Oil tycoon J Paul Getty, named the richest living American by Fortune magazine in 1957, took some sound advice from his father: “You must never try to make all the money that’s in a deal. Let the other fellow make some money too, because if you have a reputation for always making all the money, you won’t have many deals.”
It’s a point of view corroborated in a recent study by Huthwaite International and the International Association for Contract and Commercial Management (IACCM). The research has finally proved that having a clear and defined approach to negotiation makes a massive bottom line difference.
The study, titled Improving Corporate Negotiating Performance, explored how the world’s largest organisations (including Microsoft, BP, General Motors and TNT) are trying to improve their negotiating performance during tougher economic times.
It found that companies without any formal negotiation processes in place suffered an average net income decline of 63,3% between 2007 and 2008. In contrast, the companies in the top 25% of the Huthwaite/IACCM ‘negotiation maturity’ benchmarking scale recorded an average net income increase of 42,5% over the same period.
According to Professor Barney Jordaan, programme director of the negotiating skills course at the University of Cape Town Graduate School of Business, these results prove that planning, preparation and research are paramount to achieving negotiation success. It also proves that good negotiation skills can be the difference between success and failure in the business world, he says. We asked him to elaborate on why it pays to be cooperative rather than competitive.
How can good negotiation skills improve profits?
Most people think of negotiation as a contest. We are hardwired to approach it as a positional game. The mindset is, “I must win, and I will win at your expense, because for me to win you must lose.” That is how negotiation has traditionally been taught. It’s all about the money and you must get as much of it as you can.
The problem with that approach is that you are assuming that what is on the table is all there is to be had. If you are buying a property, for example, it’s standard to negotiate on price alone. As the buyer, you want to pay as little as possible, while the seller wants to make as much as they can.
I propose an approach that says, “Your gain is not my loss”. In this instance, price is only one issue and it has to be resolved jointly. How about putting more items onto the table to increase the value of the deal? The seller may agree to paint the entire building or make some alterations in order to seal the deal. This way, you get additional value, and they get the price they wanted. But you can only do that if you approach negotiation as a collaborative effort that actually increases the total value of the deal for both parties.
What are the basics of good negotiation?
Business owners would do well to think more strategically about what they have to offer and what they expect to get before they even reach the negotiation table. Good negotiation begins with careful preparation and research. You also need to prepare the table (Who is going to be there? What do we do if we can’t agree?) and design the deal in such a way that it is really attractive to the other party as well as yourself.
What’s the best way to prepare beforehand?
The study proves that careful planning, preparation and research – and having a formalised approach – are paramount to achieving negotiation success. You must have an understanding of the underlying assumptions and needs to be satisfied on both sides. The first step is to do your homework.
This will entail research to uncover the other party’s motivations. In negotiating a property lease, for example, it may be useful to find out the cost to the landlord of keeping the building vacant. The next step is to assess your own needs and set objectives for the negotiation. It is important that the objectives remain relatively fluid, however, so as not to obstruct the process.
It may be helpful to ask questions to form a better understanding of the needs and interests of the other party. Phrase your questions tactfully and time them correctly to avoid antagonism. Gain information and uncover basic assumptions without immediately taking positions. It’s important to listen carefully to the responses. To gain greater insight, watch their facial expressions and body language.
Why is the collaborative approach so important?
Remember that relationships are critical to good business. If you negotiate in an oppositional manner, you risk destroying the relationships you have built. The other party may be tempted to get back at you, or to simply never work with you again. Engaging in a collaborative fashion, on the other hand, can really cement a relationship and create a true, valuable partnership.
The resulting agreement is more sustainable and takes less time and effort to manage, which saves costs. A large corporate that uses its muscle to bully the little guy into making unrealistic concessions will soon find that they have to put many more resources into managing the resulting contract – there will be problems with delivery and quality because the small business will no
longer be in a position to deliver and still make a margin.
There’s another link between negotiation and profitability. When two parties enter into a business relationship, it’s unlikely to be a once-off deal. Most business relationships are ongoing. To make the deal work in the best possible way, co-operation is required.
