The Manager as Negotiator: Bargaining for Cooperation and Competitive Gain

Describes the principles of effective negotiation and shows how managers can use these techniques to sustain agreements, and obtain authority or resources.

Chapter 1

The Manager as Negotiator

Negotiating is a way of life for managers, whether renting office space, coaxing a scarce part from another division, building support for a new marketing plan, or working out next year's budget. In these situations and thousands like them, some interests conflict. People disagree. And they negotiate to find a form of joint action that seems better to each than the alternatives.

Despite its importance, the negotiation process is often misunderstood and badly carried out. Inferior agreements result, if not endless bickering, needless deadlock, or spiraling conflict. In this book, we diagnose the causes of these problems, show how they infect negotiations, and point the way to superior outcomes.

Virtually everyone accepts the importance of bargaining to sell a building, resolve a toxic waste dispute, acquire a small exploration company, or handle like situations. Yet negotiation goes well beyond such encounters and their most familiar images: smoke-filled rooms, firm proposals, urgent calls to headquarters, midnight deadlines, and binding contracts. Though far less recognized, much the same process is involved when managers deal with their superiors, boards of directors, even legislators. Managers negotiate with those whom they cannot command but whose cooperation is vital, including peers and others outside the chain of command or beyond the organization itself. Managers even negotiate with subordinates who often have their own interests, understandings, sources of support, and areas of discretion.

In a static world, agreements once made generally endure. Yet change calls on organizations to adapt. And rapid changes call for new arrangements to be envisioned, negotiated, and renegotiated among those who know the situation best and will have to work with the results.

Certainly negotiation is a useful skill for important occasions, but it also lies at the core of the manager's job. Managers negotiate not only to win contracts, but also to guide enterprises in the face of change. Our task in this book is to show why this is so and how it can be done better.

Thus we develop a special logic for negotiators, useful inside the organization and out. It is an ambitious agenda, one that we now introduce by describing a manager's continuing efforts to settle a lawsuit. Once we discuss the dilemma that trapped Les Winston in his negotiation with an "outside" party, we focus back "inside" the organization. There, the negotiations that occupy managers' lives run up against versions of the same dilemma.

Les Winston's Dilemma

Metallurgist Les Winston was sharing a drink with his old friend Tom, a noted analyst of negotiations. Les described his ongoing ordeal trying to settle a suit brought against him by the Ammetal Corp., his former employer. If Ammetal won in court, Les's two-year-old company would be forced down from its high-flying course into bankruptcy. And their latest settlement demand -- for half of his firm's revenues during the next ten years -- seemed ruinous. Concerned, Tom pressed for details.

Les had joined Ammetal just after graduate school and had happily worked in their labs and testing facilities for the next nine years. Happily, that is, until he had a strong hunch that a new process might reduce production costs for an important specialty alloy, whose market Ammetal now dominated. While his boss had not forbidden him to work on this process, he had given Les no resources for it and had loaded him down with other tasks. Still, Les had devoted all his spare time to following up his hunch at home. Soon he was convinced that he had solved the problem and excitedly showed his results to his boss -- who again seemed unimpressed, dismissing Les's work as "inconclusive." In fact he urged Les to forget the whole thing since, in his judgment, the only improvement worth making required a radically different process that no one, including Les, thought had better than a one-in-thirty chance of ever working.

That did it. Though Les really liked his colleagues and most of his job at Ammetal, especially the research, he quit to start his own firm, scraping together capital from relatives and borrowing heavily from one large backer. Eighteen months later, the modest plant that he had adapted for his process had more orders than it could handle. Best of all, Les was absolutely certain that he had just cracked the secret of the radically different process, which could, with several months of development, slash current production costs by more than half. Though he currently enjoyed about a 20 percent cost advantage over Ammetal, this new knowledge should eventually permit him to push his former employer completely out of the market.

