Negotiating Your Investments Page 8

  Now let’s learn how to derive significant power from this concept. Proper analysis and use of alternatives requires a number of steps. Good negotiators start by assessing all of their alternatives to the deal currently being discussed. It can be a lengthy list. All the possibilities should be included.

  Step 1—An Inventory of Your Possible Alternatives

  The next step is to take a critical eye to all possible other paths with the goal of identifying the very best one. Of all the things you could do if this current negotiation falls apart or cannot be concluded, which is actually the best one for you? It is very important to consider all factors; this is not just a question of money or most toys or number of beans. Don’t fool yourself into choosing an alternative that is not really best but might seem so to the outside world.

  A young Wharton graduate whose lifelong goal was to work for a prestigious investment bank on Wall Street got an offer from Greatman Stocks & Co. and dearly wanted to go there. He got into a bargaining tiff with their personnel office over moving expense reimbursement, though, and pointed out that he had an “even better” offer that paid more money from a prestigious consulting company. In addition to a high salary, the consulting firm would give him an unlimited relocation allowance. He decided that this alternative was very strong, and, when no agreement on moving costs could be reached with the folks at Greatman, he broke off negotiations and signed with the consultants. Sadly, though, he was soon in my office, weeping and depressed, to decry the terrible mistake he had made. “I badly wanted to work at Greatman,” he moaned. I had to explain to my former student that he had deceived himself by confusing “more money” with “better offer.” Alternatives should be ranked by taking into account all factors that matter, including those that are personal, psychological, and abstract.

  Step 2—Identify Your BATNA

  Once the very best alternative is identified, it gets labeled as your best alternative to a negotiated agreement (BATNA). Knowing exactly what your BATNA is gives you a powerful floor to support your negotiation effort. You will never accept a deal unless it is better than your BATNA. It forms a minimum acceptable level for you. As you will see, this is incredibly useful.

  Step 3—Strengthen Your BATNA

  Once you know what your current BATNA is, your next step is to try to improve it. Believe it or not, making your BATNA better is rather easy, and, with practice, you will become a master at it. There are two general categories of BATNA improvement. Let’s examine each in its turn.

  A negotiator can always try to take the BATNA already in hand and strengthen it. For example, a family decided to sell their home because they felt uncomfortable living in it. The old place had a number of defects, and everyone wanted something newer and more functional. A single buyer showed interest, but his bid was far lower than was hoped for. Some haggling took place over a period of weeks, but, in the end, the buyer seemed unwilling to pay a fair price for the house. All family members decided that their BATNA was to not sell and continue living there. To strengthen that BATNA, the father decided to repair the leaky roof immediately. The slow drip in the kitchen was one of the most annoying problems in the old place. Although it would not make it a paradise, fixing the leak made the home feel far more comfortable and pleasant to live in. As a result, the best alternative to selling—staying in the old home—was a better prospect than it had previously been.

  The second category is to go out and get another alternative that is even better than your current BATNA. Once this is accomplished, the new and better alternative becomes your new BATNA. By the way, your former BATNA is now another alternative but no longer your best one. With a stronger BATNA, your negotiating power has improved. Consider how much stronger would have been the negotiating position of the young grad whose goal was to work for a prestigious investment bank if he had gone out and gotten a job offer from another Wall Street firm. Even if the offer was significantly inferior to Greatman’s, as long as it was stronger than the one from the consulting firm, he would have improved his bargaining position.

  Here a little explanation may help. It is said that a strong BATNA provides the negotiator with both a sword and a shield. In other words, it allows her to be more aggressive (offense) while also protecting her from making bad deals (defense). Let’s consider the case of the young Wharton graduate more closely. He really wants to work at Greatman, but he also wants to be treated fairly and to be able to negotiate for the maximum possible advantage. Now let’s use a simplifying trick: Imagine that we could quantify the value of all his offers on a scale of 1 to 100. We will say that the offer from Greatman, all things considered, was worth 90 to him. Now we consider his alternatives. Before he was asked to work at the consulting firm, he thought his best alternative to accepting Greatman’s offer was to go to law school. He knew it would make him miserable, and so that choice gets a value of 30. He was excited to receive the consulting offer, even though it paled in comparison to working for Greatman, so it can be assigned a value of 75. When he goes out and gets a firm offer from Greatman’s competitor, a Wall Street investment firm we shall call Money Standard, his situation improves. The offer from Money is better for our grad, and so it gets a value of 85.

  Consider how this improved situation affects the Wharton graduate’s negotiating behavior. The defensive shield of a stronger BATNA protects him. Without it, the failure of the Greatman deal would see him falling from a situation worth 90 to one he values at 30—a long and painful fall that he will do almost anything to avoid. When his BATNA was strengthened to something he valued at 75, though, he had not that far to fall in the event of not reaching agreement with Greatman. He is much safer if losing the Greatman deal costs him only a little instead of a lot. We can see, as well, that when he improved his BATNA to one worth 85, he was in an even more comfortable position.

