What Negotiation Strategies Should You Use to Propose a Contract Renewal?
Idea in Brief
The Claiming
Negotiators often mainly react to the other side's moves. But for circuitous deals, a proactive approach is needed.
The Strategy
Strategic negotiators wait beyond their immediate counterpart for stakeholders who tin can influence the deal. They intentionally command the scope and timing of talks, search for novel sources of leverage, and seek connections beyond multiple deals.
The Payoff
Tactical negotiating can lock parties into a zero-sum posture, in which the goal is to capture as much value from the other side as possible. Well-thought-out strategies suppress the urge to react to moves or to take preemptive action based on fears about the other side's intentions. They pb to deals that maximize value for both sides.
When we propose our clients on negotiations, we oft ask them how they intend to formulate a negotiation strategy. Well-nigh reply that they'll do some planning before engaging with their counterparts—for instance, past identifying each side's best culling to a negotiated understanding (BATNA) or by researching the other party's central interests. But beyond that, they feel limited in how well they can prepare. What we hear most often is "It depends on what the other side does."
Fair enough. For near routine negotiations, a reactive arroyo is sufficient. When the stakes are depression, skilled negotiators tin pivot with relative ease from i tactic to some other every bit the contrary side makes moves, and oftentimes that's enough to ensure that the final deal fully captures value for them. But from fourth dimension to fourth dimension dealmakers discover themselves in complex negotiations with higher stakes. In those situations they crave a much more robust approach. Just like concern, political, and armed forces leaders, negotiators demand a strategic framework that illuminates the primal choices they must brand to accomplish their ultimate objectives.
In the xxx years nosotros've spent as advisers on hundreds of negotiations, ranging from agreements to resolve armed conflict to multibillion-dollar commercial deals, we have codified what makes negotiation strategies constructive. Negotiators should start developing them well earlier the initiation of talks, just the process is dynamic and iterative and should continue until the final deal is inked—and in some cases beyond. With well-thought-out strategies, negotiators can suppress the urge to react to counterparts or to make preemptive moves that are based on fears about the other side's intentions. They'll be able to prepare for the worst but not trigger information technology—and to identify the actions most likely to have a significant touch on bargain outcomes.
Here are the key strategic principles negotiators should apply to their next complex deal.
Rethink Counterparts
People tend to pursue deals with the obvious parties. If we're sellers, nosotros search for a buyer; if we're borrowers, we search for a lender. But nosotros frequently overlook many others in the ecosystem surrounding the negotiation: our competitors, suppliers, and customers—and their competitors, suppliers, and customers. We need an approach that encompasses all the parties that tin can and will help us fulfill our objectives.
To devise i, negotiators should answer the following questions:
- What business outcomes exercise we seek through this negotiation?
- Who cares nigh those outcomes?
- Who tin do something to bring about those outcomes?
- How can nosotros engage, straight or indirectly, with parties that share some of our interest in achieving those outcomes?
Consider how the holder of primal patents necessary to play movies and music on DVDs sought to preclude low-cost manufacturers in China from infringing on its intellectual property (and competing unfairly with its duly licensed partners). Initially, information technology tried to negotiate with those manufacturers, but in most cases it was simply ignored. And even when the Chinese manufacturers were successfully challenged and subjected to a legal process, they would simply close shop and then reopen nether a different name.
Working backward from the desired outcome (halting sales of infringing products in significant markets), the patent holder realized that although it couldn't dissuade manufacturers from making unlicensed DVD players, information technology could persuade large importers and distributors to stop buying and selling those products. By helping the importers and distributors recognize the infringement and intellectual holding issues, the patent owner got them on the same side of what would otherwise take been a steep uphill negotiation with the unauthorized manufacturers.
Analyze Counterparts' Constituencies
In high-stakes negotiations, dealmakers tend to talk near how much power and leverage the other side has, what the other side will or won't agree to, and how to influence its beliefs. While viewing counterparts every bit if they were one monolithic entity is convenient, that attitude regularly leads to analytical and strategic missteps. (In the realm of international diplomacy, negotiators have traditionally been somewhat more than attuned to thinking about how to influence multiple constituencies when forging deals—be information technology with the Taliban or the old Soviet Wedlock.)
