span>The examples I gave above were both
about legal context but the principles apply much more generally.</div>
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If you’re in or about to begin a negotiation, ask how the
context affects the incentives for both sides. Does it encourage one or both
parties to seek confrontation – or to be unduly afraid of it? How does it
affect each party’s BATNA?</div>
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It’s also worth asking how your actions may alter the
context, for good or ill. Including a neutral third party in a discussion may
encourage better behavior (e.g. for reputation reasons) but could also create problems (e.g. if you're seen to be going over your counterpart's head).</div>
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Thinking about how you can influence context is particularly important for organizational leaders, and one that in my experience if often neglected. Here we shift from thinking about context as a factor for a single deal to thinking about how to create a healthy environment for negotiation and conflict resolution generally. Many of the same lessons apply. Are people encouraged (both culturally and in terms of incentives) to raise and discuss conflicts or competing interests? Does the context provide enough of a BATNA option to push reluctant parties to the table but not one that rewards overly aggressive or dishonest behavior? These aren't always easy metrics to assess, so if you're in a leadership role you should evaluate carefully. Consider some of the following options:<br />
<br />
<ul>
<li>Look at how internal negotiations have played out</li>
<li>Put yourself in the role of various people and ask how you would feel about approaching a particular conflict</li>
<li>When talking with staff, take the time to ask about their experience with internal negotiation and/or conflict resolution</li>
</ul>
<div>
The same sort of longer term, strategic analysis can be very useful in improving results within long term relationships. If you have a partnership -- whether business, personal or something else -- where conflict resolution or negotiations are consistently frustrating it may not be a problem with interests or personalities. It may be a contextual factor that is blocking your discussions.</div>
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<br /></div>
<div>
Ultimately, whether you're focusing on a single discussion or looking to make a strategic shift in the way negotiations happen, remember to include context in your analysis. In its own way, it's as important as any other factor in determining how a negotiation plays out.</div>
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<br />
<br /></div>
Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com3tag:blogger.com,1999:blog-5628654739765950201.post-3965059132201706102012-09-19T11:37:00.000-07:002012-09-19T11:37:08.618-07:00Everything is about Strength?Mitt Romney's Presidential campaign is dealing with the release of a bootleg video from a private fundraising event in which he spoke in unflattering terms about many Americans. Naturally the press is focusing on him calling 47% of Americans victims who he can't hope to persuade to take responsibility for their own lives, but as a negotiator there was a different comment that alarmed me:<br />
<br />
<blockquote class="tr_bq">
<span class="Apple-style-span" style="font-family: Verdana, Tahoma, Arial, Helvetica, 'Bitstream Vera Sans', sans-serif; font-size: 13px; line-height: 24px;">My own view is that that the centerpiece of American foreign policy has to be strength. Everything I do will be calculated to increasing America's strength. When you stand by your allies, you increase your strength. When you attack your allies, you become weaker. When you stand by your principles, you get stronger. When you have a big military—that's bigger than anyone else's—you're stronger. [Unintelligible.] When you have a strong economy, you build America's strength. For me, everything is about strength and communicating to people what is and is not acceptable. It's speaking softly but carrying a very, very, very big stick.</span></blockquote>
<br />
There's nothing wrong with strength. One of the first pieces of advice I give to people is to strengthen their bargaining position. If you can improve your BATNA (and show your counterparts that it's improving) or worsen theirs, this can greatly improve your outcomes. I agree with Romney that having a strong military and a strong economy are assets in diplomacy.<br />
<br />
So why don't I like what Romney is saying?<br />
<br />
It's his conclusion -- that "everything is about strength and communicating to people what is and is not acceptable." That is a negotiating philosophy that could be very dangerous if applied to foreign policy.<br />
<br />
Nations, like people, don't like being pushed around. When long-term relationships matter and when interests and power are complex, the best negotiators use positions of great strength to <i>create a context for cooperation and collaboration</i>. Romney's instinct (at least according to this talk) is to use his power advantage to force the terms of negotiation. This can be effective, particularly in a single negotiation, but the natural response is escalation and resistance.<br />
<br />
Have you ever had a boss who consistently used his or her power advantage to force your compliance? How loyal did you feel to that boss or to that company? How motivated were you to help that boss?<br />
<br />
Moreover, you can't always have the upper hand. That may not be obvious to Romney. One of the ways private equity firms like Bain make money is by identifying situations where a particular stakeholder in a company is capturing more value than their negotiating strength merits. The most obvious form is when a company's workers are being paid more than alternative labor sources, whether those alternatives are unemployed local workers or overseas. In those circumstances, the private equity firm can buy the company for what it's worth under the current distribution and then increase its value by renegotiating. These negotiations are typically not aiming for "collaborative" and instead might take the form of, "We're firing you all, but you can reapply for your jobs with much lower pay."<br />
<br />
Whatever you think of this tactic, it's important to note that <i>private equity companies get to choose their battles</i>. If there isn't a big mismatch between what a company's workers are paid and the alternatives then the private equity firm moves on and looks for a different company to buy.<br />
<br />
Presidents don't have that luxury. Even a nation as powerful as ours will regularly negotiate with counterparts who have significant power with which to advance their interests. An approach to negotiation based around superior strength enabling one to dictate terms -- our way or the highway -- is a hammer in a world full of non-nails.<br />
<br />
Consider the first Gulf War. Jim Baker's assembly of a world coalition against Saddam Hussein is one of the more impressive diplomatic accomplishments of modern times. He accomplished it not by dictating terms but by dealing with allies on balanced terms. Mutual interests, value-creating trades and problem solving were his primary tools; not a big stick that let him tell them what was acceptable.<br />
<br />
Finally, some forms of strength have a cost. Wanting a strong economy is almost an empty statement unless you can find a President who wants a weak one. Standing by our principles is something I applaud and I'm glad to hear Romney say it. Having a strong military certainly has its uses, but it also has significant costs. There's the obvious financial cost, but there's also the policy cost. History shows that it's extremely difficult to have a dominant military without using it. Just as Republicans correctly point out that government has a much easier time starting a new spending program than closing one down, our military does not only serve to punish bad actors or to protect our core interests. It inevitably comes to the forefront of policy options and becomes entangled in our external relations. <br />
<br />
Even when we don't use our military, it functions as an implicit threat that naturally invokes resentment rather than trust. This isn't unique to us; a study of history finds that the neighbors of any great military power tend to view it with suspicion. If one side arranges things so they always have the option of force, the other sides are having it arranged to that force can always be used <i>against</i> them.<br />
<br />
Of course, this is one snippet from a fundraiser, and I'm adding my own interpretation. Perhaps by "communicating what is and is not acceptable" Romney merely means that attacks on U.S. interests won't be ignored and I should emphasize his discussion of values. At the same time, I can't help but think that if someone came to the negotiating table brandishing "a very, very, very big stick" I'd start looking for other partners or a stick of my own. Foreign policy <i>is</i> negotiation; if Governor Romney becomes President I hope he has a broader repertoire of negotiation tools than this one clip suggests.<br />
<br />Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com5tag:blogger.com,1999:blog-5628654739765950201.post-76574596401397015552012-08-25T12:55:00.000-07:002012-08-25T12:55:31.723-07:00Kickstarter and Deal DesignOne of my favorite web startups is crowd-funding leader <a href="http://www.kickstarter.com/">Kickstarter</a>. The core idea is pretty simple. You have a project and need funding. Kickstarter provides a platform for you to promote your project to people who might be interesting in providing part of that funding, either because they love the idea or because of tangible rewards you offer. (Many Kickstarter projects are funded with what amount to pre-orders of the game, book, film, art, etc.) If you get funded, Kickstarter collects a commission.<br />
<br />
<br />
<div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">
This is a pretty straightforward value proposition. Kickstarter can be thought of as an intermediary, a virtual place for people who are interested in cool projects to meet with people who have cool projects and need money. There are all sorts of interesting facets to this site but I want to focus on what we can learn about deal design -- and not just for people on Kickstarter itself.</div>
<div>
<br /></div>
<br />
A key part of a Kickstarter deal is that the project owner specifies a minimum amount they need to raise and all pledges are conditional on that target being met. If it's going to cost you $10,000 to do your project you can set that as your target. If your combined sponsor pledges are $10,000 or less then the sponsors are charged and your project goes ahead. If the pledges are less than $10,000 then the project doesn't go ahead. (Of course, you're not required to set your target at the cost of doing the project. More on that later.)<br />
<br />
This simple facet offers some substantial benefits. Most obviously, it reduces risk. Instead of investing money up front and hoping to recoup that investment, the seller can pre-sell her project. Risk is reduced for the buyer, too -- if he sees a project he likes he can make a pledge and then continue to learn about it, potentially increasing (or retracting) his pledge.<br />
<br />
A more subtle benefit is the interaction it enables between seller and buyers. Because a project's sponsorship period lasts for a period of weeks, the seller gets an excellent opportunity to connect with buyers and to customize her offering to their wants. A conventional product launch requires much more time before feedback from early adopters can be incorporated. A Kickstarter deal is more like a software project with beta testers providing immediate feedback before the "real" launch.<br />
<br />
Third, a Kickstarter approach enables potential customers to see other potential customers. This can offer psychological benefits for the seller (it's well-documented that people are more apt to buy something that they believe is popular) but in some cases the visibility of other customers creates tangible value in and of itself.<br />
<br />
Let's take a step back from the website to see how this approach can be applied elsewhere. Sadly the deal I'm going to discuss was not successful, but a "Kickstarter" approach increased my chances of success from zero to something reasonable and kept my personal risk very low.<br />
<br />
Some years ago I thought it could be very interesting to help young job seekers understand potential career paths. My concept was to do in-depth video interviews with people at different points along a particular path, exploring the measures of success, the rewards and challenges and how they changed as someone advanced within the company or field.<br />
<br />
After consulting with a number of people in the recruiting field I concluded that charging users was a non-starter and that hoping for sufficient ad revenues was dubious and highly risky -- but that companies that recruited a lot of people out of school might pay to be part of the service. These firms spend millions on recruiting and getting the right people is very important for them.<br />
<br />
I refined my pitch and got a meeting with senior recruiting partners at McKinsey and Boston Consulting Group. I didn't ask them to sign up but rather to explore the concept with me. They connected me with the right people at Bain Consulting. Having those three firms interested in the project made it easy to have the right conversations with other leading consulting firms.<br />
<br />
During those discussions I got very useful feedback on what each firm wanted. Each agreed that they wanted a service that included only the best firms their peers. A small boutique firm could be acceptable if it had an excellent reputation but they didn't want to be alongside second-tier firms. (This would extend to other fields as well.) Other wants were varied. One firm really valued the ability to connect with top students at smaller colleges or graduate programs; another had a laser focus on a very small number of schools and only wanted to increase their presence at those schools. The service morphed considerably from what I'd first envisioned, becoming potentially more valuable to my clients.<br />
<br />
In the end, the project didn't go ahead. The legal and marketing departments of the firms each wanted a level of control over content that I thought would undermine the project (the recruiters agreed with me) and one of the key firms decided not to go forward. This was a disappointment, obviously but the approach had made success possible...and all I lost was my time.<br />
<br />
In thinking about whether and how to apply a Kickstarter structure to negotiations, consider the following questions:<br />
<br />
1. How useful will it be to get <i>indications of interest</i> from potential counterparties? Are people more likely to be interested if they see that their peers (or rivals) are interested?<br />
2. How valuable do you think feedback will be and how can you set things up to get the most useful feedback?<br />
3. How do you close the deal?<br />
<br />
The last question is important, because it's very easy for a Kickstarter-style conversation to keep moving forward but never cross the finish line. Kickstarter deals with this in the most obvious way; it has a deadline. Unsurprisingly, projects tend to get most of their pledges shortly after launch and right as the project closes. Think about how you can convert interest into closure.<br />
<br />
<b>Kickstarter within a Kickstarter?</b><br />
<br />
I'm going to end with an anecdote that I think illustrates not only the power of the Kickstarter approach but more generally how useful it can be to think openly about deal design and negotiation.<br />
<br />
I was working with a client on raising equity investment for a start-up business. He had a good team and an exciting initial product that had the potential to be a home run success but also entailed considerable risk. He had found a group of angel investors that were ready to put up the seed money, but only at a valuation he couldn't accept. He needed a way to increase the perceived value of the deal.<br />
<br />
We discussed Kickstarter and unsurprisingly he was already planning to use it in his launch. The snag was that Kickstarter alone was unlikely to meet his full funding needs, creating a risk that even a successful Kickstarter launch (say, one that raised a third of what he needed) would create fundraising problems because he would need to raise the rest of the money quickly enough to continue product development aggressively.<br />
<br />
My suggestion was to pitch an investment agreement that would be contingent on the Kickstarter launch hitting an ambitious target. That is, the investors would agree to a more favorable valuation (i.e. get a smaller piece of the company) but their investment commitment would be contingent on a Kickstarter result that would merit that higher valuation. (Contingent agreements like this are often a good solution to different expectations about the future, e.g. how successful a product or company will be.)<br />
<br />
Again, this approach does not have to involve Kickstarter itself. Imagine a start-up that has received interest from a VC firm and from a few potential big clients. The VCs are reluctant to invest until the firm has at least one large client but the clients don't want to commit to a service from an unfunded startup. A contingent agreement might be a natural solution; if the clients know that the VC is in if they are, the deal is much more attractive. (In practice, of course, VCs will often take the initiative in making this happen.)<br />
<br />
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<br />Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com2tag:blogger.com,1999:blog-5628654739765950201.post-36283812071683482142012-08-12T12:59:00.002-07:002012-08-12T12:59:29.311-07:00Breaking the RulesOne of my most consistent pieces of advice to negotiators is to break the rules. By this I don't mean the rules of law or of ethics, but rather the self-imposed rules we're often unaware of that limit our choices. <a href="http://www.negotiatewithchad.blogspot.com/2011/05/negotiating-with-bad-batna.html">George Perkins refused to think only about the terrible BATNA facing Teddy Roosevelt's campaign</a> and as a result got paid rather than paying out a fortune. <a href="http://www.negotiatewithchad.blogspot.com/2011/04/pat-toomeys-plan-for-republican-batna.html">Pat Toomey tried to gain leverage in negotiating the debt ceiling with Obama</a> by changing the no-deal outcome so that it became a credible threat. Not every move succeeds, but many of the most successful examples of value creation and of value capture involve one or both parties going past the conventional approach.<br />
<br />
A reader of the blog sent me the following clip, which absolutely made my day. It's a perfect example of breaking the rules. The clip shows the finale of a UK game show called Golden Balls. During the show the players accumulate money in a jackpot and then in the final round they are presented with a Prisoner's Dilemma. Each must secretly choose either "Steal" or "Split". If both choose Split they split the jackpot. If one chooses Split and the other chooses Steal then he takes the whole jackpot. If both choose Steal, they get nothing. Before they decide they get 30 seconds to talk about what they're going to do.<br />
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<div class="separator" style="clear: both; text-align: center;">
<iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/S0qjK3TWZE8?feature=player_embedded' frameborder='0'></iframe></div>
<br />
Let's break down what happened.<br />
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First, let's review the incentive problem that a Prisoner's Dilemma creates. Imagine that you're one of the players and you know the other person is going to choose Split. You can then either choose Steal (and get the whole thing) or Split (and get half). You're better off choosing Steal. Now imagine you know he's going to choose Steal. You get nothing either way. Thus, Steal can be better than Split but Split can never be better than Steal. In game theory terms, Steal <i>dominates</i> Split.<br />
<br />
Given this, the normal play is to spend thirty seconds persuading the other person to choose Split, presumably with the promise that you're going to choose it yourself. Each player will pledge to "do the right thing" and then worry that the other one will choose Steal -- and, of course, some of them will choose Steal themselves.<br />
<br />
In this case, however, the gentleman on the right broke the rules. He declared that he was going to choose Steal but promised that if the other player chose Split he would split the money with him after the show.<br />
<br />
His move is based on two key insights. First, the show doesn't have to be the endpoint of the game. The whole gambit only becomes possible with the recognition that even if the show awards all the money to one player, the players could have a separate agreement to split it.<br />
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The second insight is that this particular Prisoner's Dilemma can be broken. A typical Prisoner's Dilemma requires both players to choose the "cooperate" option (in this case, Split) in order to gain the best combined outcome. In Golden Balls, however, it only requires one person choosing Split for the full jackpot to be awarded. This, combined with the ability to offer an after-the-show promise, allowed him to reverse the game theory implication for his opponent.<br />
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Imagine you're the player on the left. You believe that the other player is going to choose Steal. That leaves you with two choices -- Steal (and get nothing) or Split (and hope that he's honest and will divide the money with you). Unless you're really angry with the strong-arm tactics or really want to avoid being suckered when he says, "Thanks for choosing Split but I have no intention of sharing the money with you," your best choice is to choose Split. Instead of the Dilemma pushing you towards a "defect" option, it now pushes you to cooperate.<br />
