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Negotiation

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Negotiation
Definition and concept
What is negotiation?
‘The process through which two or more parties who are in conflict over
outcomes attempt to reach agreement. It is the constructive, positive alternative
to haggling or arguing; it is aimed at building an agreement rather than winning
a battle.’

Pillutla, M. and Nicholson, N. (eds). (2004). Negotiation: how to make deals and
reach agreement

When does negotiation occur?

Negotiation can occur in any business situation, but people negotiate in everyday
situations outside of the workplace. It occurs when there is more than one
possible outcome from a situation in which two or more parties have an interest,
but they have not yet determined what the outcome will be. For example,
negotiation occurs between a buyer and seller in the purchase of a second hand
car, or even between groups of friends when they decide which film to see at the
cinema.

Business negotiations can include:

• producing deals with suppliers, partner businesses or customers

• inter-departmental or team discussions to determine aims, processes and
resources
• management and staff discussions to discuss job priorities and workload
• discussions between management and trade unions, for example, rates of pay
• recruiting new people to the business, for example, interviews.
In a way, both business relationships and personal relationships are shaped
through the process of negotiation. Success in both business life and personal life
depends on having good negotiation skills. In practice, personal negotiations
require essentially the same skills as business negotiations.

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Context
CIMA students are unlikely to study Negotiation for their professional
examinations, but they will become involved in negotiation at all stages during
their professional careers. It will be to their career advantage to develop good
negotiating skills at an early stage.

Related concepts
Discussion; agreement; compromise

Overview
Why learn to negotiate?
Many situations will have more than one potential outcome. Learning how to
negotiate enables individuals to understand fully how complex many situations
are, and how to manage the situation more effectively. Good negotiation skills
are beneficial to both individuals and businesses.

The benefits to individuals are:

• better outcomes from negotiating situations

• resolving differences of opinion without bad feeling
• a better understanding of other parties’ aims, motivations and beliefs
• creating better business relationships
• less stressful negotiations.
The benefits to businesses are:

• reduced costs and overheads through better deal making

• more opportunities for business development
• avoidance of the cost of failing to make crucial deals
• better relationships with stakeholders and other involved parties
• more positive and less stressful work and business relationships.

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Goals and outcomes

When negotiating, it is important to bear in mind that goals and outcomes are
not the same thing.

Goals – the needs, wants and preferences that individuals consider before they
negotiate.

Outcomes – a possible result of negotiation.

Possible outcomes of negotiation

Three outcomes are possible when negotiating:

1. Win-win (both sides win).

2. Win-lose (one side wins, the other loses).
3. Inefficient but equitable (all items shared equally).

Negotiating styles
Negotiators can be either aggressive or co-operative in their personal style. Either
style can be successful or not, and it is possible to adapt a style to meet individual
situations. In addition, negotiators can be factual, relational (building
relationships), intuitive or logical in their approach.

In practice
Negotiation in practice
Goals
Goals are the needs, wants and preferences that individuals bear in mind before
they negotiate. Goals are the ‘why’ behind the ‘want’. If outcomes represent
what somebody wants from a negotiation, goals explain why they want it.

A goal determines what outcomes are acceptable. If individuals decide on a

particular outcome and try to achieve it, only that outcome is acceptable. Having
goals means that negotiation can result in more than one outcome. Individuals
can then decide what is more acceptable. Not all goals will be equally important.

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Outcomes
An outcome is a possible result of negotiation. Outcomes can be general or
specific, factual or subjective, absolute or relative. If negotiation only consists of
both sides identifying a preferred outcome, making it their goal and forcing it on
the other, haggling or arguing will result. This results in an unwise decision (or no
decision), inefficiency and potential damage to relationships. Entering
negotiations with only a specific outcome in mind can be very counter-
productive. Negotiators should consider the wider goals.

Example
A potential client negotiates with a contractor for an office cleaning contract. The
goal is to have a well cleaned office by 9am each day, regardless of how many
people or hours the contractor has to provide. One possible outcome of the
negotiation might be for the client to employ two people each day cleaning for
two hours.