There are oftentimes opportunities to change a bargain'due south telescopic and achieve better results.
For example, a client might perceive itself to be at a disadvantage in a negotiation with an of import supplier considering it represents only a small piece of that supplier'due south overall business. A closer await, nonetheless, might reveal that it accounts for a fairly large pct of the business organisation at 1 of that supplier's plants or in a specific geographic market for a detail unit of measurement. Though the supplier'south corporate leaders might view the customer as insignificant, the plant manager or unit head who depends on it would see it as critical. A corporation isn't ane uniform organization; it's a federation of businesses. Most often, profits and losses are assessed not only at the enterprise level only by unit, geography, product, and found. The potency to negotiate contracts is normally (though non always) delegated accordingly. Carefully parsing a counterpart'due south constituencies is essential to understanding negotiation leverage.
The supply chain squad at a big hospitality and amusement visitor took that lesson to centre in negotiations with major beverage suppliers. The team members recognized that bargaining with their sales counterparts over volume discounts would achieve limited value. Information technology was only past broadening the word well across discounts and the purview of sales that they learned that other stakeholders within their suppliers had much more value to contribute. There were likewise opportunities to discuss promotional sponsorships at the entertainment company'south venues and events, the strong relationships the beverage suppliers had with performers who could fill those venues, marketing events that the suppliers could host at the entertainment company's hospitality properties, and more than.
Rethink the Deal's Scope
The vast majority of negotiators take the fundamental scope of a deal as a given. They may consider a limited set of choices—for instance, shorter- versus longer-term deals—simply past and large their tactics are guided by a comparison between their BATNA and how close to some preferred consequence they think they tin get. As the entertainment company's instance illustrates, however, at that place are oft significant opportunities to change the scope of negotiations and reach much better results.
Jeff Minton
Consider a health intendance house that was seeking to renegotiate the terms of a major supply contract with a pharmaceutical company. The health intendance house needed much more than manufacturing capacity from a major plant endemic and operated past the pharma visitor. The pharma company was loath to offer more than capacity than the original contract specified, because it predictable needing to brand more of its own products at the same facility in the time to come. Many creative options were explored, including shared uppercase investments to increase the plant's efficiency and output, altered financial terms, and the possibility of a "plant within a found" operating model. Nonetheless, no solution appeared to run into both sides' needs.
However, when the scope of the negotiation was increased beyond altering the existing understanding, and both sides stepped back to reevaluate (and share information on) their corresponding global operations (including plans for building new plants) and growth objectives (and associated capital investment needs), they were able to reach an understanding. The new contract rebalanced production and supply beyond multiple plants and delivered substantially more value to both parties. The negotiators didn't expand just the pie; they expanded the entire bill of fare.
Or take the financial services firm that was seeking to renew a contract with a company that owned proprietary data assets and was enervating a hefty price increment. An assay of the almanac report and earnings calls of the information company showed that it was focused on increasing revenue from other products and services—ones the financial services firm was purchasing from several other suppliers. While some of those current suppliers were highly valued partners, and information technology didn't make sense to contemplate shifting business away from them, in other cases the financial business firm could give the data provider an increment in business organisation in the areas it wanted to build. The firm'due south negotiating team offered to do that—but only if the provider agreed to more-reasonable terms on the data it enjoyed a de facto monopoly on.
It's worth noting how counterintuitive this approach is. When confronted with opposing parties who seem to have more leverage, the natural trend is to await for ways to weaken that leverage—to find walkaway alternatives and issue threats. Such attempts oft come up short or undermine deal success. The lesson here is to offering the other side new opportunities instead of focusing just on the needs that but it tin can come across for you.
Call back nearly how precedents a deal sets may create anchors in future negotiations.