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That leaves one small problem. People aren't always rational, especially under pressure. There has to be a non-zero chance that the player on the left will choose Steal either out of anger or confusion or simply because he really doesn't want to be suckered. Our hero solves this problem by choosing Split in the end! If his gambit succeeds then the players split the money (which was his intention anyway) but if it doesn't then the other player might decide that he had good intentions all along and agree to split the money as they'd both said they wanted to do.<br />
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In my experience, opportunities to break the rules aren't rare -- they are the rule rather than the exception. The more we can free ourselves of artificial constraints, the more likely we are to find win-win opportunities (or ways to capture value) that would otherwise have gone unnoticed.<br />
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<br />Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com1tag:blogger.com,1999:blog-5628654739765950201.post-18805390334429735322012-08-10T10:50:00.002-07:002012-08-10T10:50:50.180-07:00Deconstructing an OfferToday we step out of theory for a bit and look at a very mundane negotiation; the type each of us faces regularly at home and at work. Hopefully it will be useful for your own negotiations but naturally I'm going to try tying it to a larger theoretical idea.<br />
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Part of the renovations of the school next door to my home included putting up a new fence along the abutting side of my property. At the start of the project there were two fences there; an old chain-link fence on the school side of the line and a wooden one on ours. The renovation called for the school to replace the chain-link fence with a new cedar fence.</div>
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Our fence is both old and, to use a technical term, cheap. It was already in rough shape and it sustained some damage during the project. There was an obvious win-win opportunity here; rather than ask the town to fix the damage to our fence we asked them to remove that section entirely so that when the project is complete there is only one fence -- the new wooden one.</div>
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As the date of the fence work approached, my wife and I decided we should also look at replacing our fence that ran along the back of our yard to match the new fence along the side. This also seemed like a natural win-win since the additional cost for the fencing company to add in another section of the same fence they were installing for the school would be significantly lower than for a new job. (Their crew and equipment would already be here, and they might get a further volume discount on the fence itself.)</div>
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As I contacted the fence company, I knew I was missing some potentially important information. I knew what the new fence looked like and what it was made of, but I didn't know the wholesale cost or the specific product information that would let me get a bid from another fence company. I wasn't too worried about that, however, since this was easily findable information (and the fencing company would know that).</div>
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I would never begin a large negotiation without having that homework in place but for something relatively small it can make sense to move forward and only spend time getting information if it proves necessary. As with anything, the benefits have to be weighed against the costs.</div>
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The initial quote from the fencer was significantly higher than I'd anticipated. Without having done my homework I was now in that uncomfortable position of wanting to negotiate them down in price while not knowing what would be a realistic counter-offer.</div>
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A useful technique in this situation is simply to ask the other party to explain their offer, providing some context as to why it seems high but not making a counter-offer of your own yet. I told the company that I'd expected a fairly low cost for the this fence given that they would already have their crew and equipment on site and asked them to break their quote down, including detailing the cost of the fence materials (to them) and labor.</div>
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This sort of framing is useful in multiple respects. First, it sets the other party's expectations that this is a competitive negotiation without becoming hostile or aggressive. Second, by breaking down their bid into material cost, labor and profit it becomes very hard for the vendor to keep their bid inflated. Any fence company can confirm their wholesale cost (so it's both fruitless and dangerous for them to lie about it) and labor is also hard to fudge. Thus, when they come back to me they either need a rationale for the original bid (assuming I wasn't just underestimating the fence cost) or they need to come down in price before I even make a counter-offer.</div>
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In this case they did both. The owner explained that because the school project was a public-sector job they had to pay "prevailing union wages" but that she was willing to come down 10% on the price of the job. Now I was 99% sure that nothing prevented them from having their crew do a separate job right next to the school job and pay them normal rates (even assuming they actually had to pay higher rates for the fence along the school property line) but I didn't want to accuse her of lying. So how do we get them to lower their bid further?</div>
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If a counterpart is telling you something that you think isn't true in order to justify a higher price, see if you can find a decision that makes sense if they're telling the truth but that they would want to prevent if they aren't. In this case, I answered that I'd assumed that already being on-site would make the job cheaper for them. If, in fact, it was making it more expensive then instead of having them do the extra fence we would just wait. I asked her to give me a quote for doing the work at a later date and said that with the time pressure off we could see how we liked the new fence installed and whether we wanted to replace it after all. We could also get a couple of other quotes before moving ahead.<br />
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If, in fact, they had to pay higher labor costs because of the proximity to the school project then this was the rational response on my end. If, however, they can pay their normal wage rates it's a terrible outcome for them. They risk not getting the job at all and if they do get it their costs would be higher. Rather than accusing anyone of lying I created a situation where if they were lying they would correct the lie themselves.</div>
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It seems that my initial assumptions were correct; the fence company could indeed pay normal labor rates for the work on our fence and since they were already there they could take a lower margin on the additional work than would normally make sense. They called back and said they had "figured out a way" that they could handle the wage issue by making it a separate job and their offer now came in at just over half the original quote. Calls to two other fencing companies confirmed that this bid was more than competitive; no one else would match it. One guy even said, "At that price I wouldn't make enough money to cover the cost of coming out there."</div>
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<br /></div>Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com4tag:blogger.com,1999:blog-5628654739765950201.post-2247993314362014202012-07-20T13:13:00.001-07:002012-07-20T13:13:33.846-07:00Yale and the UnionsI usually write about constructive, win-win approaches to negotiation that build trust and lead to sustainable agreements that both sides are happy with. This isn't just because I'm a nice guy but because in most negotiations that's the optimal approach to take. Today, however, we're going to look at a negotiation that may well have been won (a term I rarely use with respect to negotiations!) by an application of strong-arm tactics.<br />
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<a href="http://www.newhavenindependent.org/index.php/archives/entry/yale_workers_ok_new_contract_--_6_months_early/">Yale University recently agreed a new contract with Locals 34 and 35</a>, representing its office and blue-collar workers. Both sides, naturally, expressed happiness with the agreement, with Yale's President expressing pleasure at the positive relationship Yale has built with its unions and how Yale will continue to be able to attract top-quality staff and the unions cheering the "unprecedented" raises, maintenance of free comprehensive healthcare, and guarantees of interviews for union employees for new job openings. Local 35 even got a "no layoffs" clause, which its own members could scarcely believe.<br />
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By all outside accounts, the unions -- whose workers are already paid well above the norm -- captured the lion's share of the value in this negotiation. Yale union workers may now be the best-paid university staff in the nation, with very high job security and unsurpassed benefits.<br />
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Some of the success no doubt came from conventional, even value-creating, negotiating tactics. Yale has had difficult labor relations in the past and has a strong interest in avoiding strikes or street demonstrations. Yale also wanted a four-year contract instead of three and was willing to pay more in wages to get it.<br />
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But there is also indication that the unions may have found an external power lever and used it to great advantage.<br />
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Last August the unions <a href="http://www.nhregister.com/articles/2011/08/23/news/new_haven/doc4e5314120bbe7104392852.txt%20">backed a slate of Aldermen</a> (all with strong union ties). The unions called this an attempt to rebalance power between the Mayor and the Aldermen (their view was that the Board of Aldermen was largely controlled by New Haven's Mayor); others called it a union takeover that might lead to the Aldermen acting in the best interests of the unions rather than of New Haven.<br />
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In discussing his success, Local 35 President Proto allegedly said, "Right now we control 20 out of 30 seats on the Board of Aldermen. The University is planning to build two new residential colleges. Any brick they want to lay down has to get approval from the new supermajority on the Board."<br />
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Mr. Proto has said he was misquoted (the newspaper originally modified the quote online and then reconsidered and stated it was confident the quote was correct). But let's take an academic look at this and do two things. First, let's assume for the sake of discussion that the unions supported a slate of candidates for Alderman with the explicit intention of holding up Yale by linking the union employment contracts to (ostensibly independent) decisions by the Board of Aldermen over whether to grant Yale building rights for two new colleges. Second, let's suspend our views on whether this would be ethical or even legal if it were shown to be true.<br />
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What remains is a textbook example of one party gaining leverage in a negotiation by securing the ability to harm the other party in an unrelated area. In simple terms, the unions worsened Yale's <a href="http://www.negotiatewithchad.blogspot.com/2011/03/batna-and-zopa-quick-introduction.html">BATNA</a> from "strikes and protests" to "strikes, protests, and Yale can't build the residential college buildings it needs." Worse, for Yale, this isn't a single bullet. Yale will presumably need regular approval from the Aldermen for various developments. A four-year contract may provide some breathing room, but I would expect to see Local 35 workers getting a high percentage of construction jobs on new contracts.<br />
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We tend to look at negotiations somewhat in isolation. That is, while we're aware of potential effects on relationships and reputation we tend to think about each negotiation as a self-contained exercise that focuses on the interests relevant to what is under discussion. The negotiation between Yale and its unions is a reminder that we have to broaden our view of possibilities.<br />
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That's not to say that we should do what the unions are alleged to have done, but rather that we need to consider a broader range of possibilities. For Yale, this could have meant recognizing the potential for the unions to add government leverage to the negotiation and looking for ways to mitigate that. More broadly, however, negotiators need to cast their nets wide when thinking about parties that might be brought to the table, levers of power that might be pulled (for or against them) and tactical and strategic moves the other side might be considering. I'll be looking at some examples of this in the coming weeks.<br />
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<br />Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com0tag:blogger.com,1999:blog-5628654739765950201.post-36149717701733271762012-07-18T08:52:00.002-07:002012-07-18T08:52:16.240-07:00Mitt Romney and the Power of NormsMitt Romney is coming under increasing pressure to release more than just two years worth of tax returns. Traditionally, Presidential candidates release around twelve years of returns but Romney is arguing that this is no longer sound. During an interview with NBC in Pittsburgh he explained:<br />
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<blockquote class="tr_bq">
<span class="Apple-style-span" style="color: #333333; font-family: Georgia, Century, Times, serif; font-size: 15px; line-height: 21px;">My experience is that the Democratic Party these days has approached taxes in a very different way than in the past. Their opposition people look for anything they can find to distort, to twist, and to try and make negative, and I want to make this a campaign about the economy and creating jobs. And they want to make this campaign about attacking people and diverting attention from our job picture in this country.</span></blockquote>
<span class="Apple-style-span" style="color: #333333; font-family: Georgia, Century, Times, serif; font-size: 15px; line-height: 21px;"><br /></span><br />
<span class="Apple-style-span" style="color: #333333; font-family: Georgia, Century, Times, serif; font-size: 15px; line-height: 21px;"><span class="Apple-style-span" style="color: black; font-family: Times; font-size: small; line-height: normal;">Let's take Governor Romney at his word. That is, let's assume that there is absolutely no impropriety in his returns and that his only reluctance to release them stems from a belief that opposition research by Democrats has become particularly nasty in recent years. If that's his sincere view, what's wrong with his approach?</span></span><br />
<span class="Apple-style-span" style="color: #333333; font-family: Georgia, Century, Times, serif; font-size: 15px; line-height: 21px;"><span class="Apple-style-span" style="color: black; font-family: Times; font-size: small; line-height: normal;"><br /></span></span><br />
<span class="Apple-style-span" style="color: #333333; font-family: Georgia, Century, Times, serif; font-size: 15px; line-height: 21px;"><span class="Apple-style-span" style="color: black; font-family: Times; font-size: small; line-height: normal;">It violates norms...those powerful, often-unwritten rules that govern the behavior we expect from each other. When someone violates a norm we tend to have an immediate and emotional response of mistrust and/or anger which makes it very unlikely that we'll be open to the other party's reasons for doing so.</span></span><br />
<span class="Apple-style-span" style="color: #333333; font-family: Georgia, Century, Times, serif; font-size: 15px; line-height: 21px;"><span class="Apple-style-span" style="color: black; font-family: Times; font-size: small; line-height: normal;"><br /></span></span><br />
<span class="Apple-style-span" style="color: #333333; font-family: Georgia, Century, Times, serif; font-size: 15px; line-height: 21px;"><span class="Apple-style-span" style="color: black; font-family: Times; font-size: small; line-height: normal;">Enough Presidential candidates have released a dozen or so years of tax returns that it has become expected. As a result, very few people are open to hearing a rational argument from Romney that he should follow a different path. He can talk about spin and distortion all he wants; the bulk of the electorate (and the media that filters the news) isn't listening. As a result, the only reason we will think of for Romney's choice is that he has something to hide. It looks like he's making a terrible mistake, one that will either taint his perception among voters all the way to November or force an embarrassing reversal. (It's unfortunate for Romney that he didn't learn from a similar controversy during the primaries, when he originally intended to keep his returns private until closer to the general election.)</span></span><br />
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Companies are often surprised when customers reject proposals that seem sensible analytically but which violate norms. Coke and Pepsi floated the idea of soda machines with thermostats that would alter the price of a cold soda depending on the temperature of the day. Why not? Soda companies have already established very different price points for sodas that have nothing to do with cents per ounce. A 20-ounce bottle typically costs more than a 2-liter bottle, and cans and bottles bought in packs cost a fraction of what individual servings cost in a convenience store. Surely cola customers have fully embraced the fact that we pay mainly for convenience and immediate refreshment than we do for the specific mix of carbonated water and high-fructose corn syrup we happen to drink?<br />
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But no. Testing showed universal dislike for the concept.<br />
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Negotiators should be mindful of norms, particularly when negotiating in unfamiliar territory (e.g. in another culture where we may not know the norms) and when we have come up with something particularly clever as a reason to do things differently. As Governor Romney is learning, an argument can only work if people are willing to listen to it, and clever ideas (like variable pricing for soda) can easily blind us when the underlying problem isn't logic but the violation of a norm.<br />
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Consider banks. Commercial banking has been consistently growing the amount of income it generates from fees, and for the most part its consumers have grumbled but gone along. The fee too far? Charging a monthly fee for the use of debit cards. Similar revolts have been experienced when banks have tried to charge for checking services.<br />
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If we look at this from a purely rational point of view, what could be more natural than a service provider charging a fee for a service? If checking or debit cards had never existed and banks introduced them with a fee then certainly some customers would choose not to buy these services but would any of them be angry at the offer? Unlikely...but it is now a norm that these services be free.<br />
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Now let's look at a pair of moves that, while generating some blowback, seems to have stuck. Airlines have made two significant moves that both violate long history and thus could easily be responded to as norm violations. First, they began charging for luggage. Second, and more recently, they have <a href="http://www.cnn.com/2012/06/07/travel/window-aisle-seat-charge/index.html">begun charging more for window and aisle seats</a>.<br />
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I think the airlines have probably fared better for two reasons. First, they had a near-unanimous front. Both the change to bag fees and reserving better seats for premium fares were initiated by nearly all major airlines at the same time. Second, while few people are really fans of airlines, it was widely understood that rising fuel costs and economic recession had pushed them to the brink. As a result, while we may not have liked the changes, we understood them.<br />
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As a negotiator I try very rarely to break norms. Sometimes, however, it's unavoidable. In those cases, the following guidelines are often useful:<br />
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<li>Consider the responses of third parties. Are their players (e.g. the other airlines) who can help your change become the new normal? Are their competitors or rivals who may seize on your violation to gain ground?</li>
<li>Get agreement on the underlying problem (or opportunity). When you propose something that breaks a norm, this helps the other side recognize that you're not breaking it lightly. Just as important, it gets them engaging in the logical side of the question before the emotional response is triggered.</li>
<li>Openly acknowledge that your proposal would violate normal practice.</li>
<li>Ask the other party for their input, including counter-proposals that might solve the problem without breaking any norms, or additional steps that might address issues related to the norm.</li>
<li>Go slowly.</li>
