Article: Negotiation Planning
Author: George J. Siedel, Ross School of Business, University of Michigan
Negotiation is an important corporate capability that can provide companies with a significant competitive advantage. When formulating strategic plans, senior executives emphasize value creation. But the best strategic plan will not succeed without successful value-creating negotiations with stakeholders.
Given the importance of negotiation, it is surprising that companies do not pay more attention to the planning process. The International Association for Contract and Commercial Management (IACCM), in partnership with Huthwaite International, completed a benchmark study in 2009 titled “Improving Corporate Negotiation Perfomance.” The study concluded that, while planning is a critical area in negotiation performance, three quarters of the companies in the study did not use formal negotiation planning tools. According to the study, there is a “widespread belief that the skill of the individual will ensure a successful outcome.” For example, a director of a Global 500 company stated that “for a recent $75m deal we spent just a few hours planning the evening before.” (Siedel, “If You Want to Risk Negotiation Failure, Skip the Planning Stage,” Contracting Excellence (May 2014). The IACCM/Huthwaite studywas based on interviews with individuals from 124 organizations, most of which are in the Forbes Global 2000 (the world’s largest companies).)
The IACCM/Huthwaite study included a sample negotiation planner that was based on templates provided by several of the participating companies. IACCM then encouraged me to develop an improved template. In so doing, I combined the best research available on negotiation theory with practice experience from veteran negotiators who are members of IACCM.
* IACCM has 34,000 members from more than 160 countries. I refined a draft version of the template after receiving feedback at IACCM conferences in the United State and Europe.*
Negotiation Planning Checklist
The end result of this process is a Negotiation Planning Checklist that has four parts that are described below. The Checklist is available for free at negotiationplanner.com.
Here is an example of the benefits the checklist provides, from an American CEO of an automotive manufacturing company based in Asia:
I received a quote from a key supplier that was very good and I was going to accept it as is, [but first] I filled out the planning checklist and called in the supplier. We had a great meeting, expanding the pie, and learned tons about what each other wanted. In the end we renegotiated everything, set up yearly pricing reductions and a two-tier pricing schedule that allows me to cover depreciation expenses on any expansion, and provides my supplier the long-term commitment from me he wanted: Win-Win. The projected saving over the next five years is over $4 million USD!!!
Part 1. Goals and best alternatives
This section focuses on two elements that are especially important to negotiation success: (1) establishing goals and reasons for goals and (2) understanding best alternatives to a negotiated agreement (“BATNA”).
While the importance of establishing goals is obvious, many negotiators become fixated on their positions (“I want this car”) and do not give enough attention to the reasons for the positions (“I need transportation to work”). Questions in Part 1 help negotiators understand their and the other side’s goals and underlying reasons, which are key to developing solutions that benefit both sides.
BATNA is an especially important concept because it provides leverage during negotiations. Negotiators with strong BATNAs can take a firm stance in reaching negotiation goals because, if the other side refuses to cooperate, they can fall back on their alternatives. Several questions in Part 1 are designed to enable negotiators to develop a BATNA strategy that includes (a) identifying their and the other side’s BATNA, (b) deciding whether to disclose their BATNAs, and (c) improving their BATNAs and weakening the other side’s BATNA.
Part 2. Issues that are likely to arise (apart from price)
This section includes questions that help negotiators identify issues that are likely to arise during negotiations and to decide which ones are “tradable” because of their relatively low importance. The questions encourage negotiators to examine these issues both from their and the other side’s perspective so that they can envision how the results can be combined to create value for both sides.
The questions also encourage negotiators to think about their relationship with the other side. Is this a one-time deal or is there a long-term relationship with the counterpart. If there is a relationship—or if they want to create one—they will probably be more willing to accommodate the other side when granting concessions.
Part 3. Questions relating to price
Four key components relating to price are well known to negotiators. Part 3 defines these components as follows and asks questions designed to clarify thinking about each of them:
Reservation price: the lowest price a seller is willing to accept or the highest price a buyer is willing to pay.
Stretch goal: the highest price that a seller (or the lowest price that a buyer) can reasonably justify. Negotiators who start with aggressive stretch goals are the most successful in the long term.
Target price: This price represents a reasonable outcome in the negotiation.
Zone of potential agreement (ZOPA): The zone in which the deal can take place, which lies between each side’s reservation prices.
Part 4. Authority of agents
Questions in this section are designed to determine the existence or limits of each side’s authority. If authority is lacking, negotiators will be unable to close a deal that is binding on their companies. Confirmation of authority should come from the company, not from the agent.
Other Planning Tools
While the Negotiation Planning Checklist is the most important tool when preparing for negotiations, negotiationplanner.com includes several other planning tools, such as:
- An assessment of one’s negotiating style, which is especially useful during cross-cultural negotiations.
- A list of questions that are useful in developing negotiating power.
- A list of the psychological tools that can be used during negotiations.
- A list of guidelines that are useful when ethical dilemmas during negotiations.
- A contract law checklist of the key legal questions that arise during negotiations.
- A life goals analysis that assesses a negotiation from the perspective of one’s life goals.
While most of these tools are oriented toward business negotiations, they can also be used in other contexts. The life goals analysis is especially useful in personal dispute resolution. However, this analysis is equally useful during business negotiations. One person recently related how he used the life goals analysis when successfully negotiating for a lead role in his company—a negotiation over salary and title that took many rounds.
There are two points of caution when using the tools available at negotiationplanner.com. First, while these tools are designed to help you clarify planning for negotiation, they should not be used as crutches to replace independent analysis. In other words, they should not supplant clear thinking about goals and how to accomplish them. Nor should they replace discussions with among members of a negotiation team, although the tools are useful in organizing these discussions.
Second, these tools focus on planning for future negotiations. To achieve success over the long-term, companies should have a process for reviewing past negotiations. This review should take place immediately after negotiations, regardless of whether they were successful. When negotiations are successful, another review should take place following performance of the contract to determine whether implementation problems could have been avoided through improved negotiation.
Tools for evaluating negotiation performance from company and individual perspectives are included in negotiationplanner.com. Reviews completed from a company perspective should be shared throughout the organization to build contracting capability. A free company training program, based on a checklist created by a manager at a major international company based in Europe, is available at the website.
The personal negotiation performance review encourages negotiators to identify what they do well during negotiations and the areas where improvement is necessary. They can use the results as an agenda for skill development through reading about negotiation, observing successful negotiators in action and training programs.
George Siedel teaches negotiation at Michigan’s Ross School of Business and around the world to business leaders, entrepreneurs, attorneys, physicians, athletic directors, and judges.
Professor Siedel has received several research awards including the Maurer Award, the Ralph Bunche Award, and the Hoeber Award. He has also received many teaching awards, including the 2014 Executive Program Professor of the Year Award from a consortium of 36 leading universities committed to international education.
At the Luxembourg School of Business Professor Siedel teaches the popular two-day workshop “Negotiating for Success.” He also teaches the MBA course at on “Power and Persuasion.” Professor Siedel completed graduate studies at the University of Michigan and Cambridge University. He served as a visiting professor at Stanford University and Harvard University and as a Visiting Scholar at Berkeley. As a Fulbright Scholar, he held a Distinguished Chair in the Humanities and Social Sciences.