Leverage from Being Small

It 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.

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 don't 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.)

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 Negotiating with a bad BATNA.  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?

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:

1. Giving us what we wanted was strongly preferable to losing us.
2. Losing us was a real possibility if he said no.
3. Trying to keep us while giving us less than what we wanted would be costly, in his time.

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.

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.

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.

(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.)

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.

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.

How 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.

If you read a typical textbook on negotiation, you might think that the question of how reservation value  relates to BATNA 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.

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?

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.

Pot Odds

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.

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:

Fold: 100% chance of having $1,000.

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.

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.

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.

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, even if you think it's likely that $6,100 really is the buyer's top price.

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.

Underestimation of your BATNA

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.

Reputation

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 significant 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.

Cognitive bias

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.

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.

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 lot of value on the table.

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 ZOPA 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.

Putting it all together

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.

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.

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."

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."

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.

In this situation, there are some compelling reasons not to accept their "final" offer.

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.

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.

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.

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.

Government Shutdown & Fun with BATNAs

We approach the prospect of a new federal government shutdown.  Such a shutdown is triggered if Congress and the President cannot agree on how to fund the government going forward.  The costs of a shutdown are significant and basic funding is something Congress does regularly and routinely so it is remarkable to see us coming to close to a "no deal" situation.

I don't pretend to have a solution for the negotiation in Washington, but Negotiation theory offers some useful insights as to why the Republicans and Democrats may fail to reach a deal, and why they're making some of their most recent moves.

While all of our elected officials are dedicated public servants who place the good of their constituents and the nation ahead of all else, political calculations occasionally play just a teeny, tiny role in their decision process.  When contemplating a shutdown (i.e. evaluating their BATNA) the two parties have to predict the reaction of the American people.  Who will catch the majority of the blame?


Some conservatives, particularly those somewhat removed from the fray, remember the Clinton-Gingrich shutdown and are nervous about parallels.  Then too, an emboldened Republican majority in the House pushed hard for their agenda and found to their surprise that a crushing victory in the midterms didn't mean that the American people were on their side when it came to shutting down the government.  Republicans were blamed 2-1 and that confrontation both blunted Gingrich's revolution and likely sealed Clinton's re-election.


At that time Dick Armey pointed out a fundamental vulnerability for Republicans -- the general perception people have about the major parties' views on government.  "It is incongruous to the general public political awareness to think that Democrats would shut down government; Democrats love government. It is perfectly reasonable for them to understand that Republicans shut down government; Republicans don't like government."


Given this, and the obvious parallels between today and 1995, one might be surprised to hear many conservative voices relishing the idea of a shutdown.  Is the situation more favorable than in 1995 or is something else at play?


Even assuming nothing had changed in the objective political calculus, Negotiation theory (particularly where it intersects Behavioral Psychology) offers some possible explanations for why each party might be more willing to face a shutdown than they "should" from a purely rational calculus:

• Escalation of Commitment.  Negotiators are vulnerable to two psychological needs -- to justify decisions already taken and to "win".  Each one can cause people to escalate prior commitments, such as an assertion that no deal is possible unless the other side makes a specific concession -- along with the other side committing that that concession is impossible!
• Fixed Pie bias.  People tend to see negotiations as about splitting a fixed pie where whatever is good for you must be bad for me.  This is particularly true when the two parties have a mixed cooperative/adversarial relationship -- come election time, after all, things that are good for one party generally are bad for the other.  This can cause one side to feel that any agreement the other side is willing to take must be a bad deal for them.
• Egocentrism.  We are naturally biased towards seeing things our own way.  We think our side is fairer and more reasonable than it is, we think our position is stronger than it is and we think our future is rosier than it is.  When polls show a more even perception of blame today than in 1995 this may cause Republicans to seek a fight and may be dismissed by optimistic Democrats.

These three biases (and they aren't the only ones at play!) go a long way towards explaining why Democrats and Republicans might fail to reach agreement.  Of course there are rational explanations for Republican confidence as well.  Polls show the public more divided on how to assign blame than they were in 1995 and support for spending cuts is much higher today than it was then.

With that as background, it's very interesting to see some of the tactical moves currently at play and to ask how they reflect on the lessons of 1995.

One key difference is that Republicans are playing a more nuanced game.  In 1995 the Republicans presented their budget, Clinton refused to sign it and the Republicans took no steps to avoid a shutdown. In particular, they refused to pass a continuing resolution (a temporary funding bill).  This made it relatively easy for Clinton to argue that the Republicans had presented him with an unreasonable demand and been unwilling to compromise.

Today, by contrast, the Republicans have continued to put forward continuing resolutions but have used them as tactical weapons.  They have included cuts and most recently they have included funding for the military for the year even in the event of a shutdown.  The first step forces Democrats to give some ground just to stay at the table and the second improves the Republican's BATNA by making it impossible (if the resolution is passed) for them to be accused of making soldiers fight without pay.