Sometimes the right strategy is even to reduce the scope of the bargain. A classic slice of negotiation advice is to carefully evaluate (and seek to improve) your BATNA. The trouble is, in most high-stakes negotiations, there's actually no viable alternative to some bargain with the other party. Digging deeper into BATNA analysis is vital in such scenarios. The key is non to simply consider wholesale alternatives to whatsoever agreement with a powerful counterpart merely rather to explore alternatives to some elements of what you lot're seeking through that bargain.
Jeff Minton
Nigh the art: Photographer Jeff Minton captured the salespeople at a car dealership in Levittown, New York, hustling to meet their monthly quotas.
Here's how that approach worked for a medical device visitor that felt powerless in its negotiations with a distributor that dominated an important regional market. No other distributor had comparable coverage in the region. After considering expanding the scope of the deal, the device maker instead opted to narrow it. It identified alternative distribution channels for some of its products in some segments of the regional market. Bringing its products to market with a portfolio of smaller distributors would take been prohibitively complex and would have increased costs and reduced revenue. But once the device maker had defined a strategy to narrow the scope of the deal with the incumbent distributor, the negotiations moved to a considerably more than fifty-fifty footing.
In fact, the distributor stopped making demands and threats and became willing to engage in a collaborative process. The two sides jointly evaluated where it was peculiarly plush for the benefactor to service the device maker (business the distributor was actually happy to surrender) and where information technology would accept been most difficult for the device maker to move to culling distributors. The narrower scope made the distributor willing to reduce some of its requirements (meant to cover the costs of distributing low-margin products in expensive-to-service segments). For the device maker, the cost of agreeing to much of what the distributor was requesting dropped significantly.
Rethink the Nature of Leverage
All too often dealmakers conflate negotiation ability with a strong BATNA and the concomitant power to hurt the other party. Essentially, the message they send is: We don't need a bargain with you, and y'all demand a bargain with us, then nosotros become to dictate the terms. Such a mindset leads to pressure tactics. It also makes negotiators who lack attractive walkaway alternatives conclude that they accept no ability, which in plough causes miscalculations and unwarranted concessions. Moreover, their sense of powerlessness can brood fearfulness and resentment—negative emotions that hamper creative thinking virtually potential avenues to an optimal issue.
The solution is think beyond walkaway alternatives and consider multiple sources of not only coercive leverage but also positive leverage. By positive leverage, we hateful things negotiators tin uniquely offering to make the other side desire a deal rather than fear the absence of one.
Many technology firms have IP teams that seek to persuade consumer electronics companies such as Apple, Sony, and LG to pay for licenses. The negotiation of IP rights in this market place is dauntingly complex. Patent infringement is pervasive—though ofttimes unintentional. Legitimate efforts to collect royalties are vastly complicated by the well-known phenomenon of patent trolls. As a issue, most IP licensing teams struggle to "motion upwards in the queue" for simple consideration by underresourced in-licensing teams, who feel besieged past all the parties claiming the correct to royalties—and offering little in render except an agreement non to sue.
The IP licensing team at one well-known tech firm had a strong claims portfolio and compelling market information about the rights that other companies were infringing. The team tried to be creative and flexible, offer to alloy payments for past infringement, ongoing royalties, and cantankerous-licenses. However, its BATNA—filing lawsuits against infringers that ignored it—wasn't strong, because the ability to enforce patent rights and collect damages had been hampered in recent years in many jurisdictions around the globe. The house didn't have a particularly good track record in court, either. To various consumer electronics companies, it made sense to brushoff the team's demands. And so they did.
Thinking in binary terms is virtually ever counterproductive.
Past researching the business models and strategies of the electronics companies, the team was able to pinpoint which of its firm's patented technologies were complementary to of import initiatives at each target licensee. Working with the firm'due south tech and sales departments, the team and then defined value propositions showing each target licensee how information technology could apply the firm's IP to generate new products or revenue streams. 1 electronics company, for instance, could leverage the tech firm'due south sound and imaging IP in elder-care offerings, and another could enhance its device with the business firm'southward virtual reality expertise. Those opportunities made information technology worthwhile for the electronics companies to appoint in meaningful negotiations with the team. Though this strategy required a lot of time and effort, the payoff was worth information technology.
