Negotiating Your Way to Better Profits

You may not consider yourself a negotiator, but according to Harvard Business School Professor Michael Watkins, you are. “Whatever your business, much of your time is spent negotiating,” he says. “There is no skill more essential to success for a business owner or manager than the ability to carry out a successful negotiation.”

Jesse Hansen, owner of Next Level Electric, an electrical contracting firm based in San Diego, agrees. “It’s not solely the amount of money involved,” he says. “It’s also very important that your customer gets what he needs while staying within his budget. That’s all part of a successful negotiation.”

They are both right, of course. Whether you’re dealing with suppliers, customers, your landlord, employees, financial sources, or prospects, you’re involved in the complex challenge we call negotiation — and your level of skill in this area directly affects your business success.

For Randy Kizer, owner of Brown Service Co., an electrical contracting firm based in Richland, Texas, working with customers and prospects is his most challenging form of negotiation. Although he sees negotiating skills as a must for contractors, like Hansen, he feels it’s important to remember that there is a lot more to negotiating than price. “I won’t arbitrarily cut my price just because a competitor has underbid me,” he explains. “We’ve been in business here since 1952, so we offer stability and the knowledge that we’ll be around if anything goes wrong. I will negotiate; if I can adjust my price, I’ll have an explanation. I don’t want to create the impression that we’re only out to get top dollar.”

Watkins, who is a nationally recognized expert on business negotiations, teaches his students to break the negotiating process down into four fundamental steps.

Diagnose the situation — “The first step in preparing to negotiate from a position of strength is to diagnose the particulars of the situation thoroughly,” says Watkins. In particular, you need to learn:

Who are the players? Who will (or could) participate? — The key parties to a negotiation may seem obvious. Sometimes they are, but not always. There may be players in the background who can influence the outcome, or new players may enter the discussions and unexpectedly influence talks.

If you’re negotiating with an equipment supplier or a prospective client, for example, the cast will probably consist of just the two of you. However, if you’re negotiating with an organization, you need to know if the person or persons you’re dealing with have the authority to make a deal.

What are the rules of the game? — A clear understanding of the “rules of the game” will be a big advantage in your next negotiation. There are basic codes of conduct that apply to all business negotiations. Although these rules deal largely with courtesy, diplomacy, and other aspects of behavior on the part of the participants, there are other important factors as well.

Watkins suggests you take time to consider the following questions before you enter into any negotiation:

What laws and regulations might apply here?
What social conventions will shape the parties’ behavior?
Do professional codes of conduct apply?
What other rules of the game may influence the other parties’ behavior?

A clear understanding of these rules will help you start off in a position of strength.

What are the issues that will (or could be) negotiated? — “It’s easy but dangerous to treat the agenda as fixed,” says Watkins, who explains that by doing so you risk shaping the course of events in your favor.

“The agenda — the set of issues the parties will decide to negotiate — is itself subject to negotiation,” says Watkins. “No matter how simple and obvious the basic issues to be negotiated appear to be, it is worthwhile to probe beneath the surface.”

You should also identify and deal with what Watkins calls toxic issues or potentially volatile issues that have a high emotional content. “It may be prudent to defer a toxic issue until the other issues are worked out,” he says.

Defining your BATNA — The next step is to define your walk-away position. Negotiating experts Roger Fisher and William Ury, who wrote the book, “Getting to Yes: Negotiating Agreement Without Giving In,” call the walk-away position your best alternative to a negotiated agreement (BATNA). In other words, a BATNA is a planned course of action that you can take in case you are unable to reach an agreement. Depending on what’s at stake, your BATNA might mean going to court, refusing to renew your lease, or changing suppliers. Taking time to think through your BATNA will clarify your alternatives and strengthen your negotiating position.

What is the least you’re willing to accept to enter into an agreement? Establishing this value as a benchmark — and keeping it clearly in your mind — will help you avoid getting so caught up in the heat of negotiations that you turn down an alternative deal that was better than your walk-away position.

Shape the structure — Once you have diagnosed the situation — and have a clear idea of the players, the issues to be resolved, and the rules to be followed — it’s time for you to shape the structure of the negotiations.

According to Watkins, it’s possible to shape the structure of negotiations because they are to a degree socially constructed. This means that key elements, such as the participants and the issues agenda, are not fixed in advance but are influenced by the negotiators and their perceptions.

“The biggest mistake is to approach the ‘game’ as fixed,” he says. “Like most negotiators, people in business focus too much on what will happen at the table and not enough on influencing the context in which deliberations take place. You should pay more attention to who is, or could be, involved as well as what’s at issue and how the situation should be framed.”

Watkins calls this step “design work.” Here are the key items he feels you should address before negotiations begin:

Self assessment — In past negotiations, have you tended to accept the situations and structures as the other party presented them? If so, you should determine not to fall victim to that pitfall again. One simple way to shape the game is to invite other players into the negotiation. For example, during negotiations with your landlord for a new lease, you might invite your lawyer or accountant to join in. You must also take great pains in building, maintaining, and improving your BATNA. Knowledge of your walk-away position will add hidden power to your position.
Setting the agenda — Virtually all negotiating professionals agree that influencing the makeup of the agenda is a crucial step in successful negotiations. By helping to define the issues to be discussed and setting their priorities, you put yourself in a position of strength when the discussions begin. “Good negotiators don’t just play the game,” says Watkins, “They shape the game.”
Controlling information — Information is power. Arguably, there is no other activity where this old axiom holds truer than in the practice of negotiating. Exerting control over who gets access to what information is another way to gain a position of strength in discussions. In negotiating a new lease with your landlord, for example, you would probably want to share the fact that you have been looking at another location. On the other hand, if you know of a potential tenant who would like to move into your building, sharing that information would be a poor strategy.

