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HBR OnPoint

F R O M T H E H A R V A R D B U S I N E S S R E V I E W

A R T I C L E

Six Habits of Merely Effective Negotiators by James K. Sebenius

New sec t ions to

guide yo u thro ugh

t h e a r t i c l e :

• The Idea in Brief

• The Idea at Wo rk

• E x p l o r i n g Fur t h e r. . .

P R O D U C T N U M B E R 9 4 1 1

How to sharpen your

deal-making skills?

Master the ar t of

letting the other guy

have yo ur way.

T H E I D E A

Hi g h stakes. Intense pressure. Careless mis- takes. These can turn your key negotiations into disasters. Even seasoned negotiators bun- gle deals, leaving money on the table and dam- aging working relationships.

Why? During negotiations, six common mis- takes can distract you from your real purpose: getting the other guy to choose what you want—for his own reasons.

Avoid negotiation pitfalls by mastering the art of letting the other guy have your way—everyone will win.

Six Habits of Merely Effective Negotiators

N E G OT I AT I O N M I S TA K E S

1. Neglecting the other side’s problem. If you don’t understand the deal from the other side’s perspective, you can’t solve his problem or yours.

E X A M P L E : A technology company that created a cheap, accu- rate way of detecting gas-tank leaks couldn’t sell its product. Why? EPA regulations permitted leaks of up to 1,500 gallons, while this new technology detected 8-ounce leaks. Fearing the device would spawn regulatory trouble, potential customers said, “No deal!”

2. Letting price bulldoze other interests. Most deals involve interests besides price:

• a positive working relationship, crucial in longer-term deals

• the social contract, or “spirit of the deal,” including goodwill and shared expectations

• the deal-making process—personal, respectful, and fair to both sides

Price-centric tactics leave these potential joint gains unrealized.

3. Letting positions drive out interests. Incompatible positions may mask compatible interests. Your gain isn’t necessarily your “opponent’s” loss.

E X A M P L E : Environmentalists and farmers opposed a power company’s proposed dam. Yet compatible inter- ests underlay these seemingly irreconcilable posi- tions: Farmers wanted water flow; environmental- ists, wildlife protection; the power company, a greener image. By agreeing to a smaller dam, water-flow guarantees, and habitat conservation, everyone won.

HBR OnPoint © 2002 by Harvard Business School Publishing Corporation. All rights reserved.

4. Searching too hard for common ground. While common ground helps negotiations, different interests can give each party what it values most, at minimum cost to the other.

E X A M P L E : An acquirer and entrepreneur disagree on the entrepreneurial company’s likely future. To satisfy their differing interests, the buyer agrees to pay a fixed amount now and contingent amount later, based on future performance. Both find the deal more attractive than walking away.

5. Neglecting BATNAs (“best alternative to a negotiated agreement”). BATNAs represent your actions if the proposed deal weren’t pos- sible; e.g., walk away, approach another buyer. Assessing your own and your partner’s BATNA reveals surprising possibilities.

E X A M P L E : A company hoping to sell a struggling division for somewhat more than its $7 million value had two fiercely competitive bidders. Speculating each might pay an inflated price to trump the other, the seller ensured each knew its rival was looking. The division’s selling price? $45 million.

6. Failing to correct for skewed vision. Two forms of bias can prompt errors:

• Role bias—overcommitting to your own point of view and interpreting information in self-serving ways. A plaintiff believes he has a 70% chance of winning his case, while the defense puts the odds at 50%. Result? Unlikelihood of out-of-court settlement.

• Partisan perceptions—painting your side with positive qualities, while vilifying your “oppo- nent.” Self-fulfilling prophecies may result.

Counteract these biases with role-plays of the opposition’s interests.

T H E I D E A A T W O R K

I N B R I E F

Like many

executives,

you know

a lot about

negotiating.

But still

you fall prey

to a set of

common

errors.

The best

defense is

staying

focused on

the right

problem

to solve.

by James K. Sebenius

lobal deal makers did a staggering $3.3 trillion worth of M&A transactions in 1999 – and that’s only a fraction of the capital that passed through negotia-

tors’ hands that year. Behind the deal-driven headlines, exec- utives endlessly negotiate with customers and suppliers, with large shareholders and creditors, with prospective joint ven- ture and alliance partners, with people inside their companies and across national borders. Indeed, wherever parties with different interests and perceptions depend on each other for results, negotiation matters. Little wonder that Bob Davis, vice chairman of Terra Lycos, has said that companies “have to make deal making a core competency.”

Luckily, whether from schoolbooks or the school of hard knocks, most executives know the basics of negotiation; some are spectacularly adept. Yet high stakes and intense pressure can result in costly mistakes. Bad habits creep in, and experi- ence can further ingrain those habits. Indeed, when I reflect on the thousands of negotiations I have participated in and stud- ied over the years, I’m struck by how frequently even experi- enced negotiators leave money on the table, deadlock, dam- age relationships, or allow conflict to spiral. (For more on the

Copyright © 2001 by Harvard Business School Publishing Corporation. All rights reserved. 87

SIX HABITS OF

Merely Effective

NEGOTIATORS G

rich theoretical understanding of negotiations developed by researchers over the past fifty years, see the sidebar “Academics Take a Seat at the Negotiating Table.”)