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How might Mitt Romney have used this approach? I'm not convinced he had a <i>good</i> solution, but his team should have anticipated the response. One possible approach would have been to start a dialogue about the hit-job nature of modern politics and the trivial issues that often dominate news cycles. He could have used clips of Obama bemoaning the fact that small issues decide big elections and perhaps some elder statesmen from both parties to help make that case. Then, when he decided not to release more returns he should have explicitly acknowledged that this was an unusual step and that he understands that some people will think the worst. (Instead, he appeared combative and arguably arrogant as though asking for more returns was a new and unreasonable demand.) Finally, he should have discussed his plans and his reasoning with leading Republicans to make sure they were on board; or, if they could not be persuaded, he should probably have given up on this particular fight.Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com0tag:blogger.com,1999:blog-5628654739765950201.post-7924366791089859252012-06-28T13:18:00.002-07:002012-06-28T13:18:29.700-07:00Know Thyself, Know thy EnemySun Tzu famously said, "Know thyself and know thy enemy; a thousand battles, a thousand victories." Understanding both yours and your enemy's strengths and weaknesses would enable you to choose battles and conditions that favored you, leading to victory even against a theoretically superior foe.<br />
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Knowledge of oneself and of one's counterparts (the win-win aspect of negotiation makes <i>enemy</i> a rarely-appropriate term) is just as important in negotiation. As we've already discussed, the party with superior knowledge can often capture most of the value simply because he or she understands the ZOPA. Beyond that, however, knowledge is a fundamental requirement for creating powerful options particularly when you can't count on the other side to engage in mutual problem-solving with you.<br />
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Chris asked how I would approach her negotiation with "a crazy person". She had engaged in a number of real estate deals, one of which was done in partnership with a contractor. Chris had raised financing from friends and family shortly after the financial crisis dried up credit and this had enabled her to buy distressed properties, refurbish them and then flip them. Most of the deals had gone smoothly and she'd made good money but the partnered deal had been quite challenging.<br />
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The contractor was to earn half of a development fee (Chris receiving the other half) in return for managing several sub-contractors for electrical, plumbing, etc. As she was preparing to close the deal, however, the sub-contractors showed up with liens on the property for significantly larger amounts than had been budgeted. Her BATNA, postponing closing and potentially losing the sale, was untenable so she'd been forced to pay off the bills. She then put the development fee in escrow and demanded an accounting from the contractor (showing that the bills were legitimate) before he could collect any of his share.<br />
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Her contractor, in theory, was either in a good position (he had a legitimate accounting and could take her to court) or a bad one (he didn't have a legitimate accounting and thus faced losing his fee and potentially criminal charges). Not really knowing which was the case and not wanting to pursue litigation (as an attorney herself she believed that only the lawyers win this sort of case) she decided that it was in her best interests to make an offer that was bad for her but was contingent on him providing a full accounting.<br />
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The contractor hired a lawyer for the case but she stopped returning Chris's calls. This, combined with the refusal to accept or even to negotiate on Chris's first offer led her to believe even more strongly that he couldn't account for the costs. But if she didn't want to go to court and he wasn't willing to negotiate, what could she do?<br />
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As I talked about the case with her, my first priority was determining what her core interests were. One could easily imagine in a case like this that a client's top priority would be not being taken advantage of, or forcing the contractor either to produce the accounting or to face criminal charges. (These interests could arise from personal convictions or a need to protect a particular reputation so future partners wouldn't be tempted to play loose.) In this case, however, Chris just wanted to get as much money as possible and to put an end to the dispute.<br />
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We then looked at the negotiation from the contractor's point of view. His actions strongly indicated that he didn't have an accounting, which explained why he wouldn't (couldn't!) accept her otherwise-favorable offer. How could she use that to her advantage?<br />
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An obvious point of leverage is that he faces potential criminal liability. This gives him an incentive to delay (the statute of limitations would eliminate this liability next year) and means that he can't accept any deal that requires an accounting. On the other hand it means that his aversion to being sued may be even stronger than her aversion to suing (a court could require him to show his books or at the very least award her the whole development fee if he won't) and that a deal that allows him to keep his books private is particularly attractive.<br />
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My advice, which she is now implementing, was to give the contractor three options:<br />
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<li>A repeat of her initial offer (favorable to him, but contingent on an accounting),</li>
<li>A new offer (giving him much less money but not requiring any accounting), and</li>
<li>If neither offer is accepted by a deadline, she will sue.</li>
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Sun Tzu often advised allowing the enemy to retreat:</div>
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If you surround the enemy, leave an outlet; do not press an enemy that is cornered.</blockquote>
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One of Sun Tzu's points is that a cornered enemy is forced to fight and will gain bravery from desperation. A similar point applies here; while the threat of criminal liability gives Chris leverage the smart play for her is to give the contractor a way out. As long as her only offer was contingent on an accounting he couldn't provide he couldn't cooperate. She needed to adjust her approach to give him an avenue of retreat from what was otherwise an untenable situation.</div>
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By adding a "no accounting" option that still gives the contractor a small share of the escrowed money and by making it clear that not accepting either offer will lead to litigation, Chris will hopefully get significantly more money than she was willing to settle for while avoiding a costly legal battle.</div>
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<br />Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com0tag:blogger.com,1999:blog-5628654739765950201.post-60811401325729094912012-06-20T13:45:00.002-07:002012-06-20T13:45:39.625-07:00Active ListeningOne of the most valuable soft skills a negotiator or mediator needs is active listening. It combines focus on the speaker, questions aimed at improving your understanding, confirmation that you've understood the speaker and acknowledgement of the speaker's content and the emotions behind it. It's both a set of skills and an attitude -- one that values the other party and recognizes that understanding is important but not easy.<br />
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At its best, active listening prevents miscommunication and builds trust by showing the other party that you're genuinely interested in their perspective. It's virtually essential to creating a negotiating environment of mutual problem-solving.<br />
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As you practice active listening, however, it's important that you remain honest and that you don't assume your listening skills are getting things right the first time. Otherwise, instead of seeming genuinely interested you can come across as "managing" the other party and only paying lip-service to their concerns.<br />
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Active listening training often includes suggested phrases or questions, like:<br />
"It sounds to me like you're concerned about (thing). Can you tell me more about that?"<br />
"What specific concerns do you have about my proposal?"<br />
"If I understand you correctly, you want (thing)."<br />
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These are useful starting points but relying on them can be a trap if they aren't genuine. By all means practice suggested questions and phrases but the sooner you learn to adopt them <i>into your own natural conversation</i> the better. You should also remember that an implicit assumption of active listening is that your initial impressions of the other person's positions and/or emotional state will often be wrong. That's why active listening involves so much questioning and clarification.<br />
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I experienced a perfect example of how <i>not</i> to engage in active listening during an online customer service chat with my Internet provider. I was having difficulty setting up an email account for one of my daughters; I'd login to my page but when I selected the option to add a new email address the page would go back to login.<br />
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I explained the problem I was having to the customer service rep, who replied that he would try to help me. He then said, "I can see how important it is for you to be able to set up this email account for your daughter."<br />
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If I'd said something to indicate that this was urgent or important this might have been very good mirroring. But I hadn't. Granted, it's reasonable to guess that something a parent does for their child is important to them but by overstating his knowledge he gave the impression of an automatic response: "I can see how important it is for you to ________ (insert customer issue here)."<br />
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By assuming knowledge and then stating it back to me, the rep did the opposite of what he (or his script-writers intended). It might seem unfair to pick on a customer service rep who is probably just doing what he was told, but I've seen similar "active listening" errors from trained mediators and social workers. In this case, no harm was done -- I was mildly annoyed but filed it away as an example. In a more emotionally charged or complex negotiation, however, poor active listening can be costly. The listener may not only fail to realize that trust has been diminished rather than enhanced but is also likely to think that his original misconception has been confirmed.<br />
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Perhaps the single best piece of advice I can give for active listening is to allow for your own error. Ask rather than state, where possible, and if you're making a statement about the other person's perspective try to keep it open-ended. "I can imagine that's important to you," empathizes but also gives the other party room to say, "Actually, it's not that big a deal. What <i>really</i> matters to me is..."Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com0tag:blogger.com,1999:blog-5628654739765950201.post-34708985627007535252012-05-23T13:10:00.001-07:002012-05-23T13:10:34.989-07:00Real-Estate AgentsShould you use a real-estate agent to help buy or sell your home? You'd be forgiven for thinking that the answer is a clear, "No." No-agent websites have proliferated, and keeping an extra 3% on your house (the typical 6% commission is divided between buyer's and seller's agents) has some obvious appeal. This post looks at the theoretical and practical issues of using a broker (many of which apply to using agents in other negotiations as well).<br />
<br />
Some academics have argued that the housing market suffers a pretty serious level of "agency cost," i.e. your agent may be getting you a worse result because your interests are unaligned. Consider this passage from <a href="http://www.amazon.com/Freakonomics-Revised-Expanded-Economist-Everything/dp/0061234001?ie=UTF8&tag=widgetsamazon-20&link_code=btl&camp=213689&creative=392969" target="_blank">Freakonomics</a>:<br />
<blockquote>
A real-estate agent may see you not so much as an ally but as a mark...[A study found] that an agent keeps her own house on the market an average ten extra days, waiting for a better offer, and sells it for over 3 percent more than your house -- or $10,000 on the sale of a $300,000 house...The problem is that the agent only stands to personally gain an additional $150 by selling your house for $10,000 more, which isn't much reward for a lot of extra work. So her job is to convince you that a $300,000 offer is in fact a very good offer, even a generous one, and that only a fool would refuse it.</blockquote>
Let's get to the heart of Levitt's point about incentives. Your agent is getting a good commission, so she has a strong incentive to sell your house, but she doesn't have as good an incentive to sell your house <i>for the highest price</i>. The commission structure rewards her for closing the deal as quickly and simply as possible, whereas you might be willing to wait or take some risk in order to get a higher price.<br />
<br />
Here's how it generally works. Your agent splits the 6% commission with the buyer's agent and then splits the remainder with his or her brokerage firm, so the actual commission is more like 1.5%. 1.5% on a $300,000 house is $4,500 which is a pretty good commission for one transaction, but the incremental return on boosting the sale price is much less. For every dollar she adds to the sale price of the house she keeps just one and a half cents.<br />
<br />
Let's take a specific example and see how this might play out. Suppose you're interested in moving to a larger house within your neighborhood. You're not in a hurry, but you're ready to move -- perhaps you and your spouse have decided to have kids and you want to add a couple of bedrooms and a yard. Your current house has a market value somewhere in the range of $450K to $550K and after exploring your purchase options (and taking into account your existing mortgage) you conclude that your BATNA (staying in your current house) is preferable to any sale price that earns you less than $460K (after commission). Here's what that implies for the value created by selling your house, for you and for your broker:<br />
<br />
<br />
<table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin-left: 4.4pt; width: 361px;"><tbody>
<tr style="height: 13.0pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;"> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 111.05pt;" valign="bottom" width="111"><div class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt;">
<span style="font-family: Verdana; font-size: 10pt;">Sale Price<o:p></o:p></span></div>
</td> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 78.95pt;" valign="bottom" width="79"><div align="right" class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt; text-align: right;">
<span style="font-family: Verdana; font-size: 10pt;">$450,000<o:p></o:p></span></div>
</td> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 81.0pt;" valign="bottom" width="81"><div align="right" class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt; text-align: right;">
<span style="font-family: Verdana; font-size: 10pt;">$500,000<o:p></o:p></span></div>
</td> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 1.25in;" valign="bottom" width="90"><div align="right" class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt; text-align: right;">
<span style="font-family: Verdana; font-size: 10pt;">$550,000<o:p></o:p></span></div>
</td> </tr>
<tr style="height: 13.0pt; mso-yfti-irow: 1;"> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 111.05pt;" valign="bottom" width="111"><div class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt;">
<span style="font-family: Verdana; font-size: 10pt;">Value to You<o:p></o:p></span></div>
</td> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 78.95pt;" valign="bottom" width="79"><div align="right" class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt; text-align: right;">
<span style="font-family: Verdana; font-size: 10pt;">-$37,000<o:p></o:p></span></div>
</td> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 81.0pt;" valign="bottom" width="81"><div align="right" class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt; text-align: right;">
<span style="font-family: Verdana; font-size: 10pt;">$10,000<o:p></o:p></span></div>
</td> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 1.25in;" valign="bottom" width="90"><div align="right" class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt; text-align: right;">
<span style="font-family: Verdana; font-size: 10pt;">$57,000<o:p></o:p></span></div>
</td> </tr>
<tr style="height: 13.0pt; mso-yfti-irow: 2; mso-yfti-lastrow: yes;"> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 111.05pt;" valign="bottom" width="111"><div class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt;">
<span style="font-family: Verdana; font-size: 10pt;">Value to Broker<o:p></o:p></span></div>
</td> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 78.95pt;" valign="bottom" width="79"><div align="right" class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt; text-align: right;">
<span style="font-family: Verdana; font-size: 10pt;">$6,750<o:p></o:p></span></div>
</td> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 81.0pt;" valign="bottom" width="81"><div align="right" class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt; text-align: right;">
<span style="font-family: Verdana; font-size: 10pt;">$7,500<o:p></o:p></span></div>
</td> <td nowrap="" style="height: 13.0pt; padding: 0in 5.4pt 0in 5.4pt; width: 1.25in;" valign="bottom" width="90"><div align="right" class="MsoNormal" style="margin-bottom: .1pt; margin-left: 0in; margin-right: 0in; margin-top: .1pt; text-align: right;">
<span style="font-family: Verdana; font-size: 10pt;">$8,250<o:p></o:p></span></div>
</td> </tr>
</tbody></table>
<br />
<br />
If we compare sale prices of $450K and $550K we see a huge difference for you -- from unacceptable to nearly $60,000 better than your BATNA. The broker's commission changes much less -- at the unacceptable price it's 82% of what it is at the home run price.<br />
<br />
This can work against you in two ways. First, the broker has only modest incentive to do extra work (trying to find a better buyer). Let's say you've got an offer for $500K but if the broker were to <i>really</i> work her network and invest another twenty hours of work she could find a buyer at $550K. That's an hourly return to you of over $2,000 but for her it's less than $50 per hour. She's likely better off spending that time cultivating new clients since the bulk of her commission comes from getting a sale at all rather than from maximizing price.<br />
<br />
The second potential problem is risk aversion. Intuitively it might seem that you're more risk averse, since it's your home, but in many cases the reverse is true. Let's again consider our $500K buyer. Suppose we think there's a 75% chance we can get that buyer to pay $550K if we hold out, but a 25% chance that we'll lose the sale. In this situation, that's a very good bet for you. You have a 75% chance of gaining $47,000 in value and a 25% chance of losing $20,000 in value. For the agent it's a bad bet. She has the same chance of gaining, but her gain ($1,250) is much lower than what she's risking ($7,500) so her expected return is negative.<br />
<br />
This means that the agent has an incentive to encourage you to price your house at a lower-than-optimal (for you) price and to be less aggressive in negotiating. If you have an offer for $500,000 (which is better than your BATNA, but not much), your broker may tell you that that's the best offer you're likely to get and you should take it.<br />
<br />
Levitt argues that there's a straightforward and obvious cost to all this -- brokers push you towards a lower price in order to close the deal, while when it's their own house they hold out and get more money. Does this mean that hiring a broker is a bad idea?<br />
<br />
Not necessarily. First of all, all of Levitt's "evidence" other than one study is anecdotal...and the plural of anecdote isn't data. As for the study itself, while it does control for factors such as "location, age and quality of the house, aesthetics, and so on" there are two rather obvious factors it did not take into account: motivation for selling and where the seller was moving.<br />
<br />
Opportunistic sellers are by nature more patient and more likely to respond to price opportunities than someone who has to sell. Someone who has already bought a house or who is moving for a new job faces time pressure that may prevent them from holding out for a higher price. Brokers, being immersed in housing, are presumably more likely to sell opportunistically (e.g. when the market is particularly hot for the type of property they own, or because a colleague with a suitable client is more aware of an agent's house than a random property on the market). Since real-estate brokers tend to nurture community relationships over a long period of time it may also be that they are more likely to upgrade locally than move to another region, which again would let them choose their timing more patiently. Thus, the differences Levitt notes could be explainable by factors he was unable to control for.<br />
<br />