So he was stunned to read an announcement one morning that Ammetal planned to build a large plant that obviously would use the process currently in place in his plant. (It was nearly impossible to protect such processes by patent; secrecy was the only hope.) Les was further dismayed that same day to learn that Ammetal had filed suit to enjoin him from further using his process. They alleged that he had violated his employment contract with them, improperly using results from his work in the Ammetal labs. When his lawyer examined his old contract and gave him only a fifty-fifty chance of a successful defense, Les's spirits sagged. It did not cheer him at all that his lawyer argued -- and had also heard informally from an old partner who worked in Ammetal's legal department -- that the other side could expect no more than even odds of winning a case like this.

Five months into this discouraging episode, Les had decided that some form of negotiated settlement could protect him against the chance of losing the case, avoid further legal costs, lessen his anxiety, and free him to spend his time helping his business to grow. He had initially offered Ammetal a 3 percent royalty for the next three years, and had gradually raised his offer to 15 percent during the next five years. (This was about equal to the highest royalty rate in the industry for an analogous, but friendly, licensing agreement.) But Ammetal was miles away, insisting at first on 60 percent indefinitely, and now, on a "rock-bottom final" demand of 50% for the next decade. There they had deadlocked, with the trial only a week hence.

With an air of resignation, Les finished his recitation and said to Tom, "So, that is how we stand, and all I can see is doing my damndest to increase the odds of winning that suit. Otherwise,..."his voice trailed off as he rolled his eyes back and sliced across his neck with his forefinger. "Except, of course, that I'll eventually recover, pick up the pieces, put together a new organization, and blow them out of the water when I get the new process going. It might even be fun, watching them write off their big new plant, which will suddenly become obsolete. But what a price for revenge!"

Tom registered all this, then leaned forward and asked Les to describe what he would really like to come out of it. A bit taken aback, Les thought and replied, slowly, "Well, I would really like to be left alone to continue with the current process, until the new one is perfected. That, however, will take some months and I'd need to raise a lot of money. Actually, Tom," he continued meditatively, "it may sound a little strange after all Ammetal has done, but I would most enjoy working on this new process with my good friends in the lab there -- and not have to worry about all the financing and logistics and administrative headaches of running my own show. Ammetal's manufacturing and distribution networks are first class once they've got a good product. Of course, I don't want to give up the money, quite a fortune really, that would come from doing it myself. Also, freedom feels very good, especially after dealings with that jerk of a boss."

"So why not propose a joint venture?" Tom queried.

"In fact," Les replied, "I suggested just that to Albert Laxel [a social acquaintance and senior VP at Ammetal]. I ran across him playing tennis last weekend and told him how sick I was of this whole miserable thing, how I wished they would just drop the suit and forget their new plant, which they'd end up regretting anyway., I finished by tossing out the idea of jointly commercializing my new process -- on the right terms, of course. He seemed sympathetic, especially about my old R&D boss, who's been on everyone's nerves for a while, who championed their newly announced alloy venture -- and who undoubtedly instigated the suit against me.

"Still, Albert dismissed my idea out of hand, saying something about how this episode must be taking a real toll on me. Otherwise, why would I make such an obvious bluff about discovering the new process -- which no one could take seriously, especially given my current fix, and how remote everyone, including me, had judged the odds of its working.

"The only way to convince Ammetal, would be to actually show them the new work -- which there's a snowball's chance in hell of my doing now, just so they could steal it, too. The irony of all this," Les continued, "is that we would both be better off if they didn't sink a ton of money into a useless plant and if I could do only what I want with the new process -- with no extraneous business stuff -- and yet still profit handsomely from it."

Tom thought for a moment, and then intoned professorially, "Well, Les, maybe it wouldn't be so hard to persuade them that you have the new process and that they should think again." With Les's full attention now, Tom continued, "Why not drop your current position and better their demand for 50% of your revenues? Why not just offer them a 60% royalty on your current operation? Or really shock them by offering even more?"