There are as many specific reasons for bad outcomes in negotiations as there are individuals and deals. Yet broad classes of errors recur. In this article, I’ll explore those mistakes, comparing good negotiating practice with bad. But first, let’s take a closer look at the right negotiation problem that your approach must solve.

Solving the Right Negotiation Problem In any negotiation, each side ultimately must choose be- tween two options: accepting a deal or taking its best no-deal option – that is, the course of action it would take if the deal were not possible. As a negotiator, you seek to advance the full set of your interests by persuading the other side to say yes – and mean it – to a proposal that meets your interests better than your best no-deal option does. And why should the other side say yes? Because the deal meets its own interests better than its best no-deal option. So, while protecting your own choice, your negotiation problem is to understand and shape your counterpart’s perceived deci- sion – deal versus no deal – so that the other side chooses in its own interest what you want. As Italian diplomat Daniele Vare said long ago about diplomacy, negotiation is “the art of letting them have your way.”

This approach may seem on the surface like a recipe for manipulation. But in fact, understanding your counter- part’s interests and shaping the decision so the other side agrees for its own reasons is the key to jointly creating and claiming sustainable value from a negotiation. Yet even experienced negotiators make six common mistakes that keep them from solving the right problem.

MISTAKE 1 Neglecting the Other Side’s Problem

You can’t negotiate effectively unless you understand your own interests and your own no-deal options. So far, so good – but there’s much more to it than that. Since the other side will say yes for its reasons, not yours, agree- ment requires understanding and addressing your coun- terpart’s problem as a means to solving your own.

At a minimum, you need to understand the problem from the other side’s perspective. Consider a technology company, whose board of directors pressed hard to de- velop a hot new product shortly after it went public. The

company had developed a technology for detecting leaks in underground gas tanks that was both cheaper and about 100 times more accurate than existing technologies – at a time when the Environmental Protection Agency was persuading Congress to mandate that these tanks be con- tinuously tested. Not surprisingly, the directors thought their timing was perfect and pushed employees to com- mercialize and market the technology in time to meet the demand. To their dismay, the company’s first sale turned out to be its only one. Quite a mystery, since the tech- nology worked, the product was less expensive, and the regulations did come through. Imagine the sales en- gineers confidently negotiating with a customer for a new order: “This technology costs less and is more ac- curate than the competition’s.” Think for a moment, though, about how intended buyers might mull over their interests, especially given that EPA regulations per-

mitted leaks of up to 1,500 gal- lons while the new technology could pick up an 8-ounce leak. Potential buyer: “What a tech- nological tour de force! This handy new device will almost certainly get me into need- less, expensive regulatory trou- ble. And create P.R. problems too. I think I’ll pass, but my competition should definitely have it.” From the technology

company’s perspective,“faster, better, cheaper” added up to a sure deal; to the other side, it looked like a headache. No deal.

Social psychologists have documented the difficulty most people have understanding the other side’s per- spective. From the trenches, successful negotiators concur that overcoming this self-centered tendency is critical. As Millennium Pharmaceuticals’ Steve Holtzman put it after a string of deals vaulted his company from a start-up in 1993 to a major player with a $10.6 billion market cap today, “We spend a lot of time thinking about how the poor guy or woman on the other side of the table is going to have to go sell this deal to his or her boss. We spend a lot of time trying to understand how they are modeling it.” And Wayne Huizenga, veteran of more than a thou- sand deals building Waste Management, AutoNation, and Blockbuster, distilled his extensive experience into basic advice that is often heard but even more often forgotten.

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James K. Sebenius is the Gordon Donaldson Professor of Business Administration at Harvard Business School in Bos- ton, where he led the creation of the negotiation unit. He helped found and worked at the Blackstone Group, a New York investment banking and private equity firm. He is co- author with David Lax of the forthcoming book 3-D Nego- tiation: Creating and Claiming Value for the Long Term.

Your negotiation problem is to understand and shape

your counterpart’s perceived decision so that the

other side chooses in its own interest what you want.

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Early in his deal-making career at Cisco Systems, Mike Volpi, now chief strategy officer, had trouble completing proposed deals, his “outward confidence” often mis- taken for arrogance. Many acquisitions later, a colleague observed that “the most important part of [Volpi’s] development is that he learned power doesn’t come from telling people you are powerful. He went from being a guy driving the deal from his side of the table to the guy who understood the deal from the other side.”

An associate of Rupert Murdoch re- marked that, as a buyer, Murdoch “un- derstands the seller – and, whatever the guy’s trying to do, he crafts his offer that way.” If you want to change someone’s mind, you should first learn where that person’s mind is. Then, together, you can try to build what my colleague Bill Ury calls a “golden bridge,” spanning the gulf between where your counterpart is now and your desired end point. This is much more effective than trying to shove the other side from its position to yours. As an eighteenth-century pope once noted about Cardinal de Polignac’s remarkable diplomatic skills,“This young man always seems to be of my opinion [at the start of a negotiation], and at the end of the con- versation I find that I am of his.” In short, the first mistake is to focus on your own problem, exclusively. Solve the other side’s as the means to solving your own.