The reality is probably something not quite as bad as Levitt suggests, but still raises the question of whether hiring a broker is a good idea given that your incentives may be mismatched. For most of us I believe the answer is still yes. A broker's expertise is very useful in navigating the process of buying or selling a house and reducing the risk of pitfalls. If you're selling, a broker can advise you on how to present your house most effectively, how to respond to buyer conditions and be alert to major pitfalls that could result in legal liability. She may also be able to interpret statements from buyer's brokers more accurately than you would, since they know each other's signals, making her a useful partner even if you want to take the lead in negotiations yourself.<br />
<br />
The more interesting question for me is how you might address the mismatch of incentives to get the best use of your broker. A lot of sellers are negotiating with their broker but I suspect they're doing so in the wrong way. The typical approach is to push for a lower commission. This saves money but <i>worsens</i> the incentive mismatch and essentially relegates the broker to the role of low-skill intermediary whose only value-add is likely to be handling the legal paperwork. If Levitt is right that broker effort adds to the final selling price then the last thing we want to do is remove that effort.<br />
<br />
In many situations a more effective approach would be to suggest a <i>higher</i> commission rate but based off of a floor. Suppose in our example above the seller's agent received a 30% commission (apart from the 3% that goes to the buyer's agent) on the purchase price less $450,000? In other words, if the price is $450,000 (which you can presumably get without an agent's help) the agent would get nothing but would get twenty-five cents for each additional dollar? Now a $450,000 price is worthless, a $500,000 price nets her $7,500 and a $550,000 price yields $15,000. That extra twenty hours of work would now pay almost $400/hr, making the effort worth her while. (These numbers are used only to illustrate the point; the general idea would be to set a floor that was easily achievable and a rate that would make the broker's commission equal at a 'normal' sale price.)<br />
<br />
A side benefit to this approach is self-selection. An agent who is confident she can get the highest price for your property is more likely to accept a commission structure like this, whereas one who thinks they're unlikely to do better than $500K may balk.<br />
<br />
Finally, don't forget the power of talking. Even if you decide you don't want to negotiate an unusual commission structure, talk to your agent about the incentive problem. If you're comfortable holding out for a higher price make sure that your agent knows this and that she thinks of her mission to get you as high a price as possible rather than just completing the sale.<br />
<br />
<br />
<br />
<br />
<br />Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com1tag:blogger.com,1999:blog-5628654739765950201.post-83459975008582803092012-05-22T10:58:00.003-07:002012-05-22T10:58:49.516-07:00The Brinkmanship TrapWe're witnessing two new examples of brinkmanship in world politics. In Europe, Greece (both its newly-elected government and its voters) is in a showdown with Germany and much of the rest of Europe over the austerity plan agreed as part of the Greece's bailout. In May, Greek voters shifted dramatically against the incumbent parties that had agreed to the austerity package in favor of parties that opposed it. With no coalition government proving possible, Greece is headed into another set of elections in June with the very real prospect that Greece will shift further against austerity, putting the rescue package and indeed Greece's ability to remain in the Euro at risk.<br />
<br />
At home, meanwhile, Republicans and Democrats are rattling sabers over the debt ceiling again. We may be headed for a repeat of our recent showdown, in which Republicans stake out an extremely aggressive position and threaten to bring about default if their demands aren't met.<br />
<br />
<b>What is brinkmanship?</b><br />
<br />
I define brinkmanship as a tactic in which one or more parties stakes out a position that, if granted, would capture far more of the ZOPA than might be expected from normal negotiation <i>and then attempts to a real or perceived commitment</i> to that position, such that the other parties think that failing to grant it may mean no deal is possible.<br />
<br />
Commitment is a critical component. If you and I are dividing $1,000,000 in a situation where we both go home empty-handed if no deal is reached, a "demand" by me that I get $900,000 is something you'd probably laugh off as an aggressive opening. You know that you can hold firm at a much better split and that it would be irrational for me not to move.<br />
<br />
But what if I show you a contract that compels me to pay $2,000,000 to a third party in the event that I agree to accept less than $900,000? Now I'm committed to my position and the math has shifted against you. Beforehand you could say, "Sorry, Chad, but I'm not going to be taken advantage of. We can split the money evenly or we can walk away." You'd be presenting me with a choice of $500,000 or nothing. Now, however, you're offering me a choice of negative $1,500,000 or nothing because if I accept your deal I lose far more on the contract. It's irrational of me to take any deal less than $900,000 and thus you're the one who has to choose whether to take $100,000 or nothing.<br />
<br />
Commitment can take many forms. Public statements that would be embarrassing to step back from, contractual commitments or steps to make it literally impossible to step back all serve the same basic purpose of blotting out a large chunk of the ZOPA so that the other party(ies) must accept a deal they would normally balk at.<br />
<br />
<b>What's wrong with brinkmanship?</b><br />
<br />
As we saw above, effective brinksmanship can be very rewarding. So what's wrong with it? Why shouldn't every rational negotiator consider brinkmanship merely another available tool, like making multiple offers or adding parties to a negotiation or anchoring?<br />
<br />
The most obvious problem is that brinksmanship is extremely damaging to relationships. It's essentially an effort to use force and intimidation to capture more than one's fair share of the pie -- and since it's out in the open there's no way to soften the effects.<br />
<br />
Beyond that, brinkmanship can lead to no deal at all, even when the ZOPA is large. There are two principal reasons for this.<br />
<br />
First, brinksmanship is rarely clean. My contract in the example above would be clean brinksmanship. One moment we are negotiating on equal terms over how to split $1,000,000. The next you can see that any deal that gives me less than $900,000 is impossible for me to accept. In the real world, brinksmanship involves only partial commitments. When Boehner declares publicly that he won't accept any revenue increases as part of a debt ceiling deal he's making it harder to accept them but certainly not impossible. Many commitment gambits carry a risk that they'll be viewed as bluff and bluster by the other side.<br />
<br />
Second, the incentive to engage in brinksmanship is generally mutual and can be mutually reinforcing. If, in fact, the ZOPA is genuinely large that means that both sides have a lot to lose if no deal happens. Remember, the ZOPA can be thought of as the total amount of money sitting on a table waiting to be divided. Brinksmanship can be self-reinforcing because our rational side often takes a back seat to our emotions if we think someone is treating us unfairly or trying to push us around. Since brinksmanship is pretty much explicitly unfair and bullying as a tactic, our natural response to it is to push back just as hard.<br />
<br />
Thus, while brinksmanship seems like a sensible tactic in a lot of game theory scenarios it is highly problematic (at best) in most real world situations. Moreover, it is almost never a good thing to be on the receiving end of. This brings us to our final question.<br />
<br />
<b>How can we prevent our counterparts from employing brinkmanship against us?</b><br />
<br />
The key to fighting brinksmanship is to remember the ingredients that make it attractive:<br />
<br />
<ol>
<li>Large ZOPA, relative to value creation opportunities</li>
<li>Rational expectation that brinksmanship may lead to capturing the lion's share of the ZOPA</li>
</ol>
<div>
Both of these can be fought. Let's start with the ZOPA. A large ZOPA is a good thing but sometimes a ZOPA is big because both sides have a terrible BATNA rather than because the deal is wonderful. A strong BATNA makes you less vulnerable to brinksmanship (and a number of other strong-arm tactics), which is another reason why you should never think of your BATNA as fixed.</div>
<div>
<br /></div>
<div>
It's also important that brinksmanship (because it tends to shut down value creation efforts) depends on a ZOPA that's large <i>relative to value creation opportunities</i>. You can't always ensure that every deal you do has value creation but you can often influence deals in this direction. Moreover, you can improve the chance that your counterpart is aware of value creation possibilities by raising them up-front, e.g. by including multiple options in your initial proposal.</div>
<div>
<br /></div>
<div>
Next, you can attack the "rational expectation" problem. The simplest way to do this is not to give in to brinksmanship and to let other parties know that you haven't. I like sharing stories of times people have attempted strong-arm tactics against me in part because they're often good learning examples but also because it reminds people that while I'm a sweetheart of a guy who loves to share information and to create value I'm not a pushover.</div>
<div>
<br /></div>
<div>
Similarly, if you are facing brinksmanship now you want to send a clear signal that you're not going to give in to it and also consider building a bridge that will let the other party pull back. This can include suggesting a shared principle by which the disagreement could be settled or a third-party whose opinion could be sought. Brinksmanship is a gambit in which the aggressive party traps him or herself in the hopes that doing so will force you to give in. If you're not going to give in (and most often you shouldn't) then it may be that the only way to save the deal is for you to help the person out of their trap.</div>Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com2tag:blogger.com,1999:blog-5628654739765950201.post-61863142309562696392012-05-15T14:02:00.003-07:002012-05-15T14:02:53.498-07:00The Mancini CoalitionOne of my formative moments as a negotiator took place almost fifteen years ago during a case exercise at Harvard. I had been assigned the role of Enviromental Lobby in a multi-party negotiation over how an economic region would be developed. Other roles included organized labor, the state's governor, business interests and a fifth party representing general voters. As with many such exercises, the range of agreements was abstracted into several different issues, each of which could be given a score from 1 to 5. An agreement didn't have to be unanimous but required any four of the five parties.<br />
<br />
As I read through the case, finding a good strategy looked difficult. My goal (as defined by the case) was to get the highest possible score for environmental regulation but no other party seemed likely to have that high on their list of priorities. (The case specified that the Governor had run on a "jobs" campaign.) My best chance was to form a coalition with another party but I worried that it would be relatively tempting for the other four parties to shut me out and either form an agreement without me or present me with an ultimatum of agreeing to support a bad environmental result or having them go ahead with a worse one.<br />
<br />
I arrived early at the designated negotiation spot without a solid strategy. I hoped I could feel out other parties and find a favorable surprise -- perhaps the Governor really wanted a unanimous decision and could be persuaded to apply some pressure to the other parties.<br />
<br />
Then Walter Mancini arrived.<br />
<br />
Walter is one of those people who embodies the best traits of the military. He's confident but humble, always ready to lead or to follow as the situation warrants, and completely trustworthy. It turned out that he was playing organized labor and that, like me, he had one metric that was by far the most important to him. He had a mild preference for low environmental regulation but it wasn't critical.<br />
<br />
I proposed a coalition. He and I would tell the other parties that we would agree to any deal that scored a 4 out of 5 on each of our primary metrics but would refuse any deal that was below 4 on either. Walter agreed.<br />
<br />
When the rest of the parties arrived, we explained our agreement. Predictably, the other three parties tried to break our coalition, mainly by offering Walter more favorable deals. Predictably, they failed. In the end the three remaining parties negotiated separately to reach a deal that met our requirements.<br />
<br />
Ever since then I've been a student of coalitions. In my experience, negotiators often fail to get good value out of coalitions, either missing opportunities to build them, failing to nurture them or using them poorly. I offer the following as a set of guidelines for building and using coalitions effectively.<br />
<br />
<br />
<ol>
<li>Think broadly about potential coalition partners. Many people look only for parties with common interests -- our natural coalition partners. Many times, however, your ideal coalition partners don't share your interests. Walter was an ideal partner even though our interests were somewhat at odds <i>because we trusted each other</i>. Knowing the other wouldn't defect made it easy for us to turn down favorable deals with confidence that we wouldn't get punished for it.</li>
<li>Think about the purpose of your coalition. Coalitions frequently exist to increase the power of their members but that's not the only function they can serve. Some of the most effective coalitions are designed to persuade rather than to exert power. Bringing on board someone your counterpart trusts and thinks highly of may convince them to take your proposal more seriously or to give credence to your claims where otherwise they might be skeptical.</li>
<li>Consider how other parties may react to your coalition. If your coalition gives you a position of power you risk having the other parties feel threatened or that you're not negotiating in good faith. More broadly, inviting the wrong ally into a coalition may push others away. A classic example is the Bush coalition in the first Gulf War. Israel was kept out of the alliance of nations that pushed Iraq out of Kuwait precisely because their inclusion would have forced other Arab states to exit. Being aware of office politics can let you avoid a similar trap, where a seemingly-powerful addition to your coalition causes other key parties to balk.</li>
<li>If your coalition is powerful, consider moderating your requests. One of the most dangerous situations for negotiators is when they have the other party over a barrel. It can be very tempting to use your power to the utmost and to extract every ounce of value but often this is not the best approach. First, there is always a risk that the other party will reject your strong-arm tactics, either out of principle, out of anger or because you have misjudged how costly it is for them to say "no deal". Second, such tactics can seriously damage relationships and become part of your reputation.</li>
</ol>
<div>
In our case, Walter and I diffused potential tension by asking "only" for scores of 4 out of 5 in our preferred metrics and in stating our willingness to agree to any deal that met that condition. This was clearly a good result for us but not excessive. Instead of being angry our counterparts respected our tactical move. We got better outcomes than we might have working independently and we strengthened our reputations going forward, being seen as trustworthy partners and as strong but reasonable opponents.</div>Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com0tag:blogger.com,1999:blog-5628654739765950201.post-50880788868424460032012-05-07T12:48:00.001-07:002012-05-07T12:48:26.028-07:00Recognizing Weakness from InconsistencyOne of the most common ways people give away deception is through inconsistent behavior. A recent case I mediated is a perfect illustration. The two parties were very far apart. The plaintiffs were willing to settle for a bit less than their full suit but not much. They thought they had a winning case; on top of that they were emotionally invested, having (in their view) been treated quite unfairly. The defendant's position was that they were wasting their time. He'd declared bankruptcy subsequent to the debt being incurred and in addition he had a counter-claim against them for substantial damages.<br />
<br />
By all appearances, it looked like a deal with no <a href="http://negotiatewithchad.blogspot.com/2011/03/batna-and-zopa-quick-introduction.html">ZOPA</a>, since each party thought their <a href="http://negotiatewithchad.blogspot.com/2011/03/batna-and-zopa-quick-introduction.html">BATNA</a> (going to court) was far better than what the other party might agree to. During a private meeting my co-mediator in the case expressed extreme skepticism that any deal would be reached, and the court liason (a highly-experienced mediator) said afterwards that she didn't expect an agreement either. I was almost certain that they would settle. Why? Poker experience.<br />
<br />
It had come up during private session that the defendant had offered to pay nearly half of what the plaintiffs were suing for. Normally this might be a "final offer" at his reservation value as a last chance to avoid going to court but what struck me about it was that it was <i>wholly inconsistent with his stated beliefs</i>. If he indeed thought that bankruptcy protected him from the debt or that his counter-claim was likely to have the court award him money then why offer to pay half? He wouldn't. Either he was <i>extremely</i> risk-averse or he was bluffing.<br />
<br />
Poker players are familiar with this form of bluff. The last card comes up in a game of Hold-'em and someone bets big. An experienced player calls because the bettor's play in prior rounds is inconsistent with a hand that would have benefitted from that card. Perhaps their early betting suggested a high pair or AK and they bet big on a 4 that created no straight or flush possibilities. The trick is looking at a party's behavior as a set rather than in isolated pieces. If some of that behavior is inconsistent with other words or actions it's likely that he or she is misrepresenting something (or, more charitably, is confused about their own interests). That contradiction is often a point well worth analyzing closely. After all, if someone is trying to conceal information from you it is likely to be information that you want to be aware of!<br />
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Almost every negotiation book discusses the importance of stepping back mentally during moments of stress. William Ury coined the phrase "going to the balcony" to describe the mental exercise of imagining that the negotiation is taking place on a stage and then removing yourself to the balcony to look down on it calmly and objectively. While it's certainly true that you should do this whenever your emotions are taking over it's just as important to do so whenever something your counterpart says strikes you as off. A contradiction between what a person says and their previous statements (or known facts) often signals a chance for you to gain important information. Make sure you take the time to reflect on those signals and to make the best inference as to what they mean.<br />
<br />
(As it happened, the defendant did offer to settle for what the plaintiffs were asking.)<br />
<br />
<br />Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com0tag:blogger.com,1999:blog-5628654739765950201.post-77715844377369742312012-03-19T13:43:00.000-07:002012-03-19T13:43:51.008-07:00A Nice Example of Value CreationA lot of value creation in negotiation boils down to identifying things that are more valuable to one party than the other and finding ways to put them in that party's hands. All too often negotiators fight over what should be "theirs" instead of looking for opportunities to trade for value.<br />
<br />
Niko organizes tournaments called Pro Tour Qualifiers, which involve large numbers of Magic: the Gathering players competing for the right to go to yet another tournament called the Pro Tour. It's something I used to do myself (playing, not organizing!) and it's great fun if you like that sort of thing. For our purposes it's enough to know that he needed to rent a large space in which to hold a tournament for a couple hundred players and that his revenue comes mainly from entry fees but is supplemented by selling snacks.<br />
<br />
His original search left him with two main choices. One hall, at a hotel, was clearly superior but the price he'd been offered was significantly higher than he'd hoped. He assumed there was some room to haggle but he needed a significant reduction in cost to make the hall attractive. In discussions with the hotel, Niko raised the fact that it was traditional for the organizers to sell snacks and asked whether that would be a problem. The hotel said they could set up a stand themselves but didn't want competition in food sales.<br />
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It would have been easy for Niko to see this as a negative point in the negotiation. On top of a high price he was losing the income from selling snacks. Many negotiators would have fought to retain a traditional source of income.<br />
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Instead Niko recognized that while selling snacks was valuable for him it was clearly more valuable for the hotel. They could offer a wider variety of food, including meals, buy it more cheaply and have less risk of under- or over-estimating demand. He didn't fight over the issue but instead pointed out that two hundred hungry gamers were likely to buy a lot more food than the average event for that hall and that this extra value needed to be factored into the price.<br />