To identify the goals, it is necessary to consider business goals (‘hard’ goals) and
cultural or personal issues (‘soft’ goals).

‘Hard’ goals
Strategy - The long-term aims of the business.

Change - The need or desire to change the business in order to achieve a specific
outcome.

Adaption - The need to adapt to changes to ensure the continued survival of the
business, or to move into new areas.

Improvement - These aims could include greater efficiency, saving money,

greater profit margins or streamlining processes.

Growth - This might include increased turnover, new products and services, or
product diversification.

Project oriented goals - These goals will be directed at a specific outcome.

‘Soft’ goals
These are cultural factors (overall business culture, employee involvement and
status within the business) and personal factors (motivation and ambition, peer
pressure and insecurity).

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Preparing to negotiate
Before negotiation starts, there are several steps to consider.

1. Think carefully about what you want and why you want it.
2. Set specific goals based on realistic and justifiable targets.
3. Gain commitment by putting your goals in writing and sharing them with
another team member.
It is important to identify, as far as possible, the other side’s goals. This may
involve research on companies and their markets, individuals and business
culture.

Prior to negotiating, individuals should consider:

• What is the negotiation nominally about?

• What is it ‘really’ about, if different?
• Which issues matter to both sides?
• Which issues are more important (or relevant) to one side?
• How do various issues affect each other?
• Are some issues irrelevant or trivial? Would it simplify the negotiating process
to omit them?
• Should you consider issues not on the formal agenda if they offer flexibility
and alternatives?
Few negotiations involve only two parties. There may be several parties on each
‘side’. The more people involved in a negotiation, the more goals have to be
considered. Each party brings different goals to the negotiation, and some goals
will conflict. It is important to consider:

• What is each party’s interest in the negotiation?

• How will they be affected by the outcome?
• How can they affect the outcome?
• How can you affect their position or viewpoint?
• Does their influence benefit or harm your own goals? Should you attempt to
increase or reduce it?
• What are the links and interdependence between parties?

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The bottom line

It is useful to think about a bottom line, or the minimum you will accept. All
negotiations have a bottom line which sets limits to flexibility. An outcome below
the bottom line is not acceptable. For a buyer, the bottom line is the highest
price he or she is prepared to pay. For a seller, the bottom line is the lowest price
he or she is prepared to accept. Where these overlap, there is an area of
potential agreement known as ‘the bargaining zone’.

In a more complex negotiation, the bottom line might be defined as an

unacceptable factor in a deal. It may not be possible to set a bottom line until
negotiations start or the other side makes an offer. Individuals should look at
how close they are to meeting goals, not how far they are from the bottom line.

Best Alternative to a Negotiated Agreement (BATNA)

Negotiators must consider their position if negotiations fail to produce an
acceptable outcome. They can determine a Best Alternative to a Negotiated
Agreement (BATNA). A BATNA gives an alternative where agreement cannot be
reached. It does not need co-operation from others and gives options when
negotiations fail.

For example, the potential client may decide to re-open the tendering process
and look for another office cleaning contractor if the terms and conditions
offered by one particular contractor go below the bottom line and are deemed
unacceptable.

A negotiator can:

1. Avoid being forced into an unsuitable agreement.

2. Assess potential outcomes against the BATNA to decide whether a
negotiated agreement is better than the alternative.
3. Understand when the other party does not need them to achieve their goals
i.e. the other party has leverage.
4. Understand when they will damage the other party’s interests if negotiations
fail i.e. they have leverage.

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Leverage
Leverage is the ability to reach agreement on the terms you want – it is the flip
side of the BATNA. It depends on the threat of a negative outcome for the other
party. Leverage is determined by whose need is greater, which party has the most
to lose if a deal is not reached, and who can afford to quit negotiations. In short,
leverage is determined by being in the stronger position.

It is possible for the various parties to have leverage in different areas.

Negotiators can introduce extra options to increase their own leverage and to
reduce another party’s leverage over them. Leverage is often based on perception
not facts; negotiators can make the other side think they have more leverage
than they actually have.