MISTAKE 2 Letting Price Bulldoze Other Interests

Negotiators who pay attention exclu- sively to price turn potentially coopera- tive deals into adversarial ones. These “reverse Midas” negotiators, as I like to call them, use hard-bargaining tactics that often leave potential joint gains unreal- ized. That’s because, while price is an im-

portant factor in most deals, it’s rarely the only one. As Felix Rohatyn, former managing partner of the invest- ment bank, Lazard Frères, observed, “Most deals are 50% emotion and 50% economics.”

There’s a large body of research to support Rohatyn’s view. Consider, for example, a simplified negotiation, ex- tensively studied in academic labs, involving real money. One party is given, say, $100 to divide with another party as she likes; the second party can agree or disagree to the

Paralleling the growth in real-world negotiation, several generationsof researchers have deepened our understanding of the process. In the 1950s and 1960s, elements of hard (win-lose) bargaining were iso-

lated and refined: how to set aggressive targets, start high, concede

slowly, and employ threats, bluffs, and commitments to positions with-

out triggering an impasse or escalation. By the early 1980s, with the

win-win revolution popularized by the book Getting to Yes (by Roger

Fisher, William Ury, and Bruce Patton), the focus shifted from battling

over the division of the pie to the means of expanding it by uncovering

and reconciling underlying interests. More sophisticated analysis in

Howard Raiffa’s Art and Science of Negotiation soon transcended this

simplistic “win-win versus win-lose” debate; the pie obviously had to be

both expanded and divided. In The Manager as Negotiator (by David Lax

and James Sebenius), new guidance emerged on productively manag-

ing the tension between the cooperative moves necessary to create

value and the competitive moves involved in claiming it. As the 1990s

progressed with work such as Negotiating Rationally (by Max Bazerman

and Margaret Neale), the behavioral study of negotiation – describing

how people actually negotiate – began to merge with the game theo-

retic approach, which prescribed how fully rational people should ne-

gotiate. This new synthesis – developing the best possible advice with-

out assuming strictly rational behavior – is producing rich insights in

negotiations ranging from simple two-party, one-shot, single-issue situ-

ations through complex coalitional dealings over multiple issues over

time, where internal negotiations must be synchronized with external

ones. Negotiation courses that explore these ideas have always been

popular options at business schools, but reflecting the growing recog-

nition of their importance, these courses are beginning to be required

as part of MBA core programs at schools such as Harvard. Rather than

a special skill for making major deals or resolving disputes, negotia-

tion has become a way of life for effective executives.

A C A D E M I C S TA K E A S E AT AT T H E N E G O T I AT I N G TA B L E

“In all my years of doing deals, a few rules and lessons have emerged. Most important, always try to put yourself in the other person’s shoes. It’s vital to try to understand in depth what the other side really wants out of the deal.”

Tough negotiators sometimes see the other side’s con- cerns but dismiss them: “That’s their problem and their issue. Let them handle it. We’ll look after our own prob- lems.” This attitude can undercut your ability to prof- itably influence how your counterpart sees its problem.

arrangement. If he agrees, the $100 is divided in line with the first side’s proposal; if not, neither party gets anything. A pure price logic would suggest proposing something like $99 for me, $1 for you. Although this is an extreme al- location, it still represents a position in which your coun- terpart gets something rather than nothing. Pure price ne- gotiators confidently predict the other side will agree to the split; after all, they’ve been offered free money – it’s like finding a dollar on the street and putting it in your pocket. Who wouldn’t pick it up?

In reality, however, most players turn down proposals that don’t let them share in at least 35% to 40% of the bounty – even when much larger stakes are involved and the amount they forfeit is significant. While these rejec- tions are “irrational” on a pure price basis and virtually in- comprehensible to reverse Midas types, studies show that when a split feels too unequal to people, they reject the spoils as unfair, are offended by the process, and perhaps try to teach the “greedy” person a lesson.

An important real-world message is embedded in these lab results: people care about much more than the ab- solute level of their own economic outcome; competing interests include relative results, perceived fairness, self- image, reputation, and so on. Successful negotiators, ac- knowledging that economics aren’t everything, focus on four important nonprice factors.

The Relationship. Less experienced negotiators often undervalue the importance of developing working rela- tionships with the other parties, putting the rela- tionships at risk by overly tough tactics or simple neglect. This is especially true in cross-border deals. In much of Latin Amer- ica, southern Europe, and Southeast Asia, for exam- ple, relationships – rather than transactions – can be the predominant ne- gotiating interest when working out longer term deals. Results-oriented North Americans, Northern Europeans, and Australians often come to grief by underestimating the strength of this in- terest and insisting prematurely that the negotiators “get down to business.”

The Social Contract. Similarly, negotiators tend to focus on the economic contract – equity splits, cost shar- ing, governance, and so on – at the expense of the social contract, or the “spirit of a deal.” Going well beyond a good working relationship, the social contract governs people’s expectations about the nature, extent, and du- ration of the venture, about process, and about the way unforeseen events will be handled. Especially in new ven- tures and strategic alliances, where goodwill and strong

shared expectations are extremely important, negotiating a positive social contract is an important way to reinforce economic contracts. Scurrying to check founding docu- ments when conflicts occur, which they inevitably do, can signal a badly negotiated social contract.