If you leave a supplier feeling like a victim or a loser, chances are that they will become aggressive. Because they feel that they’ve had a raw deal, they will cut corners and the deal may end up costing you more than you imagined. By choosing rather to add value to the deal on the table, you boost the relationship in both the short-term and the long-term.
Let’s say I’m an engine manufacturer who buys pistons from you. We develop a good relationship based on mutual respect, and over time we are able to collaborate on much bigger projects that require both sets of skills and products. We turn to each other when these opportunities arise because we have built trust, and so both of us benefit.
Successful negotiation is not about ‘winning at all costs’. In fact, coming up with mutually acceptable solutions that keep relationships in good order are more beneficial to businesses in the long run than deals where only one party gets its way. You can be tough, but leave something that will make the deal worthwhile.
How do you go about designing the best deal?
Designing an attractive deal, especially in highly competitive industries, often requires some creative thinking and stepping into the other party’s shoes. Let’s take the food market as an example. Imagine that a strawberry farmer is trying to sell his products to a large food retailer. There are many strawberry farmers in the market, so being successful will require designing a deal that offers more than just strawberries. It demands that the farmer understands what the retailer is looking for beyond just a good price.
For example, are they looking for organic produce, do they support sustainable farmers, do they promote ethical treatment of farm workers, or are they looking for local producers? Understanding what else is important to the retailer beyond cost and quality can provide crucial extra leverage when the two parties meet around the table. Do not let your deal rest upon one factor only. Look for creative ways to add some extra value. In competitive climates this can be the real deal-clincher.
Which skills are key to good negotiation?
The collaborative approach is built on three main skills. The first skill lies in managing the agenda items. Because this is a rational, analytical process, it is generally quite easy to do, provided you have determined the context and boundaries of the negotiation upfront.
This is all about preparedness. The second is the ability to manage the process. Good behaviour is critical. Try to avoid anything that can make the process tense and adversarial. This requires you to view the process as a joint problem solving effort, even if you become aware that the other party may not be as keen as you are.
Your role is to convince them that by adding some value to the deal for you, they may well be able to add value for themselves. This is where the maximum benefit happens. Besides having a mutually appealing deal to offer, businesses must also pay attention to what happens during the negotiation – the way the process is executed is critical to value creation and sustainable relationships.
The third and closely related skill lies in managing the people aspect of negotiation. If only we could leave emotions out of the process, there would seldom be a stalemate. However, nothing is as emotional as money. It gives rise to fear, anxiety and mistrust. Managing emotions enables you to deal with how you are feeling in a situation without allowing this to interfere with rational thinking.
Ego, anger, and spitefulness are common during the negotiation process and they can lead to a level of irrationality that brings to mind the gambler who knows he is losing, but in his desperation, gambles more. Research shows that when we know we are going to get hurt, we want to make sure the other person suffers too. It’s the kind of response that says, “I know this is going to destroy me, but I’ll make sure it destroys you too.” It’s a common stance in high-profile divorce cases where, because compromise cannot be reached, the costs to both parties become astronomical.
How can a deadlock be resolved?
The ideal is to resolve the issue yourselves, so that you remain in control of the process and the outcome. If you do reach a stalemate, take a break, re-look your mandate, ensure you understand what is really motivating the other party. It may be worthwhile for both of you to brainstorm and then return to the table and see what additional value you may be prepared to offer. Don’t focus on only one solution; rather try to put forward a few different options. Sometimes it helps to bring in an additional party, someone from your team perhaps.
If you truly cannot see eye to eye on an issue, try to find possible benchmarks that are available in your industry. If you can agree on the benchmark, then you can return to the table and work out a proposal that is closest to that point of reference.
If all else fails, bring in a mediator that you both agree on. The mediator will take charge of the process and help you to reach an agreement. When talks get to this stage, the mediator is the one person to whom you can speak in absolute confidence, and who will have a full understanding of where both of you are coming from. A mediator will help you to generate various possible solutions. However, their role is to move negotiations beyond the deadlock, not to make decisions. If mediation fails, you may have to make the decision to give up and move on.