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The hotel later accepted a <i>substantially</i> lower offer, one that likely wouldn't have been possible without the value creation of moving the "food sales" asset to the hotel.Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com2tag:blogger.com,1999:blog-5628654739765950201.post-52049577460750864072012-02-28T13:39:00.000-08:002012-02-28T13:39:51.532-08:00The Future of MediationAt a recent Harvard Law School symposium on mediation, a leading figure in the mediation world said we should challenge the "A" in ADR (alternative dispute resolution). After all, only a small percentage of civil disputes actually go to trial, so is ADR even alternative anymore? And if so, alternative to what? It was an interesting point but I think that the future of mediation lies not in questioning the first letter but rather in growing beyond the second and third.<br />
<br />
Imagine for a moment that there was no such thing as preventative medicine. Doctors would treat illness but no one would make vaccines. Dentists would fill or pull bad teeth but not clean them or give them a protective coating. Chemotherapy would exist to fight cancer but no efforts would be made to <i>reduce</i> the incidence of cancer in the first place.<br />
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I believe that much of the mediation world is trapped in just such a world. Framed as a subset of alternative dispute resolution, very few mediators are expanding their practice or even their research beyond situations where a serious dispute already exists. This is unfortunate because the skills and knowledge of mediation offer a great deal of value outside of a dispute context.<br />
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Consider divorce mediation. Recognizing the high costs and likelihood of emotional escalation inherent to an adversarial, contested divorce, mediation has grown as a popular alternative. But both the soft skills (e.g. active listening, moving from positions to interests and avoiding a host of emotional traps) and the value creation tools of negotiation would be at least as valuable to couples hoping to strengthen their marriage, to prevent any problems from reaching the point where divorce would be their preferred option.<br />
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Companies often choose mediation to settle disputes in order to avoid expensive litigation. Sometimes mediation enables the original business relationship to continue unharmed or even to be strengthened. But why should mediation only be useful when an agreement has broken down? Third party neutrals could be invaluable to companies <i>forming</i> new agreements, leveraging their expertise about how deals can go wrong as well as a broad range of value creation tools to help create a deal that is both durable and of maximal value.<br />
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Mediation also has a lot to offer for improving working effectiveness within companies. We're all familiar with Dilbert cartoons that depict the common tensions between departments, e.g. engineering and sales or production and marketing. These tensions are often based on divergent interests between the respective groups, implying that corporate retreats or "trust fall" bonding sessions will be of little use. How much more effective might it be to have an experienced mediator train the key players in negotiation skills and then to mediate a value-creating and sustainable internal negotiation?<br />
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Overcoming self-imposed category limits is never easy, but I believe the future of mediation lies not merely in gaining "market share" in dispute resolution but in recognizing that our field can and should get involved in relationships (personal, corporate or between states) much earlier on, when the goal can be not merely minimizing damage or fixing what's been broken but improving what is to come.Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com2tag:blogger.com,1999:blog-5628654739765950201.post-36911371225858379572012-01-23T12:35:00.000-08:002012-01-23T12:35:54.762-08:00The Problem with WinningMost of us like to win. Winning feels good, winning means we got the prize, winning...well, it sure beats losing. A drive to win can sometimes be very useful in negotiations. It can keep us sharp and aggressive and help us resist tactics designed to draw out unnecessary concessions. The best hagglers are often people who take a great deal of pleasure in winning, and I don't think that's coincidental! Unfortunately, the desire to win (and particularly our aversion to losing) can also hurt us in negotiations. Knowing how to harness your desire to win is a critical negotiation skill.<br />
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<b>A Focus on Winning Can Distract us from our Interests</b><br />
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The goal of negotiation is to meet our own interests as well as possible. If that's true, then winning or losing is virtually irrelevant. Suppose you had to choose two deal outcomes. One gives you a value of 100 happiness points. The other gives you a value of 50 happiness points. Which outcome do you prefer?<br />
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Does your answer change if you know that in the first case the same deal gave me 500 happiness points and in the second case it gave me 40? Hopefully not -- but in my experience many people prefer the second outcome (where they "win") to the first (where their interests are better met but they "lose").<br />
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If we're engaging purely in value claiming then this doesn't really apply. If the game is zero-sum, then if I get more than you it's entirely likely that you could have achieved an outcome that would have better met your needs. But winning is still a sideline; what matters is how well your interests were met compared with the range of achievable outcomes.<br />
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I recently interviewed a man who negotiated the sale of drilling rights for natural gas on his property. He and a group of other landowners joined together in an association and hired an expert attorney to negotiate on their behalf. First, of course, they had to negotiate with the attorney.<br />
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In order to align the attorney's incentives with their own, they agreed to give him a percentage of whatever up-front payment was negotiated (above a floor level). They deliberately didn't include any incentives on the royalty payment. (A typical deal includes some per-acre up front payment followed by annual royalty payments which are a percentage of the value of gas that is harvested from the field.) When I asked why, he explained that the royalties are where the real money was, so if they gave the attorney any percentage of that it could turn out to be a huge amount of money.<br />
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The deal they'd signed was for 20% gross royalties, i.e. for every $1 of revenue from natural gas the landowners would be paid twenty cents. I asked him why they couldn't have done a similar incentive system on royalties, e.g. giving the lawyer some percentage of any royalties beyond 20%. For example, if they gave him 10% of any additional royalties and he negotiated a rate of 22% then they would get 21.8% and he would get 0.2%. The reason was that that 0.2% could turn out to be much more than they would want to pay, but of course they would only be paying it if they in turn were getting $9 for every $1 the attorney got.<br />
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The landowners were happy with their attorney getting paid well for getting them a good deal but they based their strategy in part on a desire not to "lose" by paying the attorney a fortune. This may have caused them to miss an opportunity to create a true "win win" whereby the attorney could make a fortune but only by making them a bigger one. (This, by the way, is the <i>only</i> criticism I have of the way they approached the deal -- from what I can tell they got a very good outcome through a combination of thorough preparation and a very healthy approach to the deal.)<br />
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<b>Competition can be Disastrous</b><br />
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One of my negotiation professors often begins his seminars with what game theorists call a dollar auction. The rules are simple:<br />
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<br />
<ol><li>The auction is for a $100 bill.</li>
<li>The first bid must be for exactly $5 and every subsequent bid must be exactly $5 higher than the current high bid. Thus, the bidding will go $5, $10, $15, etc.</li>
<li>Bidding continues until the high bid stands for ten seconds.</li>
<li>The winner pays his or her bid and receives $100.</li>
<li>The second-highest bidder also pays his or her bid but receives nothing.</li>
</ol><div>Typically there will be a lot of people interested in bidding low amounts. When the bidding reached $40 or $50 there are typically only a few people bidding, but no one seems particularly worried. When it gets to $80 or so the remaining bidders generally recognize that they're in a trap. The problem is that since the number two bid also pays there is always an incentive to keep bidding. For example, if your bid is $80 and the high bid is $85 you can either lose $80 or bid $90 at which point you stand to make $10...except of course that now the same incentive pushes the other party to bid $95.</div><div><br />
</div><div>Once the bidding goes over $100 there's typically a chuckle in the room. Both bidders (there are rarely more since three people bidding will let one escape the trap) are now losing money but both have the same incentive to keep bidding.</div><div><br />
</div><div>Typically at some point below $200 one of the players gives in. But not always. He has seen auctions continue past $1,000 when both people are unwilling to lose. Of course, by almost any rational measure two people who lose a lot of money purely because they don't want someone else to lose <i>less</i> money aren't exactly winning.</div><div><br />
</div><div>A focus on winning can make value creation harder. It can blind us to opportunities to find mutual benefits or creative solutions to problems. At its worst it can cause negotiations to break down or negotiators to engage in mutually destructive behavior, all in the name of coming out ahead. By all means, use your killer instinct but beware that it doesn't dominate your negotiations.</div>Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com3tag:blogger.com,1999:blog-5628654739765950201.post-54707688488507063932012-01-05T10:14:00.000-08:002012-01-05T10:14:44.969-08:00Buying a Car (a personal case study)My wife and I just bought a new car, after a decade of loyal service from our Honda Accord. Car buying is arguably the classic negotiation, so I'm going to use my own experience as a case study. This is not meant to illustrate the best way to get the lowest possible price; as we'll see, at one point I deliberately didn't push for the lowest price I might have gotten. My goal here is to focus on how to approach a negotiation to maximize the chances of coming out with a result you're happy with.<br />
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<b>Negotiation is costly</b><br />
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It might seem odd to hear it from me, but negotiation is a costly activity -- in time, in emotional energy and often financially. One of the first steps, therefore, must be to assess the potential gains from negotiation work and plan your own investment accordingly.<br />
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The cars my wife and I were most interested in cost about $30,000. The difference between what one might pay given absolutely no preparation and the lowest possible price is perhaps $2,000. Most of that gain will likely come from the first few hours of research, with diminishing returns afterwards. (For example, it's probably pretty easy to get within $500 of a dealer's normal walkaway price, but if you want to track down the special incentives that may be in play that's going to take more work.)<br />
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That forms a base point for thinking about how much time I want to invest in negotiation. Someone else might well use that same information to make a different choice -- investing less time if they don't enjoy the process and time is scarce or more if they really want to get the best possible price or need to save every dollar possible.<br />
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<b>Know thy Enemy</b><br />
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One of the most common mistakes people make in negotiation is failing to look at it from the other side(s). Putting yourself in your counterpart's shoes is one of the best ways to find value-creation as well as value capture opportunities. Once you understand their interests, their constraints and where you want to improve your knowledge you're in much better shape.<br />
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A car dealership faces some pretty significant challenges. Their fixed costs aren't small, and they sell a relatively modest number of cars in order to cover them. Their capital requirements aren't as big as one might think (the cars on their lot are largely financed by the manufacturer), but they still need to make several hundred dollars per car (on average), even allowing for future profits from service & maintenance.<br />
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The big problem with charging that kind of margin is that dealers are, essentially, commodity brokers. The car held at one dealer is identical to the car (of the same model) at another dealership; in fact, dealers typically have swap agreements in place to maximize their effective inventory so if you're talking with multiple dealers about, say, a Subaru Outback 2.5i Limited in deep indigo pearl, they may be negotiating with you on <i>the exact same car </i>that just happens to be sitting in one of their lots<i>.</i><br />
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Let's say you need to average $600 in profit from selling something. Now imagine that you and two other people have equal right to sell it. Do you expect to make $600? Of course not...because if you're offering me a price that earns you $600, one of those other people is going to undercut you. Then you'll undercut them, and so on until you're barely better than not selling it at all.<br />
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This brings us to the approach that websites like Edmunds.com recommend. Get the dealer cost from their website, then invite multiple dealerships in your area to offer you quotes. Play one against the other until you've gotten the best possible price.<br />
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A great chess coach once wrote, "Your opponent also has a right to exist." Car dealerships aren't just shrugging their shoulders and saying, "Wow, I wish we weren't dependent on making good margins in a commodity business." What should we expect them to do in response?<br />
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First off, they should strive to maintain their biggest advantage -- information. It's a safe bet that "dealer invoice" isn't going to be nearly as accurate as when sites like Edmunds.com first got started. We have to assume that a host of hidden payments make their true cost less than invoice. (I was able to confirm this by asking one dealer what he recommended I do for research -- when he said, "The first thing I'd do is check out the websites that have dealer invoice data so you know exactly what my cost is," it was obvious that his cost was usefully less than invoice!)<br />
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Next, we should expect them not to cooperate with our efforts to turn the negotiation into an auction. A hidden price doesn't help them much if they're bidding against each other. Thus, we should see behavior that balances out their wish to get the sale with a recognition that a full-out auction should be resisted.<br />
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Sure enough, my request for bids from the four local Subaru dealers didn't come back with four clean, competitive bids. One dealer called me and said that one of his Internet specialists would be putting together an offer but what he really wanted to know was whether there was a price I had in mind that would close the deal right there. Another made an offer that was only a few hundred dollars below MSRP (i.e. way too high) but added that his email constituted a guarantee to match or beat any competitor's offer. Another came in a bit better (but still too high) with a similar guarantee.<br />
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Whether you've anticipated your counterpart's responses or not, it's important not to lose control of the negotiation. Even if you do have an aspiration price already in hand, don't share it yet! You can make an outrageous offer if you like, but in my view your best bet is to keep steering the negotiation (or, rather, negotiauction) in the direction that favors you. In this case you want to make clear that you plan to keep talking with multiple dealers so they know they won't get the sale with anything much higher than their reservation value.<br />
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As I was soliciting bids I was also researching other price information. As I mentioned I didn't have much faith in the dealer invoice number (just under $29K) but Edmunds offers another useful number -- the average price at which this car (including options) has been sold at in your region. For us, that was $29,775.<br />
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<b>Beware of Bias</b><br />
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<a href="http://www.negotiatewithchad.blogspot.com/2011/09/own-your-mistakes.html">As I discussed here</a>, one thing I do after every negotiation is a review with a focus on where I went wrong or could have done better. As we'll soon see, in this case I exhibited two very common "mind bugs": susceptibility to anchoring and small pie bias.<br />
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Remember how I knew that the dealer invoice number couldn't be right? Despite that knowledge, it stuck in my head as a "real" number and subconsciously I considered it the dealer's BATNA. This combined with small pie bias led me to set a target price of $29,500 for our car when I went in to negotiate with the dealer with whom we'd done our test drive. At this price I'd be almost $300 better than the average deal. The dealer's margin would be about $500 (if only the invoice number was really his cost), which was enough to be better than me going somewhere else and high enough that I could close the deal without losing a whole day haggling. (I love to negotiate but I only love haggling when it's on behalf of someone else; again, know thyself!)<br />
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<b>Close the Deal</b><br />
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Negotiating for a car is part theatre. Prices get written down. Salespeople go talk to their boss to see whether there's anything they can do with your unreasonable demand. Ours went about like this:<br />
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I started off by explaining that I'd looked up the invoice information and was only willing to pay a small premium to it. I made it clear that I had solicited bids from other dealers and was still in discussions with them but that my preference was to give him the business since he'd spent real time helping us compare models, test drive, etc. I was open to closing the deal that day but only if I was happy with the price and otherwise I would have to go back to the other dealers.<br />
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He came back with a printout of what he said was the actual invoice for the car we were interested in. It was pretty low on details but gave the invoice price at $29,700, over $700 higher than what was on Edmunds. He explained that in order to cover their costs they aimed to make $800 per car, so his offer was $30,500. At this point I took a different approach than the normal back-and-forth. I told him that we might have a problem because my walk-away price was lower than his cost. I was willing to agree today to a price of $29,500 but that anything higher than that would mean that I went back to the other dealers.<br />
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He went "behind the curtain" and came back with a price of $29,910. I reiterated that I had put my cards on the table but was no longer haggling; either he could do $29,500 or not. He left and returned with $29,596. When I repeated my position he said, "Come on, it's less than a hundred bucks. I'm doing all the moving here!" A few minutes later he did another round trip, muttered, "My boss is <i>not</i> a happy man," and agreed to my price.<br />
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Despite his protestations, I suspected I hadn't been ambitious enough. Three iterations was less than I expected, although I do know that a car dealer <i>hates</i> to see a customer leave to think it over. Sure enough, that very evening one of the other dealers (the one who had asked me for a price) decided they'd waited long enough for me to go to them and made an offer of $29,000.<br />
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<b>Know the Rules</b><br />
