The Art of Negotiating
Negotiating is a part of everyday life, but in business it’s absolutely critical to your success. Poor negotiation can cripple a company just as quickly as losing key customers. While most negotiating strategies seem like common sense, it’s not uncommon for people to get caught up in the emotion of the moment and ignore their basic instincts. Emotion, luck and magic have no place in a successful negotiation. It takes an iron gut, homework, street smarts and unblinking discipline. These keys will unlock your ability to get the best deal possible under any circumstances.
While experienced negotiators sometimes refer to their methods as the “negotiating game,” it’s really a misnomer for a process in which the stakes are often extremely high. Check your ego at the door and keep your eye on the big picture at all times. This is all about business.
Preparation is Key
Know about the party you’re negotiating with so you can capitalize on your strengths and the party’s weaknesses. If the other party is very experienced, that means he also has a history that could contain useful information. If possible, talk to business associates who have dealt with this person before. Many negotiators develop patterns and certain styles that you may be able to use to your advantage.
If you are a buyer, make sure you are thoroughly familiar with the product or service that will be the subject of the negotiation. If the other party senses you are weak on such details, you may be a prime target for a bluff or another technique designed to create anxiety and uncertainty. Psychology plays a crucial role in your ability to make the most of the other party’s lack of preparation and anticipate their next move.
Most negotiators have a price target or goal in mind before they start. It should be based on realistic expectations considering all the constraints that will undoubtedly surface. These may include budget limits, direction from management, pressure to make sales goals, and a myriad of other external forces. During the course of the negotiation, the goal may change based on changes in scope and other unforeseen actions by either party. While your ultimate goal should be realistic, this should not constrain your first offer or counteroffer.
Before you start the negotiation, ensure that the other party is fully empowered to make binding commitments. You don’t want to find yourself in a position where you believe you’ve struck a deal, only to discover that your agreement must be approved by someone higher in the chain of command.
Have a Strategy
There are basic principles that apply to every negotiation. The first offer is usually the most important and the benchmark by which all subsequent offers will be judged and compared. You’ll never get what you don’t ask for, so make your first offer bold and aggressive. The asking price is just that, and will typically include a pad or margin to give away during negotiations. You want to take all of that and hopefully more, so start lower than the seller expects. Don’t worry about insulting the other party. As long as your offer is not ridiculous, the other side will continue the negotiations in hopes of settling at a better number.
As a buyer, do not disclose your budget or other limitations in your negotiating position. A favourite ploy of salesmen is to reshuffle the product specifications, schedule and other parameters in order to sell you an inferior product to fit your budget. You want the best product you can get for the money you have to spend, so employ an approach that maintains the possibility of spending less than you had originally planned.
Always have something to give away without hurting your negotiating position. If you’re submitting a price proposal to a buyer, consider inserting decoys and red herrings for the other party to find. For example, if you are bidding a project, consider including some nice-to-have items that aren’t critical to the success of the project. You could also include spare parts that may or may not be needed in the end. If the buyer takes those items out to reduce the overall cost, you haven’t lost anything but it may help the buyer reach his price target. Such distractions will help to divert the other party from attacking the meat of your proposal. Employing this strategy must be viewed in the context and in consideration of what other bidders may be doing. If you know that the only way to win the bid is to provide a barebones cost, then this strategy may not be appropriate.
Watch for clues such as body movement, speech patterns and reactions to what you say. Be prepared to suspend or cancel negotiations if you feel things are getting nowhere or the other party seems stuck in their position. Indicate your reluctance to continue under those conditions and make the other side wonder if you are ever coming back. If they are on the hook to cut a deal, they will feel the pressure to move. Be patient even if the other party isn’t. This can be difficult for those with a passion for instant gratification, but the last thing you want is for the other party to think you’re under the gun to finish quickly.
From a contractual standpoint, a counteroffer automatically rejects all previous offers. Once an offer is made, you should expect an acceptance or rejection of your offer, or a counteroffer that keeps the negotiation open. If your offer is rejected and you are asked to submit a new and better offer, do not fall into that trap. That would be tantamount to negotiating with yourself, and you should never do this. If the last offer on the table is yours, always insist on a counteroffer to force the other party to move his/her position before you make another offer.