The Process. Negotiators often forget that the deal- making process can be as important as its content. The story is told of the young Tip O’Neill, who later became Speaker of the House, meeting an elderly constituent on the streets of his North Cambridge, Massachusetts, dis- trict. Surprised to learn that she was not planning to vote for him, O’Neill probed, “Haven’t you known me and my family all my life?”“Yes.”“Haven’t I cut your grass in summer and shoveled your walk in winter?” “Yes.” “Don’t you agree with all my policies and positions?” “Yes.” “Then why aren’t you going to vote for me?” “Be- cause you didn’t ask me to.” Considerable academic re- search confirms what O’Neill learned from this conversa- tion: process counts. What’s more, sustainable results are more often reached when all parties perceive the process as personal, respectful, straightforward, and fair.1

The Interests of the Full Set of Players. Less expe- rienced negotiators sometimes become mesmerized by the aggregate economics of a deal and forget about the interests of players who are in a position to torpedo it. When the boards of pharmaceutical giants Glaxo and SmithKline Beecham publicly announced their merger in 1998, investors were thrilled, rapidly increasing

the combined company’s market capitalization by a stunning $20 billion. Yet de- spite prior agreement on who would occupy which top executive positions in the newly combined com- pany, internal disagreement about management control and position resurfaced and sank the announced deal, and the $20 billion evapo- rated. (Overwhelming stra-

tegic logic ultimately drove the companies back together, but only after nearly two years had passed.) This episode confirms two related lessons. First, while favorable overall economics are generally necessary, they are often not suf- ficient. Second, keep all potentially influential internal players on your radar screen; don’t lose sight of their in- terests or their capacity to affect the deal. What is “ratio- nal” for the whole may not be so for the parts.

It can be devilishly difficult to cure the reverse Midas touch. If you treat a potentially cooperative negotiation like a pure price deal, it will likely become one. Imagine a negotiator who expects a hardball, price-driven process. She initiates the bid by taking a tough preemptive posi- tion; the other side is likely to reciprocate.“Aha!” says the

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S i x H a b i t s o f M e r e l y E f f e c t i v e N e g o t i a t o r s

People care about much more than the absolute level of their

own economic outcome; competing interests include relative results,

perceived fairness, self-image, reputation, and so on.

negotiator, her suspicions confirmed.“I knew this was just going to be a tough price deal.”

A negotiator can often influence whether price will dominate or be kept in perspective. Consider negotia- tions between two companies trying to establish an eq- uity joint venture. Among other issues, they are trying to place a value on each side’s contribution to determine ownership shares. A negotiator might drive this process down two very different paths. A price-focused approach quickly isolates the valuation issue and then bangs out a resolution. Alternatively, the two sides could first flesh out a more specific shared vision for the joint venture (to- gether envisioning the “pot of gold” they could create), probe to understand the most critical concerns of each side – including price – and craft trade-offs among the full set of issues to meet these interests. In the latter ap- proach, price becomes a component or even an implica- tion of a larger, longer term package, rather than the pri- mary focus.

Some negotiations are indeed pure price deals and only about aggregate economics, but there is often much more to work with. Wise negotiators put the vital issue of price in perspective and don’t straitjacket their view of the richer interests at stake. They work with the subjective as well as the objective, with the process and the relation- ship, with the “social contract” or spirit of a deal as well as its letter, and with the interests of the parts as well as the whole.

MISTAKE 3 Letting Positions Drive Out Interests

Three elements are at play in a negotiation. Issues are on the table for explicit agreement. Positions are one party’s stands on the issues. Interests are underlying concerns that would be affected by the resolution. Of course, positions on issues reflect underlying interests, but they need not be identical. Suppose you’re considering a job offer. The base salary will probably be an issue. Perhaps your position on that issue is that you need to earn $100,000. The interests underlying that position include your need for a good in- come but may also include status, security, new oppor- tunities, and needs that can be met in ways other than salary. Yet even very experienced deal makers may see the essence of negotiation as a dance of positions. If in- compatible positions finally converge, a deal is struck; if not, the negotiation ends in an impasse. By contrast, interest-driven bargainers see the process primarily as a reconciliation of underlying interests: you have one set of interests, I have another, and through joint problem solv- ing we should be better able to meet both sets of interests and thus create new value.

Consider a dispute over a dam project. Environmental- ists and farmers opposed a U.S. power company’s plans to build a dam. The two sides had irreconcilable positions:

“absolutely yes” and “no way.” Yet these incompatible po- sitions masked compatible interests. The farmers were worried about reduced water flow below the dam, the en- vironmentalists were focused on the downstream habitat of the endangered whooping crane, and the power com- pany needed new capacity and a greener image. After a costly legal stalemate, the three groups devised an inter- est-driven agreement that all of them considered prefer- able to continued court warfare. The agreement included a smaller dam built on a fast track, water flow guarantees, downstream habitat protection, and a trust fund to en- hance whooping crane habitats elsewhere.

