Negotiating Your Investments Read online

  Be Resolute about Claiming Your Fair Share

  Good negotiators, though, insist on claiming a fair share of the value created. How can we start to measure what might be fair? In Chapter 3, we considered authoritative norms and standards as well as objective criteria. In other words, what outside measures of fairness can we muster for the effort? With diligence, we will find many such measures and use the best ones to guide us toward a fair, legitimate, and workable solution.

  Think of Warren Buffett and Goldman Sachs bargaining over the exact terms of Berkshire’s investment. Even though it was going to create a great deal of value for each side, they did not simply make things up or pull numbers out of the air. While there is no public record of their secret negotiations, we can assume that both sides invoked precedent, industry standards, and economic facts as they searched for mutually acceptable conditions and stipulations. Neither side would let the other claim all of that value. Their discussions can be seen as an effort to find a fair division of it. In the case of Buffett and a top Goldman negotiator, their experience and skill allowed them to ensure that the other side was not walking off with too big a slice of the newly created pie. You must be alert to making sure of the same thing. Keep in mind that nothing less than a fair share of the mutually created value can be considered a good outcome.

  Chapter Summary

  During the bargaining phase, offers are considered and counteroffers made. This phase is about both creating value and claiming a fair share of the value that has been created. Good negotiators do both things simultaneously.

  Trade those things you want that cost the other side little to give in exchange for things they want that you can give at little cost. These trades benefit everyone. They create more value.

  Such trades should be explored with conditional language. Good negotiators hunt for trades that might be acceptable and test for terms that might be agreeable, without committing to them. Such proposed deals are framed using if–then language to test what is possible.

  Begin by exploring offers that are at the most favorable end of the range of arguably fair agreements. Be sure you can justify your proposals with an objective standard.

  When offering concessions, make it clear that you are doing so. Make each concession slowly and carefully.

  Insist on claiming at least a fair share of the value that the deal creates.

  Notes

  1. G. Richard Shell, Bargaining for Advantage: Negotiation Strategies for Reasonable People, 2nd ed. (New York: Penguin Books, 2006), 156.

  2. Tami Luhby, “Buffett’s Berkshire Invests $5B in Goldman,” CNNMoney.com, September 24, 2008.

  3. Roger Fisher, William Ury, and Bruce Patton, Getting to Yes: Negotiating Agreement Without Giving In, 3rd ed. (New York: Penguin Group, 2011), 62.

  4. Alan A. Benton, Harold H. Kelley, and Barry Liebling, “Effects of Extremity of Offers and Concession Rate on the Outcomes of Bargaining,” Journal of Personality and Social Psychology 24, no. 1 (1972): 73–83.

  5. Shell, Bargaining for Advantage, 164.

  6. David Lax and James Sebenius, Manager as Negotiator: Bargaining for Cooperation and Competitive Gain (New York: The Free Press, 1986), 29.

  Chapter 10

  The Closing and Commitment Phase

  The bargaining stage of a negotiation draws to a close as you and your partners prepare to enter into an agreement. Now you arrive at the final phase of the process, in which you are looking to memorialize what has been decided, shake hands, and start implementing all that has been promised.

  From the very first chapter, this book has argued that you should be focused on what you are really trying to achieve. That concept makes a good guide to thinking about the final phase of a negotiation. What you are really seeking, in any deal, is an agreement that is durable, realistic, and helpful for all parties. As you come to the close of a negotiation, you are seeking to structure the agreement to ensure those characteristics.

  Let’s take a minute to think about what you are not trying to do. Surely you are not seeking merely to make and listen to a lot of promises, get signatures on a piece of paper, or have everyone voice assent to some deal they have little intention of following through on. In one of the most infamous agreements in the twentieth century, British Prime Minister Neville Chamberlain returned from shaking hands with Adolf Hitler and declared that he had secured “peace for our time.” History recalls that the German had no intention of keeping his word. Chamberlain had gotten an agreement but had not forged any kind of durable commitment. He got what he sought but failed utterly in achieving what he, and his country, really, really wanted.

  You Want Promises They Are Sure to Keep

  As a skilled negotiator, you are seeking commitments that are likely to be fulfilled by everyone involved. You seek promises that you can have every expectation will be kept. What this means, of course, as discussed in Chapter 2, is an agreement that meets the other parties’ interests. They will keep their promises, and complete their part of the deal, if it is in their best interest to do so.

  Thus, the target for concluding a negotiation is an agreement wherein it makes perfect sense that they will keep all the promises they made. If you put yourself in their shoes, does the deal look like a good one that they would be willing to defend to their friends and colleagues and even to their critics? Do they have a lot to lose if the deal later falls apart? Examining these questions from their standpoint, rather than your own, is a powerful technique for understanding the impediments to strong commitments.