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Once you agree on a price, a car dealer typically does everything they can to make that deal feel fixed in stone. They bring out paperwork, ask for a deposit, etc. You want to make sure you know what you're actually committed to. In this case I knew that the paperwork was non-binding and the deposit could only be applied to actual expenses incurred by the dealer if I didn't take the car. Thus, I had every legal right to take the lower offer (or to try to squeeze it even lower).<br />
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Instead, I called the salesperson I'd met with and explained what had happened. I told him I understood my legal rights but that the sale was still his if he would come down $400. He conferred with his boss and, as expected, agreed to the lower price.<br />
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Why did I leave money on the table? First, personal preference. I don't like to waste people's time, and while I don't think test drives and talking with a salesman incur any obligation I also know that I'll feel better (assuming he did a good job) giving him the business. Second, going with the other dealer would have involved some additional time and potential risk. I'd already found one "trick" in the offer (on paper it looked like it was even lower, but not all the fees were identical) and there was some cost in time to going to this different dealership and confirming that everything was as it seemed. With those considerations in mind I preferred to close the deal quickly with a $400 improvement rather than to try for more.<br />
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<b>Enjoy the Prize</b><br />
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While I strongly encourage negotiators to review their performance and identify mistakes, don't let that ruin the experience or taint the results. Trish and I now have a new car that we're very happy with. I didn't get the lowest possible price but I got one I'm very comfortable with and didn't sink <i>too</i> many hours into either the research or haggling. Negotiation should be fun and rewarding; if you're not enjoying it, and the outcomes from it, that's your real problem.Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com15tag:blogger.com,1999:blog-5628654739765950201.post-22692104040779906372011-11-09T12:51:00.000-08:002011-11-09T12:51:57.278-08:00InformationIf, as Sun Tzu famously said, war is about deception then negotiation is about information. I advise people to begin every negotiation by asking questions about the information they have at hand, such as:<br />
<ol><li>What information is critical to this negotiation?</li>
<li>What parts of this information am I missing and how can I acquire them?</li>
<li>How confident am I of the information I do have, and how can I test and/or improve it?</li>
<li>What information do my counterparts have? How confident am I about my assessment of their information?</li>
<li>What information do I want to share with my counterparts? What is the best way to do so?</li>
<li>What information might my counterparts want to share with me? What <i>misinformation</i> might they want to share?</li>
</ol><div>Guhan Subramanian tells the following story to illustrate the gray area of ethics and law that negotiators can find themselves in. To me, however, it's an even better example of the importance of asking questions about information.<br />
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A large division was being sold at auction by an investment bank. It was understood that the number of serious potential bidders would likely be small (probably as few as three), and the bankers approached each of them to discuss the terms of the deal. Due diligence would take place over a weekend at the bank's main offices, and bidders would get half-day slots, beginning on Saturday morning. One interested party asked for the Saturday morning slot, but it was taken. Same with Saturday evening and Sunday evening. Sunday morning, starting at 8:00am was available. When they came in on Sunday the trash cans were overflowing with Chinese food takeout boxes and the investment bankers had stubble and looked a bit rough.<br />
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You can probably guess the rest. When the bankers approached the likely bidders only one was interested so they created the <i>perception</i> of strong interest in order to force the buyer to bid as though they were in a competitive auction. The buyer paid hundreds of millions of dollars more than necessary.<br />
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The legal side of this behavior is interesting. (Subramanian says that most American lawyers think the bankers acted legally; most European lawyers disagree.) But let's take a step back and think about what asking the above questions about information might have made possible.<br />
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If you're bidding on something that only two other parties are likely to be interested in, what information is most critical to your negotiation? Surely their <i>level</i> of interest. And how might you learn something about that? A rather obvious solution would be to hire someone to photograph (from a distance) everyone entering the building on Saturday and Sunday. That wouldn't work in all cases, but a typical investment bank has extremely low foot traffic on weekends. Given that the potential buyers would all be familiar to each other, it's quite likely that those pictures would have been worth many millions of dollars.</div>Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com0tag:blogger.com,1999:blog-5628654739765950201.post-73043152524446470862011-11-02T12:34:00.000-07:002011-11-02T12:34:37.653-07:00Relationship Building Before NegotiationBack when I was a kid, my Dad decided to repaint the outside of our garage. The garage was at the end of a driveway that bordered the property line with our neighbor, so one of the side walls was visible from the neighbor's house (and not really from anywhere else). Dad approached the neighbors and asked what color they would like the wall painted.<br />
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It was an unusual request, and if I recall the story correctly they thought at first that Dad was asking them to help pay for the project. No. He just recognized that since the wall was only visible from their property they were the ones with an interest in its color and it didn't hurt us to have the color be different from the rest of the garage. They chose something that suited them and Dad bought the paint.<br />
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I don't think we ever had any serious negotiations with our neighbors, but suppose we had. Dad's simple act of generosity would likely have earned him their trust and goodwill, greatly improving the chances that any difficult discussion went well.<br />
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One of the most important lessons of negotiation success is that your most profitable work is done away from the table -- sometimes when there isn't anything to negotiate! We don't always know where we'll find ourselves needing to negotiate, so even cynics should look for ways to strengthen their relationships and in particular their reputation for taking the other party's interests seriously.<br />
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Opportunities to generate goodwill, at low or no cost, are all around us. The challenge is to be mindful of the opportunities so that the next time we're painting a garage or have some other chance to help someone out, we take it.Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com1tag:blogger.com,1999:blog-5628654739765950201.post-57179118110890156892011-10-25T10:51:00.000-07:002011-10-25T10:51:38.402-07:00Courting bad behaviorThe other night I was watching Storage Wars and saw an unhappy but predictable bit of value destruction play out.<br />
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For those not familiar with the show, <s>kudos on having better taste than I do</s> the basic setup is as follows. Property that has been in private storage gets auctioned off when the owners fail to pay rent on their unit. Storage Wars focuses on four men who try to make a living bidding on the contents of the units. The bidding is complicated by the fact that the storage managers only open the front door to the unit; bidders can't go inside or open boxes, so they have to garner what information they can from a very limited viewing.<br />
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In this episode, nine lots from a single owner were being auctioned. The most experienced bidder (Dave, nicknamed "The Mogul" on the show) looked in the first unit and realized that the semi-random pieces of metal it contained were part of an expensive stage lighting system. He guessed (correctly) that the other units each contained part of the overall system; the whole was worth much more than the sum of the parts.<br />
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Dave decided to try to buy all nine units up for auction. Most likely he reasoned that if no one else realized what was in them they wouldn't see the value and he could outbid them and still make money. Moreover, if someone did realize what was in them, then once he bought the first unit he'd still have an advantage, since he could complete the system while a rival bidder's best hope would be to get part of it.<br />
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The snag in his plan soon became apparent. One other bidder, Darrell, understood what was going on and waited until Dave had invested a lot of money buying several lots. He then began to bid aggressively, starting with a lot he suspected had a particularly key component -- the control system. Dave, likely realizing that if he forced the issue on this lot he'd have to keep doing so on the rest, let the lot go after the bidding had gone high enough.<br />
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After the dust settled, it seemed that Darrell's gambit had worked. He did indeed have a central component to the system. He'd bought it for around $1200 and it would cost Dave $5,000 to replace. He offered to sell it to Dave for $3,000.<br />
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Dave refused, saying, "I'd rather die than see you make a buck." Instead, Dave sold what he bought as scrap metal, letting him make a profit albeit a much smaller one than he could have made. A lot of value was destroyed.<br />
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So what happened?<br />
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First, a disclaimer. Storage Wars is a TV show. The incentives are almost certainly distorted by the fact that the players are paid and drama is encouraged. That aside, this sort of dynamic plays out in competitive negotiations so let's treat it as real and unscripted.<br />
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The math on Darrell's gambit was flawed in one key respect -- it looked at this deal in isolation. He was correct in assuming that he could force Dave to let him have one of the units (in order to prevent this, Dave would have had to pay a premium for every single unit remaining), but his assumption that Dave would then buy that unit back from him only makes sense if this is the only time these two are competing. Since Dave knew there would be plenty of other opportunities for Darrell (and others) to try to hold him up in the future it could be rational for him to take a loss today in order to signal that he would retaliate against anyone trying to do so.<br />
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Darrell also magnified the likelihood that Dave would fight back by trumpeting what he was doing during the auction. He crowed about how he'd blocked Dave's plan and was going to make Dave pay him. Not only might this have made Dave angry it increased the signal value (or cost) of Dave's decision. If he paid Darrell then all the other bidders would have been on the lookout for a chance to do something similar.<br />
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Darrell's chance of success would have been much higher if he took a different approach. He should have bid on that unit without giving any indication that he knew what Dave was up to, instead indicating that he thought he saw something collectible in it. Then, when the dust settled, he could have approached Dave and said, "That unit I bought had a control panel that's a key component to the system you put together from the other units. It retails for five grand, but I wasn't buying it to screw you so I'll sell it to you for three." Dave might still have refused, but he would have had better incentive to negotiate. Instead, Darrell took completely unnecessary effort to make Dave angry and to create incentives for Dave to refuse to deal with him.<br />
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Yesterday I was in a meeting for a multi-party negotiation that has become quite contentious. One of the parties accused another party of lying on a key issue for a period of several months. I think the first party had some grounds for complaint and even for suspicion but it's very rare that calling someone a liar is constructive. In this case it was particularly self-destructive because the latter party has nearly all of the power in the negotiation. They'd like to reach a mutually-acceptable agreement but if none can be reached they are in a position to go ahead with what they want. Calling them liars encourages them to be defensive about legitimate complaints and encourages them to shut off potentially constructive paths to dialogue.<br />
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In each case, the lesson is largely the same. Negotiators need to think about how counterparts will react to their words and actions. If you've pulled off a maneuver that benefits you at someone else's expense, the last thing you want to do is trumpet it! If you want to voice criticism of the other party's behavior, think carefully about how you express it. There's a big difference between, "There have been some important pieces of information that weren't communicated clearly; how can we improve this going forward?" and "You've been hiding information you knew we needed."<br />
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Negotiation is about getting other parties to do things that are in your interest. Like a doctor's first rule is to do no harm, a negotiator's first rule should be never to cause others to act <i>against</i> our interests.Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com2tag:blogger.com,1999:blog-5628654739765950201.post-17547058355575453302011-10-18T11:27:00.000-07:002011-10-18T11:27:27.665-07:00Leverage from Being SmallIt seems absurd to think that being a relatively small client gives you leverage but in many cases it does -- provided what you want is reasonably easy to grant. Companies generally develop a low cost approach to managing small clients. The person (or service department) managing your account likely has a large number of similar clients -- more than they can possibly spend much time with. The model works because most of your peers don't ask for service and (in many cases) because the customer service reps are empowered to meet small requests quickly so that the client is retained and expense is kept low.<br />
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This comes up quite often in personal business, such as banking, cable, etc. You may not be able to avoid paying standard fees at your bank, but if you incur a one-time fee you can often negotiate it away just by asking. Similarly, if there are two cable providers in your area and the one you <i>don't</i> use is offering a sweet deal, you can likely get your own provider to match it or to provide you with something similar. Your leverage comes from providing the company with a choice -- make you happy at little cost or risk you switching to the competition. Not only don't they want you to switch, they don't want to invest a lot of expensive staff time retaining you. (In these negotiations it helps if you say that you're considering switching as a result of whatever it is you're not happy about or whatever special the other company is offering. Agents sometimes only have the ability to grant your request if you indicate that you might switch.)<br />
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This type of leverage isn't limited to getting six months free HBO. Consider my negotiation on behalf of a small healthcare non-profit we discussed under <a href="http://negotiatewithchad.blogspot.com/2011/05/negotiating-with-bad-batna.html">Negotiating with a bad BATNA</a>. My client represented well under 1% of revenue for Blue Cross Blue Shield of Massachusetts. I wasn't even negotiating with the decision-maker there, but rather with two of his subordinates. So how could my (implicit) threat to end our contract with them have any leverage at all?<br />
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Consider the situation the Vice President in charge of reimbursement was in. He was engaged in a massive struggle with Massachusetts hospitals to halt and even reverse the long trend of rate increases. He didn't want to lose small partners like us, particularly if we were profitable partners, but he also didn't want to spend any bandwidth on us. My goal, therefore, had to be to make sure that when our case got to him (and we were asking too much to think it wouldn't), two things would be apparent:<br />
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<ol><li>Giving us what we wanted was strongly preferable to losing us.</li>
<li>Losing us was a real possibility if he said no.</li>
<li>Trying to keep us while giving us less than what we wanted would be costly, <i>in his time</i>.</li>
</ol><br />
I didn't just make sure that his subordinates understood that using us was saving them money. I prepared a powerpoint slide (designed so that they could go over it with their VP) that showed how much we were saving them and then compared that with operating losses our organization was incurring. The message was clear -- we weren't just asking for money, we needed it to make our business sustainable.<br />
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Next, I provided a strong narrative for my counterparts to use in selling the increase. Internal negotiations amongst the various people in an organization are critical, so I helped my counterparts with their task of selling the increase to senior management.<br />
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BCBS came back with an offer of 3%. This was better than most providers were getting that year (most hospitals were having rate reductions) but we turned it down and said that we felt we needed to escalate to the VP.<br />
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(As a side note, I'd been very open with my BCBS counterparts both about what we needed and my awareness of their constraints, so that when I escalated it was expected and came across as a natural next step in the process rather than me going over their heads. Now they were in a key way my allies -- an escalation like this is much better for them if it goes quickly and seems justified, so from their perspective it would be much worse if the VP turned us down than if he concludes that this is a worthy exception. In the former case he's doing their jobs; in the latter they did their job correctly and now he's doing his.)<br />
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I revised the powerpoint presentation with feedback from my BCBS counterparts and they presented it to the VP, along with a list of reasons (ranging from financial to our non-profit status and work with poor communities) why we should be an exception to BCBS's determination not to give out rate increases that year. They came back with a substantial increase, no doubt in large part because the VP saw that as a better option than continuing to negotiate or risking losing us as a partner.<br />
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Being small often means that your counterpart doesn't need you it also means that granting you what you're asking for probably doesn't cost them very much. If you can frame the choice so that it feels reasonable and present your counterpart with the ability to make you happy quickly and easily, there's a good chance that doing so will be their best option.Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com0tag:blogger.com,1999:blog-5628654739765950201.post-38348490818838496712011-10-13T08:42:00.000-07:002011-10-13T08:42:59.675-07:00NBA Lockout: a mechanism for avoiding value destruction in disputesThe recently-announced NBA labor dispute will eliminate at least the first two weeks of the season. On the face of it, such disputes should be rare. The total pie (i.e. gross profits to be shared) is huge, both parties have expert negotiators to represent them and both parties incur substantial costs when they are not able to reach agreement. Today's post will look at how disputes of this kind arise generally (and not just in sports) and how they are made more likely by the structure of payments typical in sports. Finally we'll look at a mechanism that could reduce the risk of destructive escalation going forward.<br />
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Let's start with a basic problem that arises when two parties must agree how to divide a large pile of money. This seems like a wonderful "problem" to have, but it's surprisingly easy for it to go wrong. To see why, let's play a game called "Ultimatum."<br />
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There is $1,000,000 on the table. You get to propose a split. I can then either accept the split, in which case the money is divided as you proposed, or I can decline it, in which case <i>neither of us gets anything</i>. This structure puts you into a very powerful position. If, for example, you propose that you get $900,000 and I get $100,000 (a very slanted split) my choice is between $100,000 and spite. Unless I'm a very spiteful person, I'm going to take the $100,000. If you know I really need cash you could propose a split of $990,000 to you and $10,000 to me, capturing 99% of the value on the table by leveraging your position.<br />