Despite the clear advantages of reconciling deeper in- terests, people have a built-in bias toward focusing on their own positions instead. This hardwired assumption that our interests are incompatible implies a zero-sum pie in which my gain is your loss. Research in psychology supports the mythical fixed-pie view as the norm. In a survey of 5,000 subjects in 32 negotiating studies, mostly carried out with monetary stakes, participants failed to re- alize compatible issues fully half of the time.2 In real- world terms, this means that enormous value is unknow- ingly left uncreated as both sides walk away from money on the table.

Reverse Midas negotiators, for example, almost auto- matically fixate on price and bargaining positions to claim value. After the usual preliminaries, countless ne- gotiations get serious when one side asks,“so, what’s your position,” or says, “here’s my position.” This positional ap- proach often drives the process toward a ritual value- claiming dance. Great negotiators understand that the dance of bargaining positions is only the surface game; the real action takes place when they’ve probed behind positions for the full set of interests at stake. Reconciling interests to create value requires patience and a willing- ness to research the other side, ask many questions, and listen. It would be silly to write off either price or bar- gaining position; both are extremely important. And there is, of course, a limit to joint value creation. The trick is to recognize and productively manage the tension be- tween cooperative actions needed to create value and competitive ones needed to claim it. The pie must be both expanded and divided.

MISTAKE 4 Searching Too Hard for Common Ground

Conventional wisdom says we negotiate to overcome the differences that divide us. So, typically, we’re advised to find win-win agreements by searching for common ground. Common ground is generally a good thing. Yet many of the most frequently overlooked sources of value in negotiation arise from differences among the parties.

Recall the battle over the dam. The solution – a smaller dam, water flow guarantees, habitat conservation – did

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S i x H a b i t s o f M e r e l y E f f e c t i v e N e g o t i a t o r s

heodore Roosevelt, nearing

the end of a hard-fought

presidential election campaign in

1912, scheduled a final whistle-stop

journey. At each stop, Roosevelt

planned to clinch the crowd’s

votes by distributing an elegant

pamphlet with a stern presidential

portrait on the cover and a stirring

speech, “Confession of Faith,” in-

side. Some three million copies

had been printed when a cam-

paign worker noticed a small line

under the photograph on each

brochure that read, “Moffett Stu-

dios, Chicago.” Since Moffett held

the copyright, the unauthorized

use of the photo could cost the

campaign one dollar per reproduc-

tion. With no time to reprint the

brochure, what was the campaign

to do?

Not using the pamphlets at all

would damage Roosevelt’s election

prospects. Yet, if they went ahead,

a scandal could easily erupt very

close to the election, and the cam-

paign could be liable for an unaf-

fordable sum. Campaign workers

quickly realized they would have to

negotiate with Moffett. But re-

search by their Chicago operatives

turned up bad news: although

early in his career as a photogra-

pher, Moffett had been taken with

the potential of this new artistic

medium, he had received little

recognition. Now, Moffett was

financially hard up and bitterly

approaching retirement with a

single-minded focus on money.

Dispirited, the campaign workers

approached campaign manager

George Perkins, a former partner of

J.P. Morgan. Perkins lost no time

summoning his stenographer to

dispatch the following cable to Mof-

fett Studios: “We are planning to

distribute millions of pamphlets

with Roosevelt’s picture on the

cover. It will be great publicity for

the studio whose photograph we

use. How much will you pay us

to use yours? Respond immedi-

ately.” Shortly, Moffett replied:

“We’ve never done this before, but

under the circumstances we’d be

pleased to offer you $250.” Report-

edly, Perkins accepted – without

dickering for more.

S O LV I N G T E D D Y R O O S E V E LT ’ S

N E G O T I AT I O N P R O B L E M

not result from common interests but because farmers, environmentalists, and the utility had different priorities. Similarly, when Egypt and Israel were negotiating over the Sinai, their positions on where to draw the boundary were incompatible. When negotiators went beyond the opposing positions, however, they uncovered a vital dif- ference of underlying interest and priority: the Israelis cared more about security, while the Egyptians cared more about sovereignty. The solution was a demilitarized zone under the Egyptian flag. Differences of interest or priority can open the door to unbundling different ele- ments and giving each party what it values the most – at the least cost to the other.

Even when an issue seems purely economic, finding differences can break open deadlocked deals. Consider a small technology company and its investors, stuck in a tough negotiation with a large strategic acquirer adamant about paying much less than the asking price. On investi- gation, it turned out that the acquirer was actually willing

to pay the higher price but was concerned about raising price expectations in a fast-moving sector in which it planned to make more acquisitions. The solution was for the two sides to agree on a modest, well-publicized initial cash purchase price; the deal included complex-sounding contingencies that virtually guaranteed a much higher price later.