  As negotiators approach the close of a long and challenging process, they may be hesitant to put the finishing touches on the deal. For reasons of uncertainty, fear, or greed, those last few steps can be hard to walk. G. Richard Shell instructs us on several ways to get over these difficulties.1 Understanding the scarcity effect, overcommitment, and loss aversion (discussed later) will assist you with your own reluctance and in dealing with your partners’ foot-dragging.

  Create Scarcity to Enhance Their Enthusiasm for the Deal

  Both economists and psychologists study scarcity. Just as a shortage of something drives up its price in economic terms, so, too, does it increase how badly most people want it. Simply put, humans place a higher value on a thing that is scarce and a lower value on something plentiful. Among the situations that create such an effect are time, popularity, and the risk of loss. Thus, negotiators respond to what is referred to as a closing window of opportunity. Students finishing their MBA know this all too well, as many recruiting firms make exploding offers that terminate on a certain date. As we learned in Chapter 2, most negotiators wish to bind the other side while keeping their own wiggle room. When a proposal or offer is structured to end at a certain time, though, the scarcity effect adds pressure. As we have all heard in a million ads on television, “this offer is for a limited time.”

  Another factor that causes scarcity is competition. When everyone else wants something, there is a tendency for us to want it more, too. We see this all over the commercial sectors of our world, particularly in marketing campaigns. Making it clear that everyone wants the item for sale can make even those with little use for it determined to buy it. Nobody wants to be left out. Watch what happens the next time you are in the supermarket, and notice that the big sale item of the week is almost gone, with just a few left on the shelf.

  People seem to be hardwired to greatly fear loss. (Indeed, a number of experiments have shown that we tend to value a gain less than we dread an equivalent loss.) This often includes the loss of the deal being worked on or the danger that the other negotiator will just give up on us. Shell points to a tactic of walking out2 as a powerful example. A take-it-or-leave-it tactic or an ultimatum in a negotiation can raise the scarcity effect to sky-high levels. Of course, such approaches pose great risks for the negotiator employing them. As is often the case, scarcity can work its pressure on all sides.

  Overcommitment and loss aversion can be viewed as two sides of the sa
me coin. When a negotiator has worked hard trying to get something, she is loath to quit or cut her losses, even if that means overpaying. Business students are taught to ignore sunk costs—money spent that is already gone—but find it very hard to do. We have a terribly strong urge to get back what we have put in. Time and again, we see warring nations refuse to withdraw or accept peace, even after their objectives are no longer attainable, because of the blood they have already spilled—even though, as their critics point out, continuing a conflict will bring only more deaths. This topic, escalation of commitment, is frequently studied by game theorists and is demonstrated in negotiation courses by dollar-bill auctions and other cases. Loss aversion, on the other hand, is the fear driving such escalating commitment. Once we have invested our time, money, effort, and self-esteem into a deal or enterprise, we are terribly reluctant to suffer the loss of it. This excessive fear of loss is subject to manipulation. Shell warns us about nibblers who demand a last-minute concession to keep the deal alive. He also points out that phrases like “we have come so far” and “let’s not lose this after all this effort” are designed to heighten this effect.

  Good negotiators use these human tendencies to their advantage. They also refuse to be bullied or manipulated by their use. Thinking hard about issues related to closing the deal and planning carefully in this regard can reap great rewards. Of course, such careful preparation necessarily must be done in advance. When the pressure is on, it is frequently too late to do a good job.

  Prepare to Be Patient

  One of the best things you can do in the closing and commitment stage is to be patient. Try hard not to be in a hurry. The negotiator who is not rushed has a favorable position and is free to work for the best possible deal. She is much less vulnerable to the pressures that necessarily grind down someone who needs the agreement to happen right now. Some methods to help make this attitude possible include starting early, not procrastinating, and avoiding negotiating when you are in a needy state of mind. Just as you should avoid the grocery store when you are very hungry, you should not negotiate important deals when you are in a got-to-have-it state of mind. The best attitude in the world, where possible, is to be able to say, “I have all the time in the world to find the very best possible solution.” Time is going to work to someone’s advantage in most negotiation situations; work hard to make sure that the person is you.

  The tools and techniques that advantage you in the final phase of a negotiation require thought and planning. Thus, the time when the best negotiators begin doing the work of the last phase of a negotiation is in the first phase. The preparation stage, discussed in Chapter 7, is when you should be plotting out the issues of gaining a lasting commitment and getting the other parties to closure. Once again, we see that the best way to begin the process of negotiation is by thinking about the end.

  Chapter Summary

  You want an agreement they are likely to keep. This means that fulfilling their end of the bargain aligns well with their best interests. A deal that they are unlikely to live up to is of little value to you.

  The scarcity principle can be a useful tool in getting the other side over their last bits of hesitation.

  The best negotiators do everything they can to avoid being in a rush. They start preparing early, do not procrastinate, and avoid negotiating when they feel vulnerable. Use time pressure to your advantage, and work hard to avoid having it used against you.