Find the Leverage
In addition to exploiting the other party’s weaknesses, concentrate on taking maximum advantage of your strengths. If you’re the only source available for a particular product, you have tremendous leverage across the board. If economic conditions have created a market in which the product you’re selling is in great demand and low supply, that gives you more bargaining power to name your price. If you are the buyer in a depressed economy, you normally have the advantage of too much supply and lower demand. The current housing situation is a classic example of what happens when supply vastly outweighs the demand and market prices fall dramatically.
Establish a strong foundation early in the process by demonstrating your knowledge and expertise of the negotiation subject matter. This may intimidate those on the other side and put them on their heels before they’ve a chance to establish their own credibility. Playing catch-up in a tough negotiation can be challenging, so it’s much better to take the initiative and steer the process in the direction you want.
An offer is more than just a dollar amount. It must encompass all of the elements of the bargain and will normally comprise the basis for a contract that formalizes the agreement. If you make an offer without nailing down all of the specifics, you may find out later that there was no meeting of the minds with the other party. The basis of the bargain should include: offer price (in proper denomination), statement of work (scope), identification and quantities of goods or services, delivery schedule, performance incentives (if any), express warranties (if any), terms and conditions, and any documents incorporated by reference.
Trading one element for another–such as a lower price for a more relaxed schedule–is a common tactic. These bargaining chips should be kept in your hip pocket until you need them to close the deal and get the price you want. While your primary focus is normally on price, you should always keep all the other components of the deal in the forefront of your mind. Don’t be pressured into accepting boilerplate contracts represented as the “standard of the industry” or something that “we always use.” Everything, including the fine print, is open to change. If the other party refuses to alter onerous terms, consider taking your business elsewhere.
To avoid misunderstandings, offers should be presented in writing and include all elements of the bargain. It’s a good idea to keep notes containing the rationale for each offer. While these notes won’t be disclosed to the other party, they will prove to be invaluable should things go awry and you need to restart negotiations. Part of the process is benefiting from lessons learned and refining your approach and technique. If you work for a company or the government, those notes are usually required to document the negotiated outcome and complete the contract file.
Go For a Win-Win Solution
Throughout the negotiation, try to determine what you believe to be an acceptable outcome for the other party. It may be a combination of different things that aren’t necessarily tied solely to price. For example, the delivery date may be the most important thing to the other party, while product quality may be your primary driver.
Understanding the other side’s priorities is just as important as understanding your own, so figure out what you would do if you were in his shoes. When constructing your offers, attempt to satisfy some of his priorities if doing so doesn’t weaken your overall position. Be prepared to give up the little things in exchange for the big things you don’t want to concede. Know your limits and how far you’re willing to go on all aspects of the deal.
While you have the power to influence the negotiation process in your favour, your goal should be to secure a good deal without extracting the last pound of flesh from the other party. This is especially true if you will be negotiating with the same party on a recurring basis. The most effective negotiators are professionals who know their business and don’t let personalities and irrational behaviour interfere with their mission. They are capable of making the other party believe they got the best deal they could under the circumstances.
Once the negotiation is completed, you want to be able to work effectively with those in the other party during contract performance. If they are threatened and pounded into submission, they probably won’t negotiate with you again, possibly cutting off any future business. While heated confrontation is a common occurrence during negotiations, at some point collaboration and compromise are needed to get a deal.
Closing the Deal
Successful negotiation is like horse-trading in that it requires a sense of timing, creativity, keen awareness and the ability to anticipate the other party’s next move. Negotiation is also like chess in that each move should be designed to set up not only your next move, but several moves down the line. Generally, your moves should get progressively smaller, and you can expect the same from the other party.
Always have the endgame in mind as you plot your strategy, and be prepared at some point to split the remaining difference. It’s almost inevitable when the parties are close but can’t seem to make that last leap to a single number. It’s completely arbitrary, but it gets the job done. That’s why all the offers leading up to that point are so important: they will set the stage for the final handshake.