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Now imagine a more "normal" negotiation over how to split a million dollars. We'll call this game, Even Steven. We have an hour to negotiate; if we haven't struck a deal by then neither of us gets anything. Neither of us has any advantage; if you suggest a split that favors you I can say "no" without losing anything. Most likely (and this is supported by practical experience and academic studies) we'll end up splitting the pie evenly and each taking home $500,000.<br />
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Now, if you're choosing between a game where you win $900,000 and one where you win $500,000, which would you rather play? Most of us would rather play Ultimatum, which is where commitment dynamic into play.<br />
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Suppose we're playing Even Steven and you come up with a way to convince me that you'll refuse any deal that doesn't give you at least $900,000. Perhaps you sign a contract binding you to lose $1,000,000 if you agree to any worse deal. Perhaps you have a reputation for doing anything to keep your word and you swear on your honor that you don't take a penny less. Whatever the specifics, if you can make a credible commitment to take nothing unless you get $X, then you've changed the game from Even Steven to Ultimatum with you in the driver's seat.<br />
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The same dynamic happens in real-world negotiations. When the pile of money to be divided is big or the consequences of failing to reach agreement are disastrous there is an incentive to claim a big share of the pie by committing yourself to an aggressive bottom line. We saw this play out in the recent debt ceiling negotiations -- Republicans made very public commitments not to accept any tax increases precisely because saying it privately wouldn't have committed them. That put Obama and the Democrats in a position where if they insisted on tax increases they risked finding out that they were playing Ultimatum rather than Even Steven.<br />
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Even if you don't have a mechanism to create commitment, you can try to play Ultimatum by appearing committed. Using this approach, a negotiator stakes out a very aggressive position and either sticks to it or makes tiny concessions (which is generally a signal that someone is near their bottom line). "OK, you won't accept me getting $900,000 to your $100,000? I can go $880,000 to $120,000." If both parties do this, of course, the negotiation can quickly break down into acrimony -- neither side trusts the other, the parties are far from agreement, and progress looks remote.<br />
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Things get worse when we add ego (and I think it's fair to say that professional athletes and the owners of NBA teams all have healthy egos) and different senses of what's fair to the mix. If it's possible for people to fail to divide a pile of money on the table (and it most certainly is), imagine how much harder it gets if each person think that they deserve 70% of that pile. People commonly overestimate their contribution to any shared effort; it's safe to assume that the players and team owners have very different views of how much each of them "ought" to get from the revenues generated by the NBA enterprise.<br />
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All that would be bad enough, but sports leagues often add one more structural problem to the mix. Players typically earn salaries that are paid throughout the season, while owners earn a relatively high percentage of their income during post-season television. This means that each side has a window in time where the pain of a fight is greater for the other side than for themselves. For this reason, lockouts are more likely to happen at the start of the season (more painful to players) and strikes more likely later in the season.<br />
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<b>Two Different Types of Value Destruction</b><br />
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If labor and management, players and owners or whatever parties share in creating a pool of value cannot agree on how to divide it, they typically stop creating that value -- temporarily. Strike, lockout, "taking a break" in the relationship, the basic dynamic is the same. Each side stops receiving its current share of value creation until the dispute is resolved.<br />
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While in some sense any value destruction is unfortunate, a good case can be made that at least some of it is necessary, too. If the current division of value favors one party over the other, that party may need leverage to bring the other party to the negotiating table. Even in the game Even Steven it's useful to have a deadline, since otherwise negotiations could drag on indefinitely.<br />
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It's worth distinguishing, however, between two different forms of value destruction. The first is having to forego current value that would have been created if no dispute takes place. In a strike/lockout, for example, workers don't get paid* and owners don't get the profits the business would normally earn. Ideally agreements would be resolved before a strike is necessary but having that stick available is healthy and probably unavoidable.<br />
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Another source of value destruction is damage done to the enterprise itself by the strike. If a company loses key customers permanently because a strike disrupted its service to them, then when labor and management agree on how to divide the pie they are sharing a smaller pie -- potentially much smaller. As Hall of Fame goalie Ken Dryden put it (discussing the 2004-5 NHL strike), "You never want to give a fan a chance to find out whether it was passion or habit." If fans get turned off watching players and owners (each group being far richer than the typical fan), future revenues can be significantly damaged.<br />
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<b>A Mechanism to Reduce Value Destruction</b><br />
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So now we have a conflict. The ability to inflict economic pain is a useful tool, without which a division that favors one side may be impossible to resolve because that side won't come to the table. At the same time, both sides have an incentive to limit the pain to lost revenues during the negotiation itself rather than killing the golden goose.<br />
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In theory, this can be avoided by replacing an actual strike with an artificial one. Players and owners contractually would commit to pay money into a pool in the event that they are unable to agree on contract terms -- with the payments designed to simulate the revenues that would have been lost in the event of a strike. Instead of an actual strike/lockout, however, play continues -- and fans, instead of being disappointed and potentially putting their entertainment loyalty elsewhere, get to watch the teams they love compete. Best of all, instead of the losses being "real" losses they could be donated to charity. Imagine the positive press if as a result of a contract disagreement the NBA were announcing that it would be donating a large sum of money to improve inner-city parks or to provide sports equipment to low-income public schools...instead of canceling games.<br />
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Such a solution would be unusual, but far from impossible to implement. A trusted third party (e.g. McKinsey & Co.) could be brought in to do the analysis on how much each side would pay and to provide a mechanism for re-evaluating the system as revenues change in future years. All it would really take is a willingness to adopt an unusual agreement on how to resolve future disagreements. The end result would be superior for all parties -- owners, players and fans.<br />
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* Workers typically get paid by their union, but not at full wages and in any case this is money come out of their collective pockets rather than from the company.<br />
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<br />Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com0tag:blogger.com,1999:blog-5628654739765950201.post-51202490158374545202011-09-22T13:24:00.000-07:002011-09-22T13:24:41.778-07:00How does your Reservation Value relate to your BATNA?Your reservation value is the lowest value you will accept in a deal. It goes by many names -- your bottom line, your walkaway point, but whatever you call it it is the worst possible deal you would be willing to accept. We always hope to do better than our reservation values, but it's important to know what yours is, both to avoid accepting a deal you shouldn't have and as a reference point for how much a current deal is worth to you.<br />
<br />
If you read a typical textbook on negotiation, you might think that the question of how reservation value relates to <a href="http://negotiatewithchad.blogspot.com/2011/03/batna-and-zopa-quick-introduction.html">BATNA</a> is trivial. Most books define Reservation Value in terms of the value of one's BATNA and assume that they are equal. This makes sense -- as long as the deal is better than your BATNA you'd rather take it than walk away; if it's of equal value then you're indifferent and if it's worse than you'd rather follow your BATNA than take the deal.<br />
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For example, imagine you're selling a used car and your BATNA is to sell to someone who has offered you $6,000 in cash. Your BATNA is therefore worth $6,000 and any deal worth less than that will be refused. If you had a deal for $6,100 and were sure you couldn't increase it, you'd take the deal. Right?<br />
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I'm not so sure. I think there are good reasons to set your reservation price at a premium to your BATNA, coming from such diverse fields as psychology and poker.<br />
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<b>Pot Odds</b><br />
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Experienced poker players will make bets they expect to lose because of "pot odds". If the cost of losing is small relative to the gain of winning, the expected return can be positive even if the most likely outcome is a loss.<br />
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Suppose we're playing no-limit poker and I'm down to my last $1,000. There's $10,000 in the pot and it's raised $1,000 to me. Based on my read of my opponent I think I'm an underdog, with only a 25% chance to win. Even though I expect to lose, I should call assuming my decision is based purely on maximizing my expected return on this hand. The math works as follows:<br />
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Fold: 100% chance of having $1,000.<br />
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Call: 25% chance of having $12,000 ($10,000 plus $1,000 bet plus $1,000 call) and 75% chance of having $0 which is a weighted average return of $4,000.<br />
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Since the payoff was much larger than the investment the expected return on calling was positive even though I expect to lose three times out of four.<br />
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One professional negotiator I know defines reservation price as "the lowest price you'd accept if you were positive you couldn't get more" but this assumes knowledge we almost never have -- that the other person really won't do any better than their "final" offer.<br />
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In our car example, suppose you refuse the $6,100 offer and say you want $7,000. What might happen? It's possible that the other party will say, "Sorry, $6,100 really is the best I can do." They might groan and say, "I can do $6,300 but that's really it." Or they might actually value the car at $8,500 and accept your price. Since $6,100 is really only worth $100 to you (relative to your alternative offer), it's quite likely that you have a positive return on holding out for more,<i> even if you think it's likely that $6,100 really is the buyer's top price</i>.<br />
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A final consideration is that refusing someone's final offer isn't always irrevocable. If you say "no" to $6,100 and the buyer walks away you can often (not always) call back and say you've changed your mind.<br />
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<b>Underestimation of your BATNA</b><br />
<br />
I find people frequently underestimate the value of their BATNA -- in particular the potential to improve it. Is your BATNA regarding the used car really $6,000? That's an offer you have, but it might be negotiable. You might also find another buyer. We tend to focus on the most tangible aspects of our BATNA, which can lead us to undervalue it. Of course, in theory this means we may need to improve the evaluation of our BATNAs rather than that our reservation price should be set higher, but in practice it speaks to holding out for more.<br />
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<b>Reputation</b><br />
<br />
Many negotiations you undertake are semi-public -- people you'll negotiate with in the future (including those you're negotiating with now!) will have some awareness of the results. Given that, it's worth thinking about the reputation you'd like to craft and then weighing that in to the decisions you make. An ideal reputation would include integrity and an ability and willingness to create value but I think it should also include being someone who expects <i>significant</i> value out of a deal and will walk away if that proves impossible to achieve. This may shield you from wasting time on deals that don't offer you much and it encourages your counterparts to adopt a value-creation posture rather than trying to squeeze you.<br />
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<b>Cognitive bias</b><br />
<br />
There are at least two types of common cognitive bias that make a no-gain reservation value dangerous: small pie bias and focal point bias.<br />
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Small pie bias is pretty straightforward -- people tend to underestimate the size of the pie, which can lead to missed opportunities to grow it and to accepting too small a piece. Focal point bias refers to research showing that in stressful, complex situations (e.g. negotiations) people tend to gravitate mentally to whatever focal point is the most significant to them.<br />
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Combined, these factors can easily lead us to think that our reservation value is the value to think about and that any gain above that is a win -- a prescription for leaving a <i>lot</i> of value on the table.<br />
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One strategy for fighting this is to set an aspirational target and try to focus on that, keeping the reservation value in your back pocket to be looked at only if the negotiation goes more poorly than expected. This approach has some validity but I think it's risky for all but the most experienced negotiators. Moreover, if you come to believe you've misunderstood the <a href="http://negotiatewithchad.blogspot.com/2011/03/batna-and-zopa-quick-introduction.html">ZOPA</a> and are faced with a deal that is better than your BATNA but worse than the reservation value you've set there's nothing stopping you from taking a step back, re-examining the new information you've received, and adjusting your numbers accordingly.<br />
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<b>Putting it all together</b><br />
<br />
Let's look at an example. You've been tasked with buying the patent rights for a piece of technology that's worth $10 million more to your company than your best alternative. Based on a classic BATNA analysis, you'd set your reservation price at $10 million. Your company, however, is the only natural buyer for the technology and you're fairly confident from your analysis that the patent isn't worth anything to its owners and that the best rival offer they're likely to get (from a company in a different business) is in the $3-4 million range and probably less.<br />
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There are a lot of away-from-the-table steps you'd take if this was a real situation, but to keep it simple let's assume that they have an unknown but firm offer and are negotiating with you to see whether your company gets the patent.<br />
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Suppose they say, "We have a very good offer from (the firm you expected would pay at most $3-4 million), but we know this technology is very valuable to your firm. We'll sell it to you for $15 million."<br />
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You take this in stride as an anchoring tactic, state clearly that they have substantially overestimated how much the patent is worth, and make a counter-offer of $2 million. There is some back-and-forth but abruptly they say, "Our absolute final offer is $9.7 million. If you won't pay that, we'll have to go with the other company."<br />
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You tell them you'll consider their offer, cautioning them that it's high, and go back to your desk. You revisit your analysis with your team and bring in an outside expert for a fresh view. You still can't believe that it's worth more than $4 million to the other company. But what if it is? You don't want to throw away money, even if it's "only" $300K.<br />
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In this situation, there are some compelling reasons not to accept their "final" offer.<br />
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First, let's be pessimistic and assume there's only a 20% chance that they're bluffing -- but that if they're bluffing you'll be in the driver's seat and can reasonably expect to pay $5 million. That's an expected return of $1 million relative to your BATNA, which is greater than the $300K on offer.<br />
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Second, if your analysis is correct and the ZOPA is $6 million or $7 million in size, neither your firm nor your own career benefits from capturing so small a piece of it.<br />
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Next, is your BATNA really to do without the technology? If the firm that buys it is in a different business you may be able to license the technology from them.<br />
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This is, of course, simplified. You have a range of tactics available to gain information...but at some point in a negotiation you can be presented with a "final" offer that doesn't make sense given everything you can learn but that is slightly better than your BATNA. Theory says you should take it -- I hope I've provided some reasons to question theory on this point.Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com8tag:blogger.com,1999:blog-5628654739765950201.post-35477597491141143982011-09-14T11:04:00.000-07:002011-09-14T11:04:26.309-07:00Own Your MistakesI started this blog while at an executive negotiation class at Harvard Business School. It was a fantastic opportunity to negotiate with professional investors from around the world, and I take real pleasure in the fact that in all of my negotiations I reached agreements that created the maximum value possible (in one case my group was the only one that did) and captured significantly more of that value than average.<br />
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All of them but one, that is. In one simulation, I failed to reach a deal at all.<br />
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The negotiation involved three entrepreneurs who had formed a very loose ownership agreement when they started a new venture. A few months in, one of the founders (me, in the exercise) concluded that he was working harder and contributing more that was reflected in the original agreement and that this should be reflected with a higher share of equity. He initiated a renegotiation, sending a proposal to his co-founders which formed the starting point of the exercise.<br />
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Our discussion didn't go well. One of the other co-founders was keen to make a deal but the other wasn't. He made demands that we couldn't meet, said things that were frankly insulting (always interesting in a simulation!) and ignored our responses. As an example, one of the topics for discussion was his salary (the other co-founders were working just for equity) and neither of us could agree to anything above $110K as we didn't think the venture's cash flows could handle it. Even after we'd made that clear he was proposing deals in which he got paid $150K.<br />
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Near the end of the exercise it looked like we might be able to reach a deal, but at the last moment he said he couldn't agree to what was on the table and we "agreed to disagree". Upon returning to the class<br />
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My initial reaction was to blame our difficult partner. This was reinforced as we learned more about the other roles and it became clear that salary -- what he had made the largest demands about -- was actually his least important interest and he'd failed even to bring up his most important one. Small wonder we couldn't create enough value to reach agreement when a key player was giving poor information.<br />
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Unfortunately, life is rarely so simple. Negotiations is a complicated endeavor and one where we rarely, if ever, get a precise read on how well we did. For this reason it is vital that we review our negotiations candidly, gathering new information if possible and evaluate our performance as objectively as possible. Most of all, we have to own our mistakes. That's why I always review and analyze my negotiations to see what went well and, in particular, what I should have done differently.<br />
