I 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.
Yale University recently agreed a new contract with Locals 34 and 35, 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.
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.
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.
But there is also indication that the unions may have found an external power lever and used it to great advantage.
Last August the unions backed a slate of Aldermen (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.
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."
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.
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 BATNA 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.
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.
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.
Friday, July 20, 2012
Wednesday, July 18, 2012
Mitt Romney and the Power of Norms
Mitt 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:
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?
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.
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.)
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?
But no. Testing showed universal dislike for the concept.
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.
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.
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.
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 begun charging more for window and aisle seats.
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.
As a negotiator I try very rarely to break norms. Sometimes, however, it's unavoidable. In those cases, the following guidelines are often useful:
How might Mitt Romney have used this approach? I'm not convinced he had a good 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.
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.
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?
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.
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.)
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?
But no. Testing showed universal dislike for the concept.
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.
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.
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.
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 begun charging more for window and aisle seats.
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.
As a negotiator I try very rarely to break norms. Sometimes, however, it's unavoidable. In those cases, the following guidelines are often useful:
- 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?
- 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.
- Openly acknowledge that your proposal would violate normal practice.
- 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.
- Go slowly.
How might Mitt Romney have used this approach? I'm not convinced he had a good 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.
Thursday, June 28, 2012
Know Thyself, Know thy Enemy
Sun 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.
Knowledge of oneself and of one's counterparts (the win-win aspect of negotiation makes enemy 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.
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.
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.
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.
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?
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.
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?
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.
My advice, which she is now implementing, was to give the contractor three options:
Knowledge of oneself and of one's counterparts (the win-win aspect of negotiation makes enemy 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.
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.
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.
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.
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?
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.
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?
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.
My advice, which she is now implementing, was to give the contractor three options:
- A repeat of her initial offer (favorable to him, but contingent on an accounting),
- A new offer (giving him much less money but not requiring any accounting), and
- If neither offer is accepted by a deadline, she will sue.
Sun Tzu often advised allowing the enemy to retreat:
If you surround the enemy, leave an outlet; do not press an enemy that is cornered.
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.
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.
Wednesday, June 20, 2012
Active Listening
One 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.
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.
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.
Active listening training often includes suggested phrases or questions, like:
"It sounds to me like you're concerned about (thing). Can you tell me more about that?"
"What specific concerns do you have about my proposal?"
"If I understand you correctly, you want (thing)."
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 into your own natural conversation 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.
I experienced a perfect example of how not 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.
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."
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)."
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.
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 really matters to me is..."
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.
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.
Active listening training often includes suggested phrases or questions, like:
"It sounds to me like you're concerned about (thing). Can you tell me more about that?"
"What specific concerns do you have about my proposal?"
"If I understand you correctly, you want (thing)."
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 into your own natural conversation 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.
I experienced a perfect example of how not 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.
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."
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)."
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.
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 really matters to me is..."
Wednesday, May 23, 2012
Real-Estate Agents
Should 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).
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 Freakonomics:
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.
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:
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.
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 really 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.
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.
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.
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?
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.
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.
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.
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 worsens 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.
In many situations a more effective approach would be to suggest a higher 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.)
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.
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.
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 Freakonomics:
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.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 for the highest price. 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.
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.
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:
Sale Price
|
$450,000
|
$500,000
|
$550,000
|
Value to You
|
-$37,000
|
$10,000
|
$57,000
|
Value to Broker
|
$6,750
|
$7,500
|
$8,250
|
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.
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 really 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.
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.
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.
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?
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.
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.
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.
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 worsens 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.
In many situations a more effective approach would be to suggest a higher 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.)
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.
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.
Tuesday, May 22, 2012
The Brinkmanship Trap
We'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.
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.
What is brinkmanship?
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 and then attempts to a real or perceived commitment to that position, such that the other parties think that failing to grant it may mean no deal is possible.
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.
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.
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.
What's wrong with brinkmanship?
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?
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.
Beyond that, brinkmanship can lead to no deal at all, even when the ZOPA is large. There are two principal reasons for this.
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.
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.
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.
How can we prevent our counterparts from employing brinkmanship against us?
The key to fighting brinksmanship is to remember the ingredients that make it attractive:
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.
What is brinkmanship?
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 and then attempts to a real or perceived commitment to that position, such that the other parties think that failing to grant it may mean no deal is possible.
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.
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.
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.
What's wrong with brinkmanship?
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?
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.
Beyond that, brinkmanship can lead to no deal at all, even when the ZOPA is large. There are two principal reasons for this.
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.
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.
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.
How can we prevent our counterparts from employing brinkmanship against us?
The key to fighting brinksmanship is to remember the ingredients that make it attractive:
- Large ZOPA, relative to value creation opportunities
- Rational expectation that brinksmanship may lead to capturing the lion's share of the ZOPA
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.
It's also important that brinksmanship (because it tends to shut down value creation efforts) depends on a ZOPA that's large relative to value creation opportunities. 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.
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.
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.
Tuesday, May 15, 2012
The Mancini Coalition
One 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.
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.
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.
Then Walter Mancini arrived.
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.
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.
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.
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.
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.
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.
Then Walter Mancini arrived.
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.
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.
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.
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.
- 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 because we trusted each other. 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.
- 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.
- 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.
- 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.
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.
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