EFFECTIVE TECHNIQUES FOR NEGOTIATING COMMERCIAL AGREEMENTS
26 April 2017
It is no understatement that negotiation is a skill and an art form especially for the multi-issue level negotiation required in the context of commercial agreements. Effective negotiation can be the difference between a great deal and very bad one. Below is a handful of negotiation techniques that, when properly applied, can facilitate a better negotiated outcome, both in the context of commercial agreement but also in every day negotiations.
Know your BATNA. Negotiating power or “leverage” does not stem from wealth, status or authority of a negotiating party but from such party’s best alternative to a negotiated agreement (BATNA). If an agreement is not reached then what is your alternative in satisfying your underlying objective? If your alternative is good, say you have 3 simultaneous offers in the context of negotiating terms of selling a property, then you have a good negotiating position as your BATNA is to accept another offer. This remains true even if you are in the verge of bankruptcy and the counterparty is a billionaire. By knowing your BATNA you know your strength.
Anchoring In negotiating a price or any other term one should be extremely mindful of the first position communicated to the counterparty, whether verbally or through a 1st proposed draft of the agreement. Once this position is on the table it will be extremely difficult to go back and improve it. For this reason, any such first communication must serve as an “anchor” from which the counterparty will try to get you to concede. Allow yourself some room to negotiate and give concessions but avoid proposing extreme or ridiculous anchors as this may cause the counterparty to feel that you are not serious or credible or worse, that it insults them, and thus walk out of the negotiations. Land developers do this very well when they communicate price lists for new properties clearly above market rate and then start negotiating.
Concession Plan Before commencing negotiations, develop a detailed plan and use it throughout. Identify a position you would be happy with, your best or aspirational position and your worst acceptable position, which should be at least your BATNA. Try to anticipate your counterparty’s BATNA and their acceptable and best position and built a concession plan, namely a schedule, on how and what you are willing to concede on based on their anticipated positions and concessions in a manner which optimizes reaching your aspirational position. On a multi level issue, weight and prioritize every different issue based on its importance before you decide on a concession plan and anticipate weight and priority given to issues by the counterparty. For example, if you are a land developer your primary concern is price and one of you least concerns is which parking place you will designate for an apartment. In the context of a prospective sale both will be the subject of negotiation.
Position vs Underlying Objective There is competitive and there is cooperative negotiation. If you or the counterparty insist and continuously defend a position over a price or any other term you run the risk of digging yourselves into a situation where your ego will not allow you to concede thus losing a potentially mutually beneficial deal. For that reason, try to steer the discussion into each party’s underlying objectives or fears leading up to their position and you can potentially find solutions or common ground. For example, a tenant may not agree on the landlord’s position of 2 years’ minimum tenancy. On its face this does not allow for a negotiated agreement but if the landlord’s underlying objective is for instance to avoid repainting and the tenant is willing to undertake repainting then a mutually beneficial agreement can be reached.
Inflate & Trade Especially on a multi-issue negotiation try to create, build up, or inflate issues or features of no, or of little, importance, which will create a perception of high value in the eyes of the counterparty. Subsequently concede on or trade up these issues with issues that are in fact of actual importance to you. Taking the example of a prospective sale of property by a developer, the latter can refuse to reduce the price but instead offer the best parking place which is presented as being reserved for another property but they will move heaven and earth to secure it. These will give the prospective buyer a sense of achievement and the developer will satisfy its primary objective which to maximize income at no or little cost.
Know Your Audience Perhaps the most important technique is to know your audience and adjust your negotiating style accordingly. Psychology and emotions, especially ego, is a central component in any negotiation. If you are negotiating with a long term business associate, colleague or friend maintaining a good working relationship should be a parameter to be duly considered in choosing your negotiating style. A negotiation “win” may cost you greatly in the long run. Also, status, seniority and all other attributes of the person sitting across the table should be taken into account because if they feel threatened, disrespected, cornered or if your style damages their ego in any way they may derail the negotiation even though on the merits it is possible to reach a mutually beneficial agreement. No one wants to walk out of negotiation feeling like a loser so always try to phrase or present your positions as something your counterparty can live with.
The above are merely a handful of negotiation techniques commonly applied by practitioners, some of which may arise naturally by applying common sense, however, if put in a formal context and are appropriately applied these can become a greatly effective arsenal in negotiating commercial agreements. For more information on negotiating commercial agreements do not hesitate to contact Varnavas Playbell at Varnavas@playbell.com.
Varnavas Playbell, LLM, LLB. MBA.
The above information does not constitute advice.