Differences in forecasts can also fuel joint gains. Sup- pose an entrepreneur who is genuinely optimistic about the prospects of her fast-growing company faces a poten- tial buyer who likes the company but is much more skep- tical about the company’s future cash flow. They have ne- gotiated in good faith, but, at the end of the day, the two sides sharply disagree on the likely future of the company and so cannot find an acceptable sale price. Instead of see- ing these different forecasts as a barrier, a savvy negotia- tor could use them to bridge the value gap by proposing a deal in which the buyer pays a fixed amount now and a contingent amount later on the basis of the company’s fu-

T

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S i x H a b i t s o f M e r e l y E f f e c t i v e N e g o t i a t o r s

Perkins’s misleading approach

raises ethical yellow flags and is

anything but a model negotia-

tion on how to enhance working

relationships. Yet this case raises

a very interesting question: why

did the campaign workers find

the prospect of this negotiation

so difficult? Their inability to see

what Perkins immediately per-

ceived flowed from their anxious

obsession with their own side’s

problem: their blunders so far,

the high risk of losing the elec-

tion, a potential $3 million

exposure, an urgent deadline,

and no cash to meet Moffett’s

likely demands for something

the campaign vitally needed.

Had they avoided mistake 1 by

pausing for a moment and

thinking about how Moffett

saw his problem, they would

have realized that Moffett didn’t

even know he had a problem.

Perkins’s tactical genius was to

recognize the essence of the ne-

gotiator’s central task: shape

how your counterpart sees its

problem such that it chooses

what you want.

The campaign workers were

paralyzed in the face of what

they saw as sharply conflicting

monetary interests and their

pathetic BATNA. From their per-

spective, Moffett’s only choice

was how to exploit their despera-

tion at the prospect of losing the

presidency. By contrast, dodging

mistake 5, Perkins immediately

grasped the importance of favor-

ably shaping Moffett’s BATNA

perceptions, both of the cam-

paign’s (awful) no-deal options

and Moffett’s (powerful) one.

Perkins looked beyond price, po-

sitions, and common ground

(mistakes 2, 3, and 4) and used

Moffett’s different interests to

frame the photographer’s choice

as “the value of publicity and

recognition.” Had he assumed

this would be a standard, hard-

ball price deal by offering a

small amount to start, not only

would this assumption have

been dead wrong but, worse, it

would have been self-fulfilling.

Risky and ethically problem-

atic? Yes…but Perkins saw his

options as certain disaster ver-

sus some chance of avoiding it.

And was Moffett really entitled

to a $3 million windfall, avoid-

able had the campaign caught

its oversight a week beforehand?

Hard to say, but this historical

footnote, which I’ve greatly em-

bellished, illuminates the inter-

section of negotiating mistakes,

tactics, and ethics.

ture performance. Properly structured with adequate in- centives and monitoring mechanisms, such a contingent payment, or “earn-out,” can appear quite valuable to the optimistic seller – who expects to get her higher valua- tion – but not very costly to the less optimistic buyer. And willingness to accept such a contingent deal may signal that the seller’s confidence in the business is genuine. Both may find the deal much more attractive than walk- ing away.

A host of other differences make up the raw material for joint gains. A less risk-averse party can “insure” a more risk-averse one. An impatient party can get most of the early money, while his more patient counterpart can get considerably more over a longer period of time. Differ- ences in cost or revenue structure, tax status, or regulatory arrangements between two parties can be converted into gains for both. Indeed, conducting a disciplined “differ- ences inventory” is at least as important a task as is iden- tifying areas of common ground. After all, if we were all

clones of one another, with the same interests, beliefs, attitudes toward risk and time, assets, and so on, there would be little to negotiate. While common ground helps, differences drive deals. But negotiators who don’t actively search for differences rarely find them.

MISTAKE 5 Neglecting BATNAs

BATNAs – the acronym for “best alternative to a negoti- ated agreement” coined years ago by Roger Fisher, Bill Ury, and Bruce Patton in their book Getting to Yes – reflect the course of action a party would take if the proposed deal were not possible. A BATNA may involve walking away, prolonging a stalemate, approaching another po- tential buyer, making something in-house rather than procuring it externally, going to court rather than settling, forming a different alliance, or going on strike. BATNAs set the threshold – in terms of the full set of interests –

that any acceptable agreement must exceed. Both parties doing better than their BATNAs is a necessary condition for an agreement. Thus BATNAs define a zone of possible agreement and determine its location.

A strong BATNA is an important negotiation tool. Many people associate the ability to inflict or withstand damage with bargaining power, but your willingness to walk away to an apparently good BATNA is often more important. The better your BATNA appears both to you and to the other party, the more credible your threat to walk away becomes, and the more it can serve as lever- age to improve the deal. Roger Fisher has dramatized this point by asking which you would prefer to have in your back pocket during a compensation negotiation with your boss: a gun or a terrific job offer from a desir- able employer who is also a serious competitor of your company?

Not only should you assess your own BATNA, you should also think carefully about the other side’s. Doing so can alert you to surprising possibilities. In one instance, a British company hoped to sell a poorly performing di- vision for a bit more than its depreciated asset value of $7 million to one of two potential buyers. Realizing that these buyers were fierce rivals in other markets, the seller speculated that each party might be willing to pay an inflated price to keep the other from get- ting the division. So they made sure that each suitor knew the other was look- ing and skillfully cultivated the interest of both com- panies. The division sold for $45 million.

Negotiators must also be careful not to inadvertently damage their BATNAs. I saw that happen at a Cana- dian chemical manufac- turing company that had decided to sell a large but non- strategic division to raise urgently needed cash. The CEO charged his second-in-command with negotiating the sale of the division at the highest possible price.