Look for Links Across Negotiations
Most negotiators focus exclusively on maximizing the value of the deal at paw. In doing so, they often undermine the success of future negotiations—their own and those of their colleagues. A strategic approach requires considering success beyond the current deal and, in particular, how the precedents it sets will create anchors and shape dynamics in hereafter negotiations. After all, except with pure sales and purchases of assets, nearly high-stakes business organization negotiations are echo transactions undertaken in the context of long-term relationships.
Analyzing links across multiple negotiations can unearth hidden forms of leverage. Consider the case of a global semiconductor company that felt continually squeezed by unreasonable cost increases from OEM component suppliers. A major trouble was that negotiations over initial licensing or codevelopment of applied science for new products were conducted by one group, whereas subsequent contract negotiations (with the same suppliers, only occurring years later) were handled by another group, with relatively piffling coordination between the two. Meanwhile, negotiations with those suppliers and other third parties for maintenance and repair services and spare parts were handled past yet some other group, and all three kinds of negotiations occurred on different timetables.
Past looking at these separate but related negotiations holistically, the semiconductor company was able to modify the power dynamics. Teams negotiating supply agreements acknowledged that they had little option but to have an incumbent supplier's pricing and terms just were able to point to upcoming product introductions and warn that unreasonable positions held now would about likely exclude suppliers from being considered for next-generation products—and all associated downstream acquirement. They besides shared data about maintenance and repair revenue streams and their growing power to redirect such business to partners who demonstrated reasonableness and good organized religion.
Threats and promises nearly future business had been made in the by by the company'due south negotiators, but they weren't specific and lacked credibility. Now the benefits of increased cooperation and the potential loss of opportunities were tangible to suppliers—and hence persuasive.
Consider the Impact of Timing and Sequencing
Many people seek to speed up or boring down negotiations to put pressure level on the other side and excerpt concessions. But force per unit area tactics ofttimes backfire. Careful consideration of how the other side is likely to respond should guide when to advance, dull downwards, or pause a negotiation.
Several years ago a small technology visitor was in negotiations to renew a disquisitional bargain with an internet behemoth. The small visitor depended a lot on the revenue the deal produced, and the thought of going without it for even a curt time was frightening. Seeking to pressure the modest house, the behemoth showed little urgency to consummate the bargain and signaled that it wasn't certain the contract was worth renewing.
That turned out to be a major miscalculation. Recognizing that it could practice little to get the other side to become faster, the modest company'due south negotiation team decided to make apply of the time to build support within the firm'due south ecosystem of customers and business partners for the possibility of partnering with one of the behemoth's giant competitors instead. That time was well spent. Equally such an alternative went from unimaginable to believable to plausible, the smaller firm'due south leverage grew. In the finish the contract with the behemoth was renewed for a nine-effigy value that represented a nearly v-fold increase over the expiring deal. While the passage of time did make the small house nervous about its dwindling cash reserves, it as well gave information technology the opportunity to substantially modify the mural in which the negotiation took identify.
Choreographing the sequence in which you address issues or appoint dissimilar players is also important. Resolving some issues may reset the stakes or reframe the remainder of the negotiation.
A good instance of strategically rethinking sequence in a negotiation comes from the oil and gas industry. As office of a articulation venture deal with a national oil company, one big multinational had agreed that if a particular competitor wanted to add together itself to the deal later, information technology could exercise so by paying its share of the capital plus involvement for the fourth dimension it hadn't participated. A few years later that second multinational indeed triggered its option and sought to open negotiations on the rate of interest. Instead of discussing how many points above or beneath LIBOR would be appropriate, the multinational decided to go back to the oil company and negotiate what farther terms should apply to the revised deal. The multinational proposed the principle that a later aspirant shouldn't earn a higher rate of return than the original partners, who had taken a greater risk before the project had proved its value. The oil company readily agreed.