  Notes

  1. G. Richard Shell, Bargaining for Advantage: Negotiation Strategies for Reasonable People, 2nd ed. (New York: Penguin Books, 2006), 175.

  2. Ibid., 181.

  Chapter 11

  The Problem with Agents

  I hope this book is building your confidence as a negotiator. With better skills and a stronger technique, you can be less reliant on others to bargain for you. Nevertheless, our lives frequently put us in a position where someone else is conducting a negotiation on our behalf. We turn to lawyers, brokers, managers, and dealers, among others, to act for us.

  There are a number of reasons that might justify using an agent to negotiate in your stead. Among these are special expertise, emotional detachment, influence, and just the plain old ease of having someone else do it for us. Each of these has its proper time and place. On the other hand, it can be all too easy to simply assume that retaining an agent is a good idea.

  Sometimes Employing an Agent Is Wise

  Of course, sometimes the agent has so much specific knowledge about a subject that she is indispensable. Not only wouldn’t you want to pursue a major lawsuit without a lawyer but also you probably couldn’t do it. In other situations, the added knowledge is not indispensable but is very helpful. Consider, for example, how much more a skilled Realtor knows about the local real estate market than you do. Then there are agents whose special skill is not knowledge of subject but rather influence. Their expertise is not the what but the who. All those lobbyists on K Street in Washington command huge salaries because they know exactly the right person to talk with and can get access to those people.

  Sometimes the special capability is procedural. Some people know precisely how certain special bargaining mechanisms work. For example, a labor negotiator may have so much experience in the stylized rituals of collective bargaining that it would be folly to pass up his guidance. You should be wary, though, of those who claim special expertise as negotiators. In my experience, very few of them have any significant talent or skill. Just because someone negotiates frequently does not mean he is good at it.

  Another possible reason to engage agents is their detachment. There are situations where the emotional significance of a matter makes it very unwise for someone who cares deeply to negotiate for herself. Even those lawyers who, because of special negotiation training, are superstars know better than to handle their own divorces. What they could do brilliantly for someone else they simply cannot handle for themselves. A divorce advocate or mediator can be useful precisely because he does not care personally about the individual situation.

  Often Employing an Agent Is Foolish

  With all that said, however, there are some significant problems with agents. First of all, using them is expensive and adds to the overall cost of any deal you make. They also increase the complexity and communication challenges of a negotiation. Invariably, things go more slowly if agents are involved. Finally, there are a whole series of troubles related to conflicts of interest, asymmetries of information, and divided loyalties. Let’s take a hard look at some of these difficulties.

  As with any skilled work, agents of all types charge for their services. Sometimes they charge a great deal. This is particularly true in situations where either the value of their work or the exact amount of their fee is difficult to determine. Any charges and costs must, in the final analysis, be added to the overall price of the deal. Particularly concerning are those agents whose fee might be far higher than whatever value they are adding.

  An accountant who charges $6,000 to take on the IRS may be worth a great deal to you. If at the end of the day, though, he is able to get the assessment of what you owe reduced by only $4,000, you may be very unhappy with him. To offer real usefulness, the agent must produce more value for you than he costs you.

  Furthermore, the extra drag agents impose extends beyond money. There may also be reductions in speed, accuracy, and efficiency. It is almost inevitable that communications will be warped by having to pass through more people. This can be demonstrated by playing the kindergarten game of telephone, but it is just as true for a chain of adults: The more ears and mouths a secret must traverse, the more distorted it becomes. Furthermore, additional players mean time delays and a slower overall pace. Even if everyone is in town, at their phones or computers, and paying attention, things do not go as quickly as they would with one-on-one communication. When you add the difficulties of scheduling, double-booking, and distractions that seem to be the sine qua non of modern life, you are looking at a communications tra
ffic jam.

  Such a slowdown invariably means that it will take longer to reach an agreement. While this is not always bad, it can sometimes be a significant cost. If time is money, then we haven’t got all day. When working on a time-sensitive deal, the careful negotiator may think twice about adding more bodies, opinions, and telephone numbers into the mix.

  Are the Agent’s Interests the Same as Yours?

  The most disturbing problems in working with agents, though, have to do with conflicts of interest and divided loyalties. Does the person negotiating on our behalf have the same preferences, interests, and priorities as we do? The answer, of course, is sometimes yes and sometimes no. Where they differ, though, can be sources of real trouble.

  Difficulties can arise over who really controls a negotiation. In theory, of course, the principal is the boss. The agent is charged with following instructions and advancing the agenda of her client. In reality, though, it is the agent who is on the ground and working with the other parties. It can be very easy for the one actually conducting the negotiation to manipulate situations and shade meanings to exercise excessive power. Where there are differences in agenda, incentives, constraints, or ethical norms, the risk increases that an agent may steer a negotiation in directions very different from the desires of the principal.