The target buyer was an Australian company, whose chief executive was an old school friend of the Canadian CEO. The Australian chief executive let it be known that his company was interested in the deal but that his senior management was consumed, at the moment, with other priorities. If the Australian company could have a nine- month negotiating exclusive to “confirm their serious- ness about the sale,” the Australian chief executive would dedicate the top personnel to make the deal happen. A chief-to-chief agreement to that effect was struck. Pity the second-in-command, charged with urgently maximiz- ing cash from this sale, as he jetted off to Sydney with no

meaningful alternative for nine endless months to what- ever price the Australians offered.

Negotiators often become preoccupied with tactics, trying to improve the potential deal while neglecting their own BATNA and that of the other side. Yet the real negotiation problem is “deal versus BATNA,” not one or the other in isolation. Your potential deal and your BATNA should work together as the two blades of the scissors do to cut a piece of paper.

MISTAKE 6 Failing to Correct for Skewed Vision

You may be crystal clear on the right negotiation prob- lem – but you can’t solve it correctly without a firm un- derstanding of both sides’ interests, BATNAs, valuations, likely actions, and so on. Yet, just as a pilot’s sense of the horizon at night or in a storm can be wildly inaccurate, the psychology of perception systematically leads nego- tiators to major errors.3

Self-Serving Role Bias. People tend unconsciously to interpret information pertaining to their own side in a strongly self-serving way. The following experiment shows the process at work. Harvard researchers gave a large group of executives financial and industry informa-

tion about one company negotiating to acquire an- other. The executive sub- jects were randomly as- signed to the negotiating roles of buyer or seller; the information provided to each side was identical. After plenty of time for analysis, all subjects were asked for their private assessment of the target company’s fair value – as distinct from how they

might portray that value in the bargaining process. Those assigned the role of seller gave median valuations more than twice those given by the executives assigned to the buyer’s role. These valuation gulfs had no basis in fact; they were driven entirely by random role assignments.

Even comparatively modest role biases can blow up po- tential deals. Suppose a plaintiff believes he has a 70% chance of winning a million-dollar judgment, while the defense thinks the plaintiff has only a 50% chance of win- ning. This means that, in settlement talks, the plaintiff’s expected BATNA for a court battle (to get $700,000 minus legal fees) will exceed the defendant’s assessment of his exposure (to pay $500,000 plus fees). Without sig- nificant risk aversion, the divergent assessments would block any out-of-court settlement. This cognitive role bias helps explain why Microsoft took such a confrontational

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Many people associate the ability to inflict or withstand damage

with bargaining power, but your willingness to walk away to an apparently good BATNA

is often more important.

approach in its recent struggle with the U.S. Department of Justice. The company certainly appeared overopti- mistic about its chances in court. Similarly, Arthur An- dersen likely exhibited overconfidence in its arbitration prospects over the terms of separation from Andersen Consulting (now Accenture). Getting too committed to your point of view – “believing your own line” – is an ex- tremely common mistake.

Partisan Perceptions. While we systematically err in processing information critical to our own side, we are even worse at assessing the other side – especially in an adversarial situation. Extensive research has documented an unconscious mechanism that enhances one’s own side, “portraying it as more talented, honest, and morally up- right,” while simultaneously vilifying the opposition. This often leads to exaggerated perceptions of the other side’s position and overestimates of the actual substantive con- flict. To an outsider, those caught up in disintegrating partnerships or marriages often appear to hold exagger- ated views of each other. Such partisan perceptions can become even more virulent among people on each side of divides, such as Israelis and Palestinians, Bosnian Mus- lims and the Serbs, or Catholics and Protestants in North- ern Ireland.

Partisan perceptions can easily become self-fulfilling prophecies. Experiments testing the effects of teachers’ expectations of students, psychiatrists’ diagnoses of men- tal patients, and platoon leaders’ expectations of their trainees confirm the notion that partisan perceptions often shape behavior. At the negotiating table, clinging firmly to the idea that one’s counterpart is stubborn or ex- treme, for example, is likely to trigger just that behavior, sharply reducing the possibility of reaching a constructive agreement.

As disagreement and conflict intensify, sophisticated ne- gotiators should expect biased perceptions, both on their own side and the other side. Less seasoned players tend to be shocked and outraged by perceived extremism and are wholly unaware that their own views are likely colored by their roles. How to counteract these powerful biases? Just knowing that they exist helps. Seeking the views of out- side, uninvolved parties is useful, too. And having people on your side prepare the strongest possible case for the other side can serve as the basis for preparatory role-playing that can generate valuable insights. A few years ago, helping a client get ready for a tough deal, I suggested that the client create a detailed “brief” for each side and have the team’s best people negotiate for the other side in a reverse role- play. The brief for my client’s side was lengthy, eloquent, and persuasive. Tellingly, the brief describing the other side’s situation was only two pages long and consisted mainly of reasons for conceding quickly to my client’s su- perior arguments. Not only were my client’s executives fixated on their own problem (mistake 1), their percep- tions of each side were also hopelessly biased (mistake 6).

To prepare effectively, they needed to undertake signifi- cant competitive research and reality-test their views with uninvolved outsiders.