With that matter settled, the multinational turned to the new partner-to-be and demonstrated, using the recently audited books for the articulation venture, that the interest owed by an incoming partner would take to be 60% a yr, non anything similar LIBOR. Subsequently some initial shock, the incoming partner agreed.
Five questions can help negotiators strategically manage timing and sequencing:
- What changes in the external marketplace might increment or subtract the value or importance of the deal for each party?
- To what extent can we use additional time to strengthen our walkaway alternatives?
- To what extent can the other side use additional time to strengthen its walkaway alternatives?
- How might deals negotiated with other parties bear upon the scope of the negotiation or create precedents that influence the fashion nosotros resolve fundamental issues?
- What events or changes in the external marketplace might adversely bear upon the forcefulness of our walkaway alternatives—and the other side's—or create mutually beneficial opportunities?
Be Creative About the Procedure and Framing
When approaching a high-stakes bargain with a powerful counterpart, many negotiators debate whether to start by issuing their own proposal or by asking the other side to do so. They besides often wonder whether they should project strength by asking for aggressive terms in their beginning offer or counteroffer, or indicate a want for a win-win consequence through more-balanced and reasonable terms. But such binary thinking blinds us to the many ways nosotros might shape the negotiation procedure to reduce hazard and increase the likelihood of a cracking result.
Let'due south look at a global wellness care company that depended on a unmarried supplier to make one of its biggest acquirement-generating products. The supplier held numerous patents essential to the manufacturing process, so switching to a different one would accept taken years and major investments in redesign. But for many years the supplier had been unwilling to collaborate on improving quality and manufacturing efficiency. As the contract with it neared expiration, the health care company pondered how to open the negotiation for a renewal. Should information technology demand big price reductions and other improvements? Or should it brainstorm with more-reasonable terms and hope that the supplier responded in kind?
After much debate about the trade-offs, the wellness care company adult a third arroyo. Rather than beginning by sending an initial term canvass, it invited the supplier to a prenegotiation height—a joint discussion of what had worked well, and what hadn't, for each side nether the prior contract and of how the market and each side's business objectives had changed. This was deemed a low-take chances move. The supplier might well refuse the offering, but so what? The wellness intendance company's negotiation squad would then only revert to sending an opening term canvass.
To the surprise of some on the team, the supplier accustomed the invitation. During the acme the health care visitor's team shared an analysis of the economic science and evolving market position of the company's product. Information technology showed that unless the product's price fell significantly, new competitive offerings would take substantial market share away from it. That would reduce non but the health care visitor'due south revenue but as well the supplier'southward. The analysis triggered an animated discussion focused not on bargaining but on articulation problem-solving. That in plough led to thinking almost how to creatively restructure the style the companies worked together and to a set of principles for negotiating commercial terms in the new contract, including a framework for sharing risks and rewards. The ultimate deal saved the manufacturer tens of millions of dollars but was viewed by the supplier as more favorable than the before contract. Both sides agreed that a traditional "offering-counteroffer" negotiation process would at all-time have yielded a significantly less valuable deal for both—and could easily have resulted in no deal at all.
Determination
High-stakes negotiations tend to produce a lot of anxiety. This leads dealmakers to focus on (perceived) threats rather than identify all possible forms of leverage and think expansively nearly options. When that happens, negotiators are more likely to make poor tactical choices, either giving in to pressure from the other side or inadvertently causing their own worst fears to come to pass.
A strategic negotiation approach involves more than choosing a cooperative or competitive posture, and thinking in such binary terms is almost ever counterproductive. Assessing connections between 1 negotiation and others with the aforementioned party over time (and even with other parties), taking a hard expect at whether they're negotiating about the right things, and focusing on when and how to most effectively engage with the other side will unlock far more value for dealmakers.
A version of this article appeared in the July–Baronial 2020 issue of Harvard Business Review.
Source: https://hbr.org/2020/07/whats-your-negotiation-strategy
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