In the case of the office cleaning contract, it is highly unlikely that one cleaning
contractor will be a monopoly supplier in an area. Cleaning services are not a
scarce commodity which cannot be easily bought. It is likely that the potential
client will be able to consider hiring an alternative cleaning contractor at a
comparable or even better price and will therefore have more leverage than the
cleaning services.

Distributive and integrative negotiations

To see how goals, outcomes, BATNAs and threats function during negotiation, it
is important to understand the difference between distributive and integrative
negotiation.

Distributive negotiation: no scope for trade-offs on the basis of different

preferences or goals. Negotiation is a zero-sum game where one side wins and
the other side loses.

Integrative negotiation: the scope for trade-offs is determined on the relative

importance of different factors to each party. Any negotiation involving a range
of factors is potentially integrative because the parties will probably place
different levels of importance on various aspects.

Outcomes are often described as ‘win-win’ or ‘win-lose’. Although integrative

negotiations are often perceived as ‘win-win’ and distributive negotiations as
‘win-lose’, it is possible for an integrative negotiation to result in either outcome.

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Win-win, win-lose and other outcomes

Essentially, three negotiation outcomes are possible:

Win-win (both sides win). Items are shared out using a combination of personal
preference where possible and equitable treatment or precedent if not. A
win-win situation involves a discussion of the parties’ goals and both parties
achieving the majority of their goals.

Win-lose (one side wins, the other loses). This occurs where an aggressive
negotiator has no interest in being fair and the other party cannot respond to
these tactics. Some large supermarkets drive supplier prices down because they
can, regardless of the needs of the small supplier.

Inefficient but equitable. All items are shared equally. This is ‘fair’ but misses a
win-win situation.

Types of negotiator
There are several negotiating types, all with their own strengths and weaknesses.

The factual negotiator

A factual negotiator will know all the facts related to the negotiation. He or she
asks factual questions and will cover all angles to make sure that no facts are
omitted. A factual negotiator will provide all the necessary information, but tends
to leave out emotional issues.

The relational negotiator

A relational negotiator establishes relationships with the other party. He or she is

keen to build trust and is sensitive to emotional issues related to the case. A
relational negotiator perceives the position of the other party, but can lose sight
of the reason for the negotiation.

The intuitive negotiator

An intuitive negotiator sorts the key issues from the irrelevant detail. He or she
often comes up with unexpected solutions and sees the ‘big picture’. This type of
negotiator visualises the implications of a proposal and predicts the negotiation’s
progress. However, intuitive negotiators are often regarded with suspicion
because of their unconventional approach and lack of discipline.

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The logical negotiator

A logical negotiator sets the rules of the negotiation and develops an agenda. He
or she will argue in a logical, unemotional way, and will adapt their position to
meet changing circumstances. A logical negotiator can sometimes see the
negotiation process as being more important than the content or result.

Negotiation styles

Goals, bottom lines and BATNAs represent the ‘what’ and ‘why’ of negotiation.
Negotiation style is the ‘how’.

An individual’s character determines his or her ‘natural’ negotiation style. A

confrontational person will adopt an aggressive style, while conciliatory
individuals tend to be co-operative. ‘Aggressive’ tactics include anger, ultimatums
and threats, and the use and abuse of information. The latter includes
withholding information, exaggerating facts to support a particular position and
giving partial or misleading information. ‘Co-operative’ tactics include
information sharing, listening, flexibility and looking for a fair deal for all, not the
best deal for one side only.

Studies have shown that neither style has a monopoly on effectiveness, although
results showed that 59% of co-operative negotiators were considered ‘effective’,
against 25% of aggressive negotiators. (Pillutla and Nicholson in Negotiation:
how to make deals and reach agreement, page 38). Regardless of style, all
effective negotiators are well prepared and maximise their skills.

Success depends on how well a negotiator works within his or her style, and
understands their weaknesses. A naturally confrontational person will benefit
from improving his or her effectiveness, instead of trying to adopt an unworkable
approach. It is best to stick with your chosen style, but to adapt it subtly in
different situations. For example, an aggressive negotiator could listen more
while a co-operative negotiator might place less emphasis on feelings.