From Merely Effective to Superior Negotiation So you have navigated the shoals of merely effective deal making to face what is truly the right problem. You have focused on the full set of interests of all parties, rather than fixating on price and positions. You have looked be- yond common ground to unearth value-creating differ- ences. You have assessed and shaped BATNAs. You have taken steps to avoid role biases and partisan perceptions. In short, you have grasped your own problem clearly and have sought to understand and influence the other side’s such that what it chooses is what you want.

Plenty of errors still lie in wait: cultural gaffes, an ir- ritating style, inadvertent signals of disrespect or un- trustworthiness, miscommunication, bad timing, reveal- ing too much or too little, a poorly designed agenda, sequencing mistakes, negotiating with the wrong person on the other side, personalizing issues, and so on. Even if you manage to avoid these mistakes as well, you may still run into difficulties by approaching the negotiation far too narrowly, taking too many of the elements of the “problem” as fixed.

The very best negotiators take a broader approach to setting up and solving the right problem. With a keen sense of the potential value to be created as their guiding beacon, these negotiators are game-changing entrepre- neurs. They envision the most promising architecture and take action to bring it into being. These virtuoso negotia- tors not only play the game as given at the table, they are masters at setting it up and changing it away from the table to maximize the chances for better results.

To advance the full set of their interests, they under- stand and shape the other side’s choice – deal versus no deal – such that the other chooses what they want. As François de Callières, an eighteenth-century commenta- tor, once put it, negotiation masters possess “the supreme art of making every man offer him as a gift that which it was his chief design to secure.”

1. W. Chan Kim and Renée Mauborgne,“Fair Process: Managing in the Knowl- edge Economy,” HBR July–August 1997.

2. This and other studies illustrating this point can be found in Leigh Thomp- son’s The Mind and Heart of the Negotiator (Prentice Hall, 1998).

3. See Robert J. Robinson,“Errors in Social Judgement: Implications for Nego- tiation and Conflict Resolution, Part I: Biased Assimilation of Information,” Harvard Business School, 1997 and Robert J. Robinson,“Errors in Social Judge- ment: Implications for Negotiation and Conflict Resolution, Part II: Partisan Perceptions,” Harvard Business School, 1997.

Product no. 9411 To place an order, call 1-800-988-0886. To further explore the topic of this article, go to http://explore.hbr.org.

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S i x H a b i t s o f M e r e l y E f f e c t i v e N e g o t i a t o r s

A R T I C L E S

“Turning Negotiation into a Corporate Capability” by Danny Ertel (Harvard Business Review, May–June 1999, Product no. 5394) Ertel introduces another obstacle to effective corporate negotiating: individuals within a company treating each deal as if it were a one-off. Such negotiators can inadvertently undermine each other’s efforts; e.g., a cre- ative response to one customer’s needs may unravel a broader product strategy. Ertel suggests a coordinated negotiation system: 1) Give bargainers more information about past negotiations and corporate priorities. 2) Define success in nonfinancial terms, such as better communication with suppliers. 3) Distinguish between deals and long-term relationships. 4) Walk away from a deal if a better alternative exists. With these princi- ples, you’ll ensure each deal supports the company’s goals.

“Breakthrough Bargaining” by Deborah M. Kolb and Judith Williams (Harvard Business Review, February 2001, Product no. 6080) Meet an additional bargaining obstacle: the shadow negotiation—unspoken assumptions that determine how bargainers deal with each other, whose opinions get heard, and whose interests holds sway. To counteract the shadow, 1) Use power moves to coax reluc- tant bargainers to the table by offering explicit incentives for participating, putting a price on inaction, and enlisting support from higher-ups. 2) Use process moves to shape negotiation agendas by seeding ideas early, reframing the negotiation process, and build- ing consensus. 3) Use appreciative moves to highlight common interests, foster trust, and break stalemates by helping others save face, sustaining dialogue, and soliciting new per- spectives. These strategies turn stalled negoti- ations into constructive bargaining.

“Fair Process: Managing in the Knowledge Economy” by W. Chan Kim and Renée Mauborgne (Harvard Business Review, July–August 1997, Product no. 407X) This article focuses on fair communication process—one of the four nonfinancial inter- ests Sebenius cites. A fair process builds trust between negotiators, encouraging people to share knowledge and make decisions based on proposed plans’ merits. Three qualities define a fair process: 1) engagement—partici- pants give their opinions and test each other’s assumptions, 2) explanation—participants understand the reasons for the final decision, and 3) expectation clarity—participants grasp the final decision’s implications. Negotiations marked by trust create sustain- able value for both parties.

V I D E O

Getting to Yes: Video Workshop on Negotiation by Roger Fisher, William Ury, and Bruce Patton (Harvard Business School Publishing, 1999, Product no. 1070A) This video workshop features three experts from the Harvard Negotiation Project, includ- ing Roger Fisher. The presenters echo the importance of systematizing negotiation and pursuing your own interests while also build- ing positive long-term relationships. More than a dozen vignettes show you how to unleash creativity, generate new insights, and consistently produce optimal outcomes— turning adversarial episodes into collabora- tive encounters.

Six Habits of Merely Effective NegotiatorsE X P L O R I N G F U R T H E R . . .

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