Les slowly put down his drink, figuring that Tom could not possibly have been listening. "Tom, that's crazy. It wouldn't convince them of anything about my new discovery -- low or high, a royalty settlement has nothing to do with it. And why on earth would I give up my only card, the even chance I have of winning the suit? If I win, they know I'll stay in the industry, and that they can't go ahead with their plans. Even if I only had my current process, two plants would lead to an oversupply situation. It's a very lucrative market, but the volume is not that great. That's why they've got to knock me out through the courts. I've heard of demanding unconditional surrender but never offering it."

"Les, I understand. But that's the whole point. The 60% royalty would indeed burn your bridges with your current operation. But the only way you could possibly make such an offer is to be sure that the new process worked. Unless you were suicidally inclined or nuts, you would not set up a situation in which the only route left for you -- commercializing the new process -- was a dead end. So, with a little thought, Ammetal's got to realize you're telling the truth and that they shouldn't plan to build a new plant. Of course, as you enter the final round of negotiations, you should bring in an agreement to that effect for them to sign, but that agreement should also commit them to a joint venture, where you get a very big piece of the action, once," Tom looked sly, "once they offer you your old boss's job. After all, he's been the bad guy in this from the start."

Les Winston had been caught in a simple version of a central dilemma of bargaining. Devising a joint venture to benefit both parties depended on his actually having the new process. Yet directly sharing this information would open him to gross exploitation. If Les did not really have the process and yet bluffed that he did, Ammetal would be deterred from going ahead with their plans -- if they believed him. Knowing this, they would suspect any such statement from him. Les had to find a way to make his assertion credible without becoming vulnerable in doing so.

Tom's analysis suggested the means safely to untangle a self-serving bluff from a truthful signal: a seeming concession that committed Les to an action that would make sense only if he actually had the process. And this illustrates one small piece of a much broader problem with which we will grapple throughout this book: negotiators must manage the inescapable tension between cooperative moves to create value for all and competitive moves to claim value for each.

Again and again, we will find this central tension, whether in this relatively simply negotiation "outside" Les's firm or in more complex and subtle negotiations "inside" organizations -- in which building trust and relationships as well as repeated dealings figure much more prominently than they did in the end game between Les and Ammetal.

Key Elements of Negotiation

Virtually everyone would concur that Les "bargained" or "negotiated" to settle the suit. (We use these two terms interchangeably.) Shortly after he had rejoined Ammetal as head of the new venture, Les said, understandably, that he was relieved to have "negotiation" behind him so he "could get on with his job." By "his job", he meant working out with the CEO next year's capital budget and just how many employees would be assigned to his new project. Les meant getting the engineering and production people committed to completing the design rapidly and convincing the sales force to promote the now-cheaper alloy aggressively, even though it was only one of many products they handled. He meant talking to the accounting department to reduce some of the overhead they were allocating to his project and to modify a transfer price they had proposed for semifinished metal he would need from another division. Not to mention working out the allocation of tasks among his project team or new arrangements with his slightly edgy former peers at the R&D lab, whose boss he had replaced. To us, these aspects of his job centrally involve negotiation.

Like Les, many people have much too limited a view of the negotiation process, thinking mainly of explicit, well-acknowledged examples such as merger contests or collective bargaining. Yet its key elements occur far more widely in and out of management. Consider interdependence, some perceived conflict, opportunistic potential, and the possibility of agreement -- four of the most important such elements of negotiation:

Interdependence When Joseph depends on Laura, he cannot achieve the results he wants as cheaply, as well, or at all without her help (if only by her not interfering). Usually, dependence among people in organizations is mutual. While the reasons for a subordinate's reliance on a boss are often obvious, superiors generally depend on subordinates as well. Reasons for this include valuable, hard-to-replace skills, specialized information, or relationships with other critical players. Think, for example, of the many ways that the chief executive depends on her long-time personal secretary. Or how the shop floor supervisor relies on the one technician who can fix a key, cranky machine. Or how a sales manager needs the field knowledge of his sales force. (In turn, of course, the sales people depend on his support at headq...