The Republicans have also avoided handing the Democrats an easy rhetorical weapon.  Clinton's victory in the court of public opinion was made much easier by the fact that the Republican budget combined $270 billion in Medicare cuts along with $240 billion in tax cuts, mostly for the wealthy.  Clinton juxtaposed these numbers and argued that the Republicans wanted to use Medicare as "a piggy bank" to fund "huge tax cuts for people who don't really need them".  Michael Takiff argues that Obama can do the same but his examples are much smaller and less clear cut. 

Another difference is that there's a third actor at the table -- the Tea Party.  This new movement changes the political calculus for Republicans significantly.  It may improve their BATNA (polls show that the Tea Party may be seen as the true cause of a shutdown) and it worsens many potential deals -- members from conservative districts have already seen the danger of a primary challenge if the Tea Party decides they aren't conservative enough.

The Tea Party also changes the BATNA for Democrats.  Some Democratic strategists no doubt relish the idea of arguing that the government shut down because the Republican party was held hostage by Tea Party extremists.

What fascinates me are reports that recent stumbling blocks in the negotiation have centered not around spending cuts but around specific policy riders, most notably about Planned Parenthood and the EPA.  How does this fit into the negotiation?  Some of what follows is of necessity speculation, but hopefully we can see a reasonable narrative.

First there is the communication battle.  Both parties would like to shape public perception of why negotiations have not yet reached a deal.  Public support for spending cuts is much stronger than for using a budget crisis to accomplish non-budget objectives.  Hence you have the following contradictory statements:

Schumer: The only reason the numbers aren't solved is because Speaker Boehner knows that if he did that, then everyone would know that it's the riders, and he doesn't want that out. But if you look at how many hours in the rooms of negotiators that discussing riders, it's predominant. The Speaker's folks have admitted that we've been fair on the numbers.

Durbin: At one point we had an agreement on money, even though Boehner denies it. It's hard to believe they would shut down the government because they can't get a vote on family planning and Planned Parenthood. Honest to goodness. Is that what the last election was about? I don't think so.

Boehner: There is no agreement on a number. There are a number of issues that are on the table. Any attempt to try to narrow this down to one or two just would not be accurate.

There have been enough independent reports confirming the importance of the policy riders to consider that likely.  Assuming for the moment that policy riders are the major stumbling block, why might that be the case?

One interesting clue is that insistence on the riders, particularly for defunding Planned Parenthood, is coming not from the Tea Party but from senior Republicans.  These members are closely tied to social conservatives who have expressed increasing frustration that their priorities are being left behind in the name of fiscal conservatism and "setting priorities".  Defunding Planned Parenthood would be a major victory for these groups (and thus for the politicians courting their support) and even if significant compromises are made in the end it may be useful for individual members to have "gone down fighting" against the perceived arch-nemesis of social conservatives, particularly if the compromises leave some symbolic wins on the table -- like forbidding the District of Columbia from using local tax monies to support abortion services.

It's also likely that Democrats are far more willing to play hardball over policy riders than on spending.  Given the current political climate a government shutdown caused by inability to agree on spending cuts is very dangerous for Democrats.  A shutdown caused by Republicans insisting on using the budget crisis to achieve controversial policy goals that are not widely seen as having much to do with the deficit is quite another matter.  Small wonder then that Democrats are pushing this narrative so aggressively.

It will be interesting to see whether the work each side has done to improve its BATNA will result in those BATNAs becoming reality.  We could be hours away from finding out.

BATNA and ZOPA -- a quick introduction

I'm not a huge fan of jargon or acronyms but there are two that are so handy and so important that anyone doing negotiations should know them.  I also want to be able to use them freely here, so I'm going to explain them up front.  The terms are BATNA and ZOPA.

BATNA stands for Best Alternative To Negotiated Agreement.  Your BATNA is what you'll do if you don't reach a deal.  It could be "go to court" if you're trying to settle a legal dispute, it could be "invest the money organically" or "buy a different company" if you're negotiating an acquisition or it could be, "stay home and watch TV" if you're negotiating with your parents for permission to go with your friends to a party.

Your BATNA is very important because it defines what deals are worth considering and what deals aren't.  Any offer that isn't better for you than your BATNA is worse than "no deal" and should be refused.

ZOPA stands for Zone of Possible Agreement.  The people you're negotiating with have a BATNA too.  The ZOPA is the set of all deals that are at least as good for each party in a negotiation as their respective BATNAs.

To put it in simple terms, let's assume you're negotiating to buy a used car.  You've thought about what you'll do if you can't reach a deal and there's another car you could buy for $8,000 but the car you're negotiating for now is worth $1,000 more to you.  Your BATNA is "buy the other car for $8,000" and in terms of this deal that's equivalent in value to "buy this car for $9,000".

Unknown to you, the seller is moving overseas and has to sell.  She has an offer for $6,000 and if she can't get a higher price from you, she'll take it.

The ZOPA for this negotiation is $6,000 to $9,000.  Any deal within that range is possible.  The ZOPA reflects how much value is being created in the deal -- you and the seller are better off by a combined $3,000 if you buy the car from her.  Where you end up in the ZOPA (assuming you don't negotiate yourself out of a deal altogether) reflects how much of the value you capture for yourself.