When should you walk away?
The ability to walk away is critical. The question of power – which often pits a small player against a larger, more dominant business – comes to the fore here. I always advise people to have an alternative solution in mind if the person with whom they are negotiating will not budge. You do not want to be in the onerous position of being forced to compromise because you have no alternative. If you are a small business, start spreading your risk and looking for alternative customers and options.
This will protect you from bullies, and is in the best interests of growing your business. On the other end of the scale, you also don’t want to be the person wielding the stick; threatening people into a solution is not the answer. Remember it’s about persuasion, not coercion.
What role does ethics play?
Behaving unethically damages relationships and can have serious legal consequences. Although it’s sometimes difficult to know exactly what is right and what is wrong, there are questions you can ask to keep you on the right path. How do you want to be remembered as a negotiator? Which will bring you more business – being ruthless or being ethical? Take the trusted friend test – would you do what you have just done to your best friend? Would you want someone else to do that to a loved one? Think about reciprocity and make your decision based on that.
The quick guide to negotiation
In their book Getting to Yes: Negotiating Agreement without Giving In, Roger Fisher and William Ury recommend conducting negotiations according to the process of “principled negotiation.” Their method has four main tenets:
- Separate the people from the problem. Both sides should attack a problem, rather than attacking each other. To achieve this goal, it is necessary to overcome emotional responses and set aside egos.
- Focus on interests rather than positions. The natural tendency in many negotiations is for both sides to state a position and then move toward middle ground. Fisher and Ury warn against confusing people’s stated positions with their underlying interests, and claim that positions often tend to obscure what people truly hope to gain through negotiation.
- Generate a variety of options before deciding what to do. The pressure involved in any type of negotiation tends to narrow people’s vision and inhibit their creativity, making it difficult to find optimal solutions to problems. Instead, Fisher and Ury suggest developing a wide range of possible solutions as part of the negotiating process. These possible solutions should attempt to advance shared interests and reconcile differences.
- Base the result on objective criteria. No one will be happy with the result of a negotiation if they feel that they have been taken advantage of. Find and apply some fair standard that guarantees a mutually beneficial result.
Tips from the boardroom
Play open cards
CEO, Vox Telecom
I like a simple informal chatty approach which we refer to as the ‘dumb farmer’ routine because this generally disarms people and makes them underestimate you. It is essential to be thoroughly prepared, have your objectives clearly prioritised and lay them out. I don’t believe in holding your cards close to your chest. Rather get all parties to be open because this speeds up the process, encourages lateral solutions and makes it easier to construct a win-win deal. Visualise beforehand the outcome that you desire. Be prepared to compromise on the small things, as that will make it easier to stand firm on the critical points. Remember, business is not personal; leave your ego at the door.
Know what’s non-negotiable
CEO, Business Connexion
I learnt two important lessons during Telkom’s bid for Business Connexion, a process which lasted two years and finally ended when the competition authorities blocked the deal. Had it gone through, it would have been extremely beneficial for our shareholders, but not for our staff and customers. We knew this when we first entered negotiations and we were resolute about ensuring that any proposed deal would be in the best interests of our employees and our clients. Because we had determined that upfront, we were unwavering on that point. I also learnt that you must not allow negotiations to distract you from the business itself. In our case, the process went on for so long that we took our eye off the ball. It’s important to recognise when a potential deal is detrimental to the business and to let it go.
Retaining core values
The merger between Europcar and Imperial Car Rental was made easier because both companies were in the same group. At the outset, the challenge was the negotiation with Europcar International for the long term franchise rights in Southern Africa. This was the most critical part of the integration of the two businesses. These negotiations took some time to finalise as Imperial Car Rental was already an established, well respected and reputable brand in South Africa with a significant share of the car rental market. The main areas of negotiations related to migration and retention of the Imperial Car Rental brand during the transitional period, as well as systems integration, franchise fees and customer service. We had to ensure that we retained Imperial’s core values and areas of strength in the process.