How To Lead A Negotiation (Part 1.)

Countless books and articles offer advice that can help deal makers avoid missteps at the bargaining table. But some of the costliest mistakes take place before negotiators even sit down to discuss the substance of the deal. That’s because people fall prey to a seemingly reasonable—but ultimately faulty—assumption about deal making. Negotiators often take it for granted that if they bring a lot of value to the table and have sufficient leverage, they’ll be able to strike a great deal. While those things are certainly important, many other factors influence where each party ends up.

In this article I draw on my experience advising scores of companies on deals worth millions or billions of dollars to present four factors that can have a tremendous impact on negotiation outcomes. In each case, I provide guidance on what negotiators should do before either side starts making offers or counteroffers.

1. Negotiate Process Before Substance

A couple of years ago, two cofounders of a tech venture walked into a meeting with the CEO of a Fortune 100 company who had agreed to invest $10 million with them. A week earlier, the parties had hammered out the investment amount and valuation, so the meeting was supposed to be celebratory more than anything else. When the cofounders entered the room, they were surprised to see a team of lawyers and bankers. The CEO was also there, but it soon became clear that he was not going to actively participate.

As soon as the cofounders sat down, the bankers on the other side started to renegotiate the deal. The $10 million investment was still on the table, but now they demanded a much lower valuation; in other words, the cofounders would have to give up significantly more equity. Their attempts to explain that an agreement had already been reached were to no avail.

What was going on? Had the cofounders misunderstood the level of commitment in the previous meeting? Had they overlooked steps involved in finalizing the deal? Had the CEO intended to renege all along—or had his team convinced him that the deal could be sweetened?

Upset and confused, the cofounders quickly assessed their options. Accepting the new deal would hurt financially (and psychologically), but they’d get the $10 million in needed funds. On the other hand, doing so would significantly undervalue what they brought to the table. They decided to walk out without a deal. Before they left, they emphasized their strong desire to do a deal on the initial terms and explained that this was a matter of principle as well as economics. Within hours, they were on a plane, not knowing what would happen. A few days later, the CEO called and accepted the original deal.

The gutsy move worked out for the cofounders, but it would have been better not to let things go wrong in the first place. Their mistake was a common one: focusing too much on the substance of the deal and not enough on the process. Substance is the terms that make up the final agreement. Process is how you will get from where you are today to that agreement. My advice to deal makers: Negotiate process before substance.

Consider another scenario. You’ve been negotiating with someone for months. You have a few final concessions that you’ve been holding back—they’re costly but worth making if it will close the deal. With the finish line in sight, you make the concessions, and the other side responds: “This is great. I appreciate your flexibility on these issues. Let me share this with my boss to see what she thinks.” Unfortunately for you, you had no idea your counterpart even had a boss—you thought he was the final decision maker. The negotiations are clearly not over, and you have nothing left to give.

The more clarity and commitment you have regarding the process, the less likely you are to make mistakes on substance. Negotiating process entails discussing and influencing a range of factors that will affect the outcome of the deal. Ask the other party: How much time does your company need to close the deal? Who must be on board? What factors might slow down or speed up the process? Are there key milestones or dates we should be aware of? Remember to find out simple things such as, Who will be in the meeting tomorrow? What will the agenda be? Since we are not going to discuss the issues of importance to us in the next meeting, when will we address them?

Of course, you can’t always get clear answers to every question at the outset—and sometimes it is premature to ask certain questions. But you should seek to clarify and reach agreement on as many process elements as possible—and as early as is appropriate—to avoid stumbling on substance later.

2. Normalize the Process

A businessman who owns multiple manufacturing facilities in Asia once told me that he no longer does business with companies from the West unless their top managers are willing to first fly into his city to meet with him. My initial thoughts were: Is this about ego? Is it about building relationships? Is it a cultural norm or ritual of some sort? Actually, none of those had anything to do with his precondition to signing a contract.

Here’s how he explained it to me: “Until they have flown into my city and then driven to our manufacturing plants—which are located 20 kilometers from the airport but take almost three hours to reach—until they have experienced that, they simply don’t understand how things work around here. And if they don’t understand, we run into serious problems. Because the first time there is a delay or disruption, or if we need to renegotiate something, they will immediately assume we are either incompetent or stealing from them. Once they’ve seen how things actually work, we can have a more productive relationship.”

Unless business partners understand what is “normal” in a given context or culture, they are likely to misunderstand or overreact to adverse events. The same is true in negotiations of all kinds: It is important to normalize the process. If you’ve ever been involved in an ugly conflict that went into mediation, you may have seen this in action. When a good mediator sits down with parties who are in a bitter dispute, she might say something like, “You think you hate each other today? I can assure you, about three days into this process, you’re going to hate each other even more. And when that happens, I want you to remember something: That’s normal.”

If the mediator does not give this warning, the parties are much more likely to abandon the process when emotions heighten and things seem to be falling apart. But if she explains at the outset that it’s normal for things to get worse before they get better, the parties are more likely to keep at it. By normalizing the process, she effectively manages their expectations.

The same principle applies to any negotiation where there’s a risk that things will not go perfectly smoothly. If you anticipate delays or disruptions on your side, tell your counterparts. This allows you to shape how they will interpret a negative event should one occur and to ensure that they do not overweight its significance. You’ll have a much harder time trying to influence their perceptions or win back their trust after something goes wrong that they did not expect.

Normalizing the process entails discussing, in advance, any factors that might cause the other side to question your intentions or ability or to doubt the likelihood of a successful outcome. You might explain typical barriers that need to be overcome, moments during the process when it’s common for parties to feel anxious or pessimistic, events that might delay progress, and the difference between disruptions that are commonplace and easy to resolve and ones that are more serious.

Encourage the other side to do the same for you. People often hesitate to discuss “what might go wrong,” because they’re focused on presenting themselves and the merits of the deal in the best possible light. This is especially true in certain cultures and in contexts where competition is fierce. Your counterpart might be thinking, “Why should I talk about problems if my rivals are pretending things will be great?”

That’s understandable. If other parties think that mentioning a potential disruption could cost them the business, or that you’ll use it as a lever to extract greater concessions, they’re unlikely to be truthful. To encourage people to be open about problems, make it safe for them. Explain that you are experienced enough to know that every deal and relationship is likely to encounter difficulties and disruptions, and that you want to learn more about the specific risk factors that might play a role in this case. And if you can signal (or commit to) having no intention of holding those factors against them, you have a better chance of reaching an understanding that works for both sides.

To be continued…..

Culled from Harvard Business Review

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