Tuesday, October 20, 2009

7 Common Pitfalls to Avoid When Negotiating

I found an interesting article from the Stanford Graduate School of Business Knowledgebase.

The article is based on research by Margaret A. Neal, the Stanford University John G. McCoy-Banc One Corporation Professor of Organizations and Dispute Resolution and Graduate School of Business Trust Faculty Fellow for 2009-2010.

The research described on the blog suggests that successful bargaining means putting a positive spin in every possible circumstance. “If I can trade off issues that I care about more and you care about less, then we've been able to create value in a transaction," according to Neale, "That's the silver lining." She points out common pitfalls or traps that negotiators fall into and leave money on the table. Below is my brief summary of those pitfalls.

1. Poor Planning. Planning is the sine qua non of effective negotiations. Successful negotiators make plans. They know their priorities and their alternatives. They have thought about and discussed thoroughly their Best Alternative to a Negotiated Agreement (BATNA) with their client. They know their bottom lines and deal killers. And they spend the time with their client to make sure that the clients understand and agree with the BATNA.

Good negotiators also try to understand the other parties’ preferences and BATNAs. While at the bargaining table they test to determine if their hypotheses regarding the other parties’ preferences are correct. Good negotiators often prepare a written list or set of goals for themselves.

2. Thinking the pie is fixed. Usually it is not. It is a common mistake when both parties want the same thing to assume that the other side is negotiating from a fixed “win-lose” situation.

3. Failing to pay attention to your opponent. Negotiation trainers emphasize that the single most important skill is the ability to listen to and understand what motivates the other party – the other parties’ interests.

Another important skill is called “framing.” If you are able to frame an issue that addresses the other party’s interests (for example, while your offer may be lower than the other party has asked for, you can talk about certainty of payment, or better relationships, or any other advantage that your offer provides). You can then talk about why your offer is different – and better – than the alternatives. You have framed the issue from explaining why your offer is lower in one aspect to why it is better – for the other party.

4. Assuming that cross-cultural negotiations are just like “local” negotiations. People are different. Cultural differences between negotiators or the parties they represent can create potential benefits or big problems if ignored or misunderstood. These differences range from the huge differences between people from other cultures, to the more subtle differences between men and women, or between people in different occupations, for example, attorneys and engineers.

The bottom line is to pay attention. Do your homework (see the first item above) and be sensitive to cultural and social differences between negotiators.

5. Don’t be locked into anchors. An anchor is when a party tries to set parameters to the negotiations; to try to “anchor” the other party. For example when someone walks in and says “This is a $500,000 case and if you aren’t prepared to negotiate based on that, we are out of here” they are trying to anchor the case.

Don’t accept their premise; rather try to clearly set your parameters for the negotiation. If your BATNA is $150,000, it won’t help you to respond by offering $10,000. Rather, a better approach is to ask the other party to explain the basis of their demand and then explain why that is not reasonable from your point of view. You can ask the other party to think about whether they are willing to come back with a more reasonable offer.

The risk is that they will walk, but if you make a first offer of $150,000 (your bottom line BATNA), the other party will think that it is an opening offer and you have room to move. If you open at $10,000 the other party is likely to walk or assume that you are playing a game with them. Better to watch the anchors and where they are set and negotiate about the anchors, if possible.

6. Caving in too quickly. One negotiations guru described this principle this way: “90% of the work in a negotiation is done in the last 10% of the time.” Make people feel as if they have worked for the deal. No matter what the price of a first offer, even if it is fair, offer less – if only to make the other party feel good about the deal.

7. Don’t gloat. So, when you’ve cut the deal and you love it, don’t dance in front of the other party or even in the elevator on the way out. Never tell the other side that you would have settled for less. Keep it professional and congratulate the other parties on the good job they did. Remember, your paths may cross again.

For more from Margaret A. Neale, see Negotiating Rationally by Max H. Bazerman and Margaret A. Neale, Free Press, 1992.

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