Value Negotiation: How to Finally Get the Win-Win Right 2/x

Horacio Falcao

Part 1.

03/ Challenge Your Negotiation Foundations

Value Foundation

  • Many negotiations end up zero-sum (win-lose), but many of these negotiations didn’t start as zero-sum.

  • While this sounds as a psychological self-manipulation, it pays to think that all negotiations have a potential for a positive-sum outcome. It’s the chance game, but if a party starts looking for the ways to achieve win-win, the probability of a positive outcome for both parties increases.

  • Pareto optimality – if the deal can be improved without making the other party worse off, it’s not optimal (and a Pareto improvement is needed). In theory, if both parties stick to this approach in their negotiations – collectively they will create the maximum value. After the deal is Pareto optimal, only unilateral (win-lose) improvements are possible.

  • It’s natural to stop when both parties get what they want; this doesn’t mean they’ve created the most value in the negotiation. Most likely the deal is not Pareto optimal, at least because it’s highly unlikely that the parties used all the information at their disposal. The initial agreement is nothing more than a safety net and should be treated as such.

  • The Pareto optimality is a theoretical concept as there’s no practical way to maximise value for both parties, as there are limits to the amount of information that can be exchanged and there are unknown unknowns: the parties themselves may not know every single bit that’s good for them. So it’s prudent to stop when the time runs out or when any new suggestions make at least one of the parties worse off.

Relationship Foundation

  • Everyone agrees that trust is important for negotiations, but the truth is that it’s not necessary. More specifically, one can have very productive negotiations without trust, although the presence of trust surely helps. [MK: think GPS vs a paper map: both will get you where you want.]

  • Many negotiations occur without trust; it takes time to build one, and even if a party develops trust towards another party over the course of the negotiation, this doesn’t negate the fact that the negotiation has started and/or progressed without trust.

  • Most of the time the negotiations without trust are the ones that a run on a win-lose basis. The parties often consider themselves enemies of each other. And behaving this way hardly builds any trust, too.

  • The rational (not naïve) solution is to ignore this chicken-and-egg game altogether and start with win-win without trust. Such behaviour applied consistently shows the other party the willingness to cooperate and act ethically. This interdependence to achieve a win-win outcome can be communicated much faster than trust and be relied on.

  • Interdependence aligns the parties’ interests towards a deal as partners, not enemies.

  • Short-term relationships: it’s tempting to use the win-lose approach for once-in-a-lifetime transactions, but many of such transactions are in fact repeated. So oftentimes a short-term win (monetary or emotional) kills the opportunity for repeated transactions.

  • It only becomes clear whether a relationship is short- or long-term at the end of the negotiation and not in the beginning. Thus, the length of a relationship is a choice, but if this choice is made too early, this either leads to the loss of value on the table or an exploitation of a naïve customer.

  • The choices of the relationship length and the negotiation approach are independent of each other.

Communication Foundation

  • 80% of observed “players” start with the wait-and-see approach (so that they can reciprocate), but many of them in fact defect close to the start in order to “protect” themselves from a possible defection of the other party. The other party is often confused as to the motivation of such win-lose attack. And thus, the race to the bottom starts.

  • One of the reasons for such misunderstanding is the incorrect assumption that the intention of one party can easily be communicated to another party in full. However, the way things are communicated may be completely inappropriate for the message sent and thus be perceived as aggression. The intent-impact gap occurs when one party assumes that another party shares a certain context with them, and this is almost never the case.

  • Everything we say, do or not do sends some message to the other party, and we don’t always know how it may be interpreted.

  • The wait-and-see approach is flawed because it depends on the first (early) move of another party. It is by definition reactive. It’s a hope that another party will be reasonable. It’s driven by the fear of losing and taking risks in the first round.

  • Reciprocation is an emotionless rational strategy aimed at affecting future behaviour of the other party; reactions are just that – responses to the past actions, often – emotional. Reciprocation means maintaining control over our actions; reaction means giving control away.

  • Tit-for-tat (see above) is a proactive reciprocation strategy. It creates the opportunity of leading another party into cooperation (not without a risk, of course). And since 80% of people prefer the wait-and-see approach (even though some of them defect), the chance is quite high.

  • The value of being proactive is that the proactive party can lead the conversation from a gridlock or non-Pareto optimal deal towards looking for (and hopefully finding) better alternatives. Hence, the risk of leading is lower than the risk of leaving it to the other party. It’s not about being naïve and putting our party in danger, it’s just worth understanding that other party’s actions may look like defection, or may be caused by fear, not by greed.

Part 3.