  Think, as well, about the aspect of a stronger BATNA that we referred to as a sword. Just how assertive or bold might our young grad be when he risks losing his offer worth 90 and falling all the way to an alternative he thinks is worth 30. He dare not take a risk. When he strengthens his BATNA to a 75, however, he may be less fearful and more able to negotiate forcefully. After his best alternative is further improved, all the way to something he valued only a little less than the Greatman offer, he had little to lose. He might have the courage to bargain without fear. His confidence, skill, and cleverness can all be let loose, now that he knows there is a solid safety net right below him.

  It is worth noting that not every value or benefit can be reduced to a number. The “simplifying trick,” to assign everything a quantitative value, was employed solely to teach the concept. In a real-life negotiation, you must find a way to value, weigh, and compare every single aspect of the primary deal and its alternatives. Don’t overweight those that can be easily measured or give short shrift to the ones, like comfort, feelings, or personal well-being, that are hard to calculate.

  Step 4—Estimate What the Other Side’s BATNA Might Be

  Make an intelligent guess as to the other negotiator’s BATNA.

  Once you have assessed your current BATNA and worked to strengthen it, the time comes to begin thinking about your negotiating partner’s best alternative. While you cannot know exactly what she sees as her best choice if agreement with you cannot be reached, you can make an educated guess. You are already thinking hard about her situation and how things look from where she stands. Furthermore, you are asking as many questions as possible to gather even more data. Consider asking her. Of course, you must treat her answer with care since she has strong incentives to lie about this. Clever questions, though, can shed a great deal of light on how the other side may be evaluating its own situation.

  Having some idea of what the other side sees as their BATNA will be of real help to you. Do you expect them to be comfortable with no deal or to dread that outcome? Will they try hard to find agreement with you, or can they afford a take-it-or-leave-it attitude? These are questions you really
want answers to, all the while reminding yourself that you are working with estimates and educated guesses, not hard facts.

  Not only will an idea of what their BATNA might look like help you approximate relative negotiating strength but also it will give you the opportunity to alter it. Just as you worked hard to strengthen your own best alternative, so can you think about weakening theirs.

  Step 5—Consider Whether You Can Weaken the Other Side’s BATNA

  Can you weaken their BATNA? Sometimes. While strengthening our own best alternative is fairly easy and should be done in just about every case, reducing the value of theirs can be challenging. It is even harder to make their alternative weaker in an ethical way. Nevertheless, there are occasions where it can be achieved, and a good negotiator always gives the matter due consideration.

  A university-based pharmacology group developed a new process for a certain drug and was negotiating its sale to a multinational pharmaceutical company. Their only concern was a scientist known for his skepticism about the particular pathway the new process used. He was creating a whole new mechanism, and, while his method was several years from completion, waiting for this alternative might well be the buyer’s BATNA. Could they weaken this alternative? The group decided to hire the doubting scientist as a consultant on their project. They paid him a hefty fee, but, as part of his contract, he could not compete with them or discuss their method publicly for two years. Effectively, they had taken the alternative away from the pharmaceutical company, leaving them with their next best alternative to serve as a weaker BATNA.

  A more gruesome example comes from Francis Ford Coppola’s The Godfather. In that movie, the consigliere is sent to Hollywood to negotiate getting a particular movie role for the godson. The movie producer, who will make the decision, is offered help with some labor troubles he is having on his movie set. “The Godfather would like to do you a favor,” the consigliere tells him. Of course, in return he expected the favor of the role going to the godson. After a day of low-level negotiating, the producer went to bed believing that he would reject the deal. As anyone who has seen that movie well remembers, the producer awakens to find the severed head of his favorite racehorse in the bed with him. Before retiring the previous evening, the producer believed that his BATNA looked something like this: He would have a strike on the movie set, and the Godfather would not be pleased with him. The producer believed that, while not pleasant, he could live with that BATNA. The message sent with that severed horse head was this: “You have misunderstood your BATNA. It is much worse than you have been assuming. Now that you understand it correctly, do you care to proceed with it? Or would you rather make the deal?”

  As this example suggests, it can be quite hard to actually weaken the other side’s BATNA. You do not have the kind of resources that the fictional Godfather could muster. Furthermore, few of us would even consider the use of such brutal, illegal, and immoral tactics. The concept, though, is clear and useful. If you can weaken the other side’s best alternative you will have, in effect, made yourself relatively stronger.

  Here is a slightly silly example but one that a group of my undergraduates tried out. An agreement hinged on a fraternity’s supplying ice cream to the neighboring sorority. When the negotiation got heated, the young woman made clear that they could simply bypass the brothers and go to the local ice cream shop and buy the “moose tracks” flavor in question. While the discussion dragged on, one fraternity member was secretly dispatched to buy out all the “moose tracks” ice cream from the shop. When the deal was done, the fraternity’s negotiator challenged this counterpart that her BATNA was not as strong as she thought. Of course, this story turns on the fact that rivalry between these two groups was so intense that no expense would be spared in trying to best each other. Woe unto the businessman who tried this particular technique.