The key negotiation skills

‘Natural’ human reaction to different opinions is often not helpful. Many people
will become either timid or aggressive when placed in a situation with people
whose aims and motivations differ markedly from their own. To reach agreement
effectively, individuals need to learn new skills and then make the effort to use
them.

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The key skills for negotiators are:

Making the other party want to engage in talks - This means understanding
the other party and working with and not against the grain of their characters
and values.

Being a good interviewer - This involves negotiators asking appropriate

questions at the right time. Skilled negotiators make a sound case and put
forward proposals in such a way that people find it easy to choose them.

Active listening - Good negotiators take on board what other people are saying
and use the information constructively to move negotiations forward.

Discipline - Successful negotiations depend on careful preparation, keeping

promises and staying committed to their bottom line.

Flexibility - Being prepared to create, consider and analyse a number of

potential outcomes, rather than working towards a predetermined outcome.

Cultural differences

Negotiations between people of different cultural backgrounds can be difficult if

those differences are not understood. Cultural differences can be economic,
social, political or religious. They can include a shared sense of values and a
personal outlook. Negotiators should ask themselves:

1. What business goals are considered ‘natural’ and ‘normal’?

2. What outcomes are seen as ‘fair’?
3. What is acceptable behaviour during negotiations?
4. How much information should be exchanged during negotiations?
Direct confrontation is acceptable in individualistic societies like the United
Kingdom or the United States. It may offend in collectivist societies like China or
Vietnam, where co-operation is part of social interaction. Social status is
important in hierarchical societies like Japan or Malaysia, but everybody is
considered to be more or less equal in the Netherlands and Italy. Obligations to a
social group or class matter in collective societies like Hong Kong and Taiwan.

Listening
Much negotiation depends on what you do not say. Listening is beneficial
because it allows negotiators to gauge the negotiating style of the other party, to
identify their goals and to assess their BATNA.

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Key listening techniques include keeping quiet, not jumping to conclusions,

seeking clarification or repetition, not stating your own expectations and using
non-verbal listening signals.

Uncovering goals and preferences

In co-operative negotiation, the main focus is to establish the other side’s goals
and preferences. Some good tactics for bringing these into the open include:

• talking generally rather than specifically

• making several proposals and use the responses to infer their goals and
preferred outcomes
• using probing questions
• suggesting alternatives
• requesting advice.

Generating options
After establishing the goals of both sides, the next stage is to create suitable
outcomes. Sharing information, keeping options open on both sides and giving
the other party choices will assist this process. Other good tactics include:

• brainstorming
• developing a common purpose, for example, focusing on customers and any
feedback
• asking ‘what if?’
• adapting and reusing
• agreeing with your opponent
• appealing to the ego.

Reaching agreement
Negotiators must question themselves to make sure that the chosen outcome is
the right one before they commit themselves. They should ask:

1. Does the outcome fully meet identified goals?

2. Have any goals been compromised? What is the trade-off?
3. To what extent have the other party’s goals been met? How important is this
and how will it affect the relationship?
4. Have all possible options been explored?

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5. Is this the best possible deal which could have been obtained in the
circumstances?
6. If not, what factors justify accepting a worse deal?

Gaining commitment
Commitment is gained in several ways. They include shaking hands, verbal
agreements, making a public announcement, creating and signing documents,
and agreeing to penalties for breaching the agreement.

If the negotiations stall, there are several ways to get back on track. They include
revising goals or preferred outcomes, making small concessions, submitting fresh
information, changing personnel or offering an apology.

General useful tips

• Work out your objectives in advance
• Be assertive
• Respect the other party
• Don’t undersell yourself
• Always bargain – don’t accept anything for nothing
• Make a realistic offer
• Take time to think if necessary
• Ensure a mutually beneficial outcome

References
Lewthwaite, J. (ed.) (2000). Negotiate to succeed. London: Hawksmere

Pillutla, M. and Nicholson, N. (eds.) (2004). Negotiation: how to make deals and
reach agreement in business. Norwich: Format Publishing. (Decision Makers
Series)

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