RISKS RELATING TO NEGOTIATION STRATEGY AND CONTRACT IMPLEMENTATION

A major and often overlooked risk arises when contract negotiators, in their zeal to claim value for themselves, overlook opportunities to create value that will improve results for both sides. We will first describe a negotiation exercise entitled "the House on Elm Street” (which is used by one of the authors in classes for business executives and MBA students) to illustrate a strategy for minimizing this risk. in essence, this strategy requires moving from a position- based to an interest-based negotiation strategy. We will then examine another major and costly negotiation risk that arises when there is a separation between a deal-making and a deal- implementation mindset.

MISSING VALUE-CREATING OPPORTUNITIES DURING THE NEGOTIATION PROCESS

In simplified form, the House exercise involves a negotiation between the owner of an old Victorian house that has a large back yard and a company that wants to purchase the house, tear it down, and use part of the back yard for extra parking. The seller needs at least $150,000 for the house so she can purchase an assisted living apartment designed for senior citizens. She is proud of the house and wants the buyer to preserve it.

Because of concerns that the owner might not sell to a company that wants to tear down the house, the buyer negotiates through a secret agent. (That is, the seller thinks that the agent is buying the house for family purposes and does not realize that the agent represents the company.) the buyer is in the business of constructing assisted living apartments designed for senior citizens and has a large inventory of unsold apartments. It is willing to pay up to $250,000 for the house.

When this exercise is debriefed in class, the results are predictable. Students acting in the roles of buyer and seller focus on price (sellers obviously want a high price for the property and buyers want to pay a low price) and they typically negotiate deals that range from $150,000 to $250,000, with results clustering around $170,000. they are then asked to consider an alternative strategy that focuses on identifying the interests of each side and builds on those interests to create value. this is the philosophy advocated in the classic book Getting to Yes by Fisher, ury and Patton.[1]

When they move beyond the position-based focus on what the other side wants (high price versus low price) to the interest- based focus on why the other side is making its demands, they realize that the seller needs the purchase price to acquire an assisted living apartment and that buyer can meet this need with one of its large stock of empty apartments. they also realize that the buyer can meet its real estate needs by using only a portion of the back yard without tearing down the house, which is important to the seller. As a result, the seller can obtain an apartment worth more than what she could acquire for the typical negotiated purchase price of $170,000, while the buyer's purchase price is reduced because its building costs are less than the value of the apartment to the seller. The buyer is also better off with this solution because it can sell the house and the unused portion of the yard to a family, thus reducing its costs further. So, through the adoption of an interest-based strategy, the results are better for both sides.

in order for this strategy to succeed the two sides should attempt to avoid being trapped by the mythical fixed pie assumption. As articulated by Harvard professor Max Bazerman,[2] negotiators often assume that they are fighting over a fixed pie and that their interests are in direct conflict. By focusing on interests, participants in the House exercise realize that not all interests are in conflict: the seller needs an assisted living apartment and the buyer can easily meet this need. As a result they can create a larger pie that benefits both sides.

  • [1] Fisher, R., ury, W. and Patton, B. (1991) Getting to Yes: Negotiating Agreement Without Giving In, 2nd edn. New York, NY: Penguin Group.
  • [2] Bazerman, M.H. (1994) Judgment in Managerial Decision Making, 3rd edn. NewYork, NY: John Wiley.
 
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