  Work to Shape Their Perceptions

  Having identified our best alternative, strengthened it, made an educated guess about the other side’s BATNA, and considered weakening it, we have one more thing to consider. The leverage that comes from having a stronger alternative than the other side hinges on perception, not facts. You are in the better position as long as the person sitting across from you thinks you are. Of course, this can be a two-edged sword in that you may actually have a stronger alternative, but they may not know it.2 It may be necessary to find ways to show her your willingness to walk away from the deal because you have something else available that is of almost equal value to you.

  Mother Nature has incorporated this idea into the defense systems of some animals. In a confrontation between two elephants, the smaller one may flare its ears in an attempt to look bigger than it really is. In a similar vein, the Wizard of Oz urges Dorothy to focus on the giant apparition before her and “pay no attention to the little man behind the curtain.” Notwithstanding the maxim that “size doesn’t matter,” it may sometimes be important to convince the other negotiators that yours is bigger. Sometimes perception can play a bigger role than underlying facts, particularly when some of the facts are subjective or not readily apparent.

  In the end, though, your BATNA is as strong as your own true preference to use it. If you will gladly live with your alternative, you are in a strong position regardless of what anyone else might think about it. If John Lennon was happy to forgo another record deal in favor of just sitting in his apartment and “watching the wheels go round and round,” he was in a very strong position, even though anyone else in the world would have jumped at the chance for the music contract he was turning down.

  Be Careful Not to Rely Too Much on BATNA, Especially Where Relationships Are Important

  Understanding and harnessing the power of BATNA is one of the most important things a negotiator can do to increase her power in a negotiation. Indeed, it can be so potent as to blind us to some negative effects. I have long studied the mismatch between self-evaluation and third-party ratings of negotiators. Or to put the matter in plain English, why do some folks think themselves superstar negotiators when everyone else finds them ineffective and unpleasant to deal with?

  In particular, those with a competitive negotiating style are far more likely to rate themselves good or excellent while outside evaluators see them as less effective. What might explain this anomaly? It took me a long time to discover that the self-evaluators were not taking into account deals that they were never offered or that they unwisely walked away from. They were ranking themselves based only on the outcomes of those deals they completed. In other words, they got good numbers when they made an agreement but lost out because many good prospective deals were not being made.

  The confidence that comes from knowing you can walk away from a deal, with only slight diminishment in your results, can become a strong internal motivator. Why should I work hard to persuade you, compromise with you, or build a better arrangement with you, when I can just go on to my alternative? It becomes a little too easy to just walk away. Indeed, strengthening one’s BATNA and then just moving on to it can become something of a habit. This might work fine for my magnificent Wharton students who are juggling four job offers. Consider, though, how destructive it could be in a marriage or a partnership. When people are strongly bound together for reasons that transcend a mere financial relationship, walking away should probably be something of a last resort. Although a commodities dealer might think BATNA is the greatest thing since sliced bread, a marriage counselor might find it distasteful. Remember that really good negotiators, as opposed to those who merely delude themselves, do not substitute a strong BATNA for doing the hard work of finding a way to make the primary deal succeed in a way that is good for everyone.

  Until now, this book has offered skills and techniques for you to use throughout a negotiation. The next four chapters lay out the four stages of a negotiation and explain what you should be thinking about in each successive phase.

  Any serious negotiation begins long before the parties take a seat at the metaphoric negoti
ating table. In his Bargaining for Advantage, G. Richard Shell refers to the first phase as the strategy preparation stage.3 He goes on to outline the three subsequent stages of negotiation: the second is exchanging information, the third is opening and making concessions, and the final phase is closing and gaining commitment. Shell clarifies that “in complex bargaining encounters, people vary the sequence and pacing of these steps.” Skilled negotiators, he says, are “alert to their counterpart’s pace, striving to stay ‘in step’ as the process moves along.” Keeping this requisite flexibility in mind, Shell’s four basic stages give us an organized and thorough framework for making our way through a negotiation.

  Chapter Summary

  The relative negotiating power of each party comes from how easy it would be to walk away from the deal being discussed. The less you mind walking away—the less you need the deal—the more power you have relative to your partner.

  Good negotiators first assess all of their alternatives to the deal at hand, taking into account all factors, including personal, psychological, and abstract concerns.

  Once every realistic alternative has been considered, the one currently judged best is assigned the label BATNA—your best alternative to a negotiated agreement.

  BATNA is dynamic. Indeed, it changes frequently based on both actions you take and circumstances beyond your control.

  Never accept a deal unless it is better than your BATNA. In effect, your BATNA forms a minimum floor below which you will not go.