Managing the process — The third step in breakthrough negotiations is determining the best way to handle the actual face-to-face negotiations. The important steps in this phase include:

Sensitivity to early interactions — “How a negotiation begins tinges everything thereafter,” says Watkins. “Initial impressions, based on limited information, persist and are resistant to change.”

Watkins stresses that mutual respect at the beginning of the process increases the likelihood of eventual agreement, but bad blood at the beginning of the discussions can poison all that follows. In what he calls “irreversibilities,” Watkins observes that negotiators often walk through doors that lock behind them. In particular, he cautions against trying to take back a concession once you have made it. Any action that undermines trust is likely to provoke an irreversible change in the attitude of the other participants.

Tipping points — You should keep yourself aware of thresholds in negotiation that Watkins calls “tipping points.” These are the sensitive points in the talks where even tiny concessions or refusals can lead to major shifts in positions. “You should always be aware of your own emotional thresholds and coping mechanisms to avoid being pushed over the edge,” he says. “Be very careful when raising issues that are hot buttons for the other side.”
Emotions — Emotions, either real or feigned, play a part in most negotiations. “A timely display of anger, for example, can demonstrate resolve so long as it is employed infrequently,” says Watkins.

However, you must keep any display of anger under careful control. Emotional outbursts of any sort can easily escalate, generating emotional conflicts that make rational judgments next to impossible. “Once strong emotions are triggered, they dissipate slowly,” cautions Watkins. “The psychological and hormonal effects of anger can’t simply be turned off; the result may be temporary inability to think rationally.”

In their book, Fisher and Ury maintain that the ideal stance is to separate the people from the problem. However you do it, keeping your emotions under tight control during negotiations will give you an important advantage. As one negotiator puts it, “When you lose your temper, you lose.”

Assessing the results — Once negotiations have begun, Watkins suggests that you step back periodically to evaluate how well you are doing. While it’s natural to do this between negotiating sessions, he says that you should also take score in the heat of battle. Ury calls this “going to the balcony” — the ability to look at your situation from a distance.

“Appraising an ongoing negotiation is partly about whether you are meeting the goals you set for yourself,” says Watkins. “Clearly identifying your goals while preparing to negotiate is only half the battle; you have to keep those objectives firmly in mind as you go forward.”

Among the questions you should ask yourself at this stage are:

Do you have a clear view of the situation? — A clear understanding of the negotiating situation is essential to bargaining success. If your view is incomplete or flawed, then you are unlikely to meet your objectives. This is the point at which you should reexamine your assessment of the points discussed under diagnosing the situation: Who are the parties? What are the rules? What issues will be negotiated?
Are you building your BATNA? — A strong BATNA builds bargaining power. Ask yourself whether there are alternatives to a negotiated agreement that you haven’t thoroughly explored.
Are you channeling the flow? — “Channeling the flow of a negotiation is like directing the course of a river,” says Watkins. “You can dam it, or you can reroute it.”

Inevitably, one of the parties to a negotiation will do more than the other to control the agenda of issues and their priorities. According to Watkins, the biggest mistake you can make is to approach the game as fixed. “Don’t allow the other party to channel the flow by default,” he advises. “Make certain that you are an active participant in this important part of the negotiation process.”

Are you learning individually and organizationally? — Every negotiation is an opportunity for you to learn, making you better prepared for your next negotiating experience. However, learning does not come simply because you went through a negotiation. “Learning takes place only when you take the time to reflect on your experience,” says Watkins.

Kizer has learned this lesson from experience, as he remembers a rather large electrical project for a residential customer where his firm gave the initial bid for the project. “We were higher than the other two bids, yet the customer wanted us to do the project because of our reputation, technician background checks, uniformed personnel, etc.,” he says. “I discussed the other bids, asked specific questions about each part of the project, and found some things the other contractors were vague about doing. That raised a red flag, giving me a legitimate reason to decrease the price.”

At that point, his firm was close to the second highest bid (he had weeded the bottom bid out because it was too low). “I used the sales training I had several years ago involving the ‘if I, will you’ question,” he says. “I offered an extra to the project that could be done at no real cost to us, but presented it in the form of a closing question: ‘If I install this extra at no charge to you, will you give my firm this project?’ The customer accepted, and the project was ours.”

This lesson taught Kizer to always look for a plausible reason to drop the price, even when he feels he’s given the best quote.

Hansen remembers a similar negotiation strategy on his firm’s biggest job last year. “I knew from having worked for the client before that some extras were going to be needed in addition to what was on the plans,” he says. “I went in with a high number, and when they came back to me, I knew I had a little room so I threw in some extra work they were asking for a separate quote on. That sealed the deal.”

Even if you feel you’ve quoted a fair price, Hansen urge you to remember that the other party may not agree. That’s why your offer must always leave you a little room for negotiation.

When negotiations are over, Watkins recommends asking yourself: What went well? What could I have done better? What did the other side do well, and what did I learn from them?”

Lynott is a veteran freelance writer who specializes in business management. He can be reached at [email protected].