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In this case I did at least a few things wrong. Foremost, I was in too aggressive a mindset. This exercise, the second in the class, came immediately after a review of a solo exercise in which I had paid $70K for an asset on which the median purchase price was over $200K. Our negotiation had been discussed in class and I judged (correctly) that in the next exercise my counterparts were going to be aggressive in order to avoid a similar result against "the tough negotiator".<br />
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Because I was gearing up for a fight, I didn't put as much thought as I normally would into understanding where my counterparts were coming from, something that is key to successful negotiation. Afterwards I would blame our difficult partner for not raising his key issue but normally I would have figured it out ahead of time and been able to raise it myself.<br />
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In negotiations it is generally preferable to take an aikido approach. If someone is being aggressive, don't meet that aggression head-on. Doing so makes irrational escalation more likely and makes it harder to work together to create value. Instead, disarm him with a lateral move. In this case if I'd put myself in his position I would have realized that he was feeling like an employee rather than a partner and that "my" initial proposal emphasized that.<br />
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Imagine that you're feeling unappreciated and are gearing up for a tough negotiation against a hard-nosed bargainer. Imagine that he begins by saying that he tried looking at the situation from your side and realized that if he was in your position he would feel taken for granted. He wants to start the discussion by asking if that's the case for you, apologizing for it, and then asking what factors are most important to making you feel good going forward?<br />
<br />
Another mistake I made was in my orientation to any final deal. As we discussed <a href="http://negotiatewithchad.blogspot.com/2011/06/hidden-source-of-value-creation-part-2.html">here</a>, the value you capture in negotiations that involve ongoing relationships are a combination of the tangible factors covered in the deal itself and the intangible consequences of how your counterparts behave in the future based on their own sense of the deal.<br />
<br />
In this exercise, three entrepreneurs were agreeing on principles of fairness and value distribution...but what value was being distributed? The equity of the company! This is far from a fixed pie; if we reached a deal but ended up not wanting to work together, we'd each end up owning a slice of nothing. Even in a class exercise this should have affected my approach.<br />
<br />
One of the most common forms of human bias is thinking we've performed better than we have. A famous example is car drivers. In one survey, motorists were asked to rate their own driving skill on a scale of 1 to 5 as well as the average skill of other drivers. Other drivers came in at 2.7, while drivers rated themselves 3.9. Unfortunately, this self-delusion can be extremely costly when it prevents us from improving. A tough self-assessment in which we explicitly look for our own errors is one tool to help us resist it.<br />
<div><br />
</div>Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com1tag:blogger.com,1999:blog-5628654739765950201.post-13952800386543286192011-09-08T13:13:00.000-07:002011-09-08T13:13:00.885-07:00Adding Issues to Create Value<!--StartFragment--> <br />
<div class="MsoNormal">As we’ve discussed in prior posts, one of the most straightforward and effective ways to create value in a negotiation is to identify and implement value-creating trades.<span style="mso-spacerun: yes;"> </span>If getting your way on an issue is worth a million dollars to you while getting my way is worth half a million to me, then my goal shouldn’t be to get “my way” but rather to let you get your way…in exchange for more than half a million dollars in value.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">In some deals this is relatively easy.<span style="mso-spacerun: yes;"> </span>The discussions begin with a variety of interests identified, the parties are sophisticated enough to be able to evaluate trade-offs efficiently and discussions move effectively towards the value-maximizing configuration of terms.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Frequently, however, life isn’t so simple.<span style="mso-spacerun: yes;"> </span>Today’s post looks at <i style="mso-bidi-font-style: normal;">introducing</i> issues to a single-issue negotiation using a real-world negotiation I’ve just begun with a software developer.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Some years ago I published a card game called <a href="http://www.yourmovegames.com/pages/hill218.html">The Battle for Hill 218</a>.<span style="mso-spacerun: yes;"> </span>It’s fun, quick and deep and has been my most successful single product (still selling quite well today).<span style="mso-spacerun: yes;"> </span>A few different players have asked me to consider making a version for the iPhone or iPad and recently one of them introduced me to a developer who was interested in creating an iOS version on a revenue share basis (i.e. instead of me paying for his time, he’d be paid out of a share of sales for the app).</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">The developer’s initial offer was a 70/30 revenue split in his favor.<span style="mso-spacerun: yes;"> </span>Alternately, I could pay him a flat fee which would be somewhere in the $10K to $20K range.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">If the revenue split is all we’re negotiating there’s not much we can do to create value in the deal.<span style="mso-spacerun: yes;"> </span>Naturally there’s some value in each of us being happy with our agreement and being motivated to promote the app, but for the most part we’d be haggling on price and trying to capture as much of the ZOPA as possible.<span style="mso-spacerun: yes;"> </span>If there’s only one issue, there’s no room for value-creating trades.<span style="mso-spacerun: yes;"> </span></div><div class="MsoNormal"><span style="mso-spacerun: yes;"><br />
</span></div><div class="MsoNormal">Price, however, is rarely the only important issue worth discussing and in this case there are a number of other possibilities worth considering besides the split of sales.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><b style="mso-bidi-font-weight: normal;">Price of the app</b>.<span style="mso-spacerun: yes;"> </span>Even if we agree on what price will maximize revenue of the iOS version of Hill 218, either of us might want to set a lower price in order to attract more users to the app.<span style="mso-spacerun: yes;"> </span>The developer <i style="mso-bidi-font-style: normal;">might</i> like wider exposure of his work and to be able to say (to other potential clients) that he produced an app that a lot of people downloaded.<span style="mso-spacerun: yes;"> </span>More concretely, I have a monetary incentive to maximize users (especially new users) since I’m still selling the physical game.<span style="mso-spacerun: yes;"> </span>I’m convinced that offering a free Java version of Hill 218 played an important role in sales of the physical game, and having an iOS version is likely to lead to more sales as well.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Let’s assume for illustration purposes that his ideal price is $3.99 and mine is $1.99.<span style="mso-spacerun: yes;"> </span>Our next task is to determine how strongly we prefer those prices, as well as how we feel about prices in between.<span style="mso-spacerun: yes;"> </span>If a price of $1.99 is worth $5,000 more to me than $3.99 and is worth $3,000 less to him, then pricing the app at $1.99 creates $2,000 in value between us.<span style="mso-spacerun: yes;"> </span>Put another way, I can give up over $3,000 in value from app revenues (which makes him better off) and as long as I give up less than $5,000 I’m better off as well.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><b style="mso-bidi-font-weight: normal;">Marketing budget</b>. <span style="mso-spacerun: yes;"> </span>Presumably we can increase sales somewhat by advertising, but I get a double benefit since advertising should boost sales of the physical game as well.<span style="mso-spacerun: yes;"> </span>To keep things simple, let’s assume that we each think that each dollar (up to $1,000) of advertising would lead to only eighty cents in additional app revenue (forty cents to him and forty to me if we’re splitting things evenly) and that I also think it will be worth forty cents in additional revenue from physical sales.<span style="mso-spacerun: yes;"> </span>The total value of advertising is $1.20 per dollar, so it’s clearly attractive.<span style="mso-spacerun: yes;"> </span>If, however, we don’t <i style="mso-bidi-font-style: normal;">negotiate</i> advertising then it won’t happen; he gets only forty cents on the dollar and I get eighty (forty from the app and forty from the physical game).<span style="mso-spacerun: yes;"> </span>Neither of us gets enough to justify doing it alone.<span style="mso-spacerun: yes;"> </span>If, however, the developer “pays” me more than twenty cents and less than forty cents for each dollar of advertising I do, we’re both better off.<span style="mso-spacerun: yes;"> </span>(Payment could be done directly (i.e. we share the actual ad expense) or indirectly (i.e. factored into the terms of the deal).</div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><b style="mso-bidi-font-weight: normal;">Split based on results</b>.<span style="mso-spacerun: yes;"> </span>Hill 218 is a new game for the developer.<span style="mso-spacerun: yes;"> </span>He’s played it online and likes it, but he’s naturally cautious about how much it will sell.<span style="mso-spacerun: yes;"> </span>I’m more optimistic, given its sales numbers and how popular the Java app has been.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">This difference will naturally factor into our discussion over what a split should be.<span style="mso-spacerun: yes;"> </span>He’ll point to the number of game apps that sell less than a thousand copies and argue that he’s unlikely to make a normal developer fee even with 70%.<span style="mso-spacerun: yes;"> </span>I’ll talk about how many unique players the Java version has, how the physical game has nearly sold out its second print run and the posts on BoardGameGeek asking for an iOS version.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">The key to moving that discussion past arguments for value capture is to recognize that different expectations create room for a compensation split that both parties prefer to any flat fee they might agree.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">To keep things simple, let’s assume a price of $3.99 (before Apple’s 30% commission) and volume forecasts as follows:</div><table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-insideh-themecolor: text1; mso-border-insideh: .5pt solid black; mso-border-insidev-themecolor: text1; mso-border-insidev: .5pt solid black; mso-border-themecolor: text1; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 191;"><tbody>
<tr style="mso-yfti-firstrow: yes; mso-yfti-irow: 0;"> <td style="border: 1.0pt; border: solid black; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-themecolor: text1; mso-border-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;"><br />
</div></td> <td style="border-left: none; border: 1.0pt; border: solid black; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-themecolor: text1; mso-border-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">Developer’s Guess</div></td> <td style="border-left: none; border: 1.0pt; border: solid black; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-themecolor: text1; mso-border-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">Chad’s Guess</div></td> </tr>
<tr style="mso-yfti-irow: 1;"> <td style="border-top: none; border: 1.0pt; border: solid black; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">1,000</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">70%</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">15%</div></td> </tr>
<tr style="mso-yfti-irow: 2;"> <td style="border-top: none; border: 1.0pt; border: solid black; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">4,000</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">15%</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">30%</div></td> </tr>
<tr style="mso-yfti-irow: 3;"> <td style="border-top: none; border: 1.0pt; border: solid black; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">10,000</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">15%</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">55%</div></td> </tr>
<tr style="mso-yfti-irow: 4;"> <td style="border-top: none; border: 1.0pt; border: solid black; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">Total Sales (unit)</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">2,800</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">6,850</div></td> </tr>
<tr style="mso-yfti-irow: 5;"> <td style="border-top: none; border: 1.0pt; border: solid black; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">Total Revenue ($)</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">$7,820</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">$19,456</div></td> </tr>
<tr style="mso-yfti-irow: 6; mso-yfti-lastrow: yes;"> <td style="border-top: none; border: 1.0pt; border: solid black; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">Each party’s share</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">$3,910</div></td> <td style="border-bottom: 1.0pt; border-bottom: solid black; border-left: none; border-right: 1.0pt; border-right: solid black; border-top: none; mso-border-alt: .5pt; mso-border-alt: solid black; mso-border-bottom-themecolor: text1; mso-border-left-alt: .5pt; mso-border-left-alt: solid black; mso-border-left-themecolor: text1; mso-border-right-themecolor: text1; mso-border-themecolor: text1; mso-border-top-alt: .5pt; mso-border-top-alt: solid black; mso-border-top-themecolor: text1; padding: 0in 5.4pt 0in 5.4pt; width: 2.05in;" valign="top" width="148"> <div class="MsoNormal" style="margin-bottom: .0001pt; margin-bottom: 0in;">$9,566</div></td> </tr>
</tbody></table><div class="MsoNormal"><br />
</div><div class="MsoNormal">(Total sales is calculated by multiplying each percentage estimate by that amount of sales, i.e. the Developer’s total sales is 70% of 1,000 plus 15% of 4,000 plus 15% of 10,000.) N.B. These are not my assumptions and I have no idea what assumptions the developer may have -- I put them up here purely for the sake of discussion!</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">The developer’s average estimate puts total dollar sales at less than $10K and he thinks there’s a 70% chance that sales will only be about 1,000 units, or less than $3,000.<span style="mso-spacerun: yes;"> </span>I think sales will be nearly $20K and my most likely scenario is a “hit” with 10K unit sales and about $28,000 for us to split.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Given this variance, the last thing we should try to do is agree a single fixed split.<span style="mso-spacerun: yes;"> </span>That’s could break the deal altogether and is likely to lead to resentment down the road when one of us turns out to be right.<span style="mso-spacerun: yes;"> </span>If I persuade the developer to take 50% and he ends up getting paid $1,400 it’s a turkey for him; similarly if sales are close to $30,000 and he got 70% of it I’d wish I’d never agreed to a revenue share deal.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">A simple alternative is a split that changes as sales grow.<span style="mso-spacerun: yes;"> </span>Suppose the developer gets 100% of the first 1,000 sales, 75% of the next 1,000 and 25% of sales beyond that.<span style="mso-spacerun: yes;"> </span>The developer would expect to receive $4,480 (on average), an increase of 15%, and his risk is much lower.<span style="mso-spacerun: yes;"> </span>If he’s right that the most likely outcome is only 1,000 units at least he gets 100% of the sales.<span style="mso-spacerun: yes;"> </span>I also expect to receive about 16% more this way, albeit with a higher risk of getting nothing.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">Some would argue against calling this <i style="mso-bidi-font-style: normal;">value creation</i> since eventually one of us will be proved wrong.<span style="mso-spacerun: yes;"> </span>Both parties might like this deal better up front but in the future one will be better off and one worse off by exactly the same amount.<span style="mso-spacerun: yes;"> </span>I would counter with two points.<span style="mso-spacerun: yes;"> </span>First, being able to “bet” according to one’s beliefs is generally regarded as valuable.<span style="mso-spacerun: yes;"> </span>Investors buy and sell stocks, companies invest in markets and technologies, collectors buy stamps, coins and other items based in part on their estimation of what the future will bring.<span style="mso-spacerun: yes;"> </span>Enabling two parties to act according to their expectations of the future is a valid goal of negotiation.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">More fundamentally, while one of us will be worse off we’re more likely to be satisfied with the variable commission because the result will be much closer to what we would have agreed if we knew the sales up front.<span style="mso-spacerun: yes;"> </span>If unit sales are just 1,000 I won’t feel bad that the developer gets all the revenue…and if I expected sales to be that modest I would view the app as a nice promotional item rather than a source of revenue.<span style="mso-spacerun: yes;"> </span>Similarly, if app sales are 10,000 units can the developer really feel badly about only getting around $10K?<span style="mso-spacerun: yes;"> </span>Not only do sales of that level imply that the game (my contribution) was highly valuable, but if we knew that sales would be that high I could contract to have the app done by a professional firm for that amount.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><b style="mso-bidi-font-weight: normal;">How to Introduce Issues<o:p></o:p></b></div><div class="MsoNormal"><b style="mso-bidi-font-weight: normal;"><br />
</b></div><div class="MsoNormal">Introducing issues is generally trivial with experienced, sophisticated negotiators.<span style="mso-spacerun: yes;"> </span>They’re eager to include as many important issues as possible for the same reason you are – they know that’s a powerful way to maximize the deal’s final value.<span style="mso-spacerun: yes;"> </span>The challenge arises when your counterpart doesn’t have this perspective.<span style="mso-spacerun: yes;"> </span>He may see an attempt to introduce issues as some sort of gamesmanship or a waste of time.<span style="mso-spacerun: yes;"> </span>Perhaps worse, he may see it as a request by you that merits a reciprocal concession – that is, your effort to introduce value creation may be met by a value capture effort by the other side.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal">I’ve found the best approach is to be up front and open about why you want to add issues and then to share at least top-level thoughts about where your interests lie (and where you think your counterpart’s may lie) on each topic.<span style="mso-spacerun: yes;"> </span>For example, here’s an excerpt from the email I sent to the developer on the subject:</div><div class="MsoNormal"><br />
</div><blockquote>If we can put haggling aside for a moment, however, I'd like to make sure that whatever agreement we reach is as valuable to us in total as possible. As you may guess from my signature, I'm a negotiations geek in addition to being a game geek. This doesn't mean that I'm a particularly hardball negotiator but rather that I'd like us to make sure that we aren't forgetting any "levers" in our agreement that might make the final deal more valuable to each of us. In addition to royalty split, I can think of some other terms we should discuss and I'll share my thoughts about my own interests on them.</blockquote><div class="MsoNormal"><br />
</div><div class="MsoNormal">I start off by establishing this as separate from haggling over price.<span style="mso-spacerun: yes;"> </span>This helps avoid the “OK, we can discuss these things but you’ll have to do better on price” trap and makes it clear that adding issues is a mutual and collaborative process of value creation.<span style="mso-spacerun: yes;"> </span>I finish by offering my thoughts, which then invites him to reciprocate with his.</div><div class="MsoNormal"><br />
</div><div class="MsoNormal"><b style="mso-bidi-font-weight: normal;">Value Creation in Parallel with Value Capture<o:p></o:p></b></div><div class="MsoNormal"><b style="mso-bidi-font-weight: normal;"><br />
</b></div><div class="MsoNormal">A key consideration through all this is that adding issues (along with other value-creation techniques) don’t replace value capture efforts.<span style="mso-spacerun: yes;"> </span>They happen in parallel.<span style="mso-spacerun: yes;"> </span>While raising other issues with the developer, I also expressed my view that his initial offer of a 70/30 split was too high.<span style="mso-spacerun: yes;"> </span>I’m also addressing his implicit anchor and working on my BATNA by getting quotes from iOS development firms for a cash-only development deal.<span style="mso-spacerun: yes;"> </span>Although I want my counterpart to be happy with our final deal, emphasizing value creation in no way means that I have to give anything away.<span style="mso-spacerun: yes;"> </span>It just means that when we finally split up the figurative pile of money on the table, we’ve got as big a pile as possible.</div><div class="MsoNormal"><br />
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</div><!--EndFragment-->Chad Ellishttp://www.blogger.com/profile/12098205622389657586noreply@blogger.com0