Back to school: Everything you need to know about ... Negotiating

In 1978, Roger Fisher and Bill Ury published Getting to Yes, their groundbreaking book on negotiation. Inspired by their work in conflict resolution and seeking to counter the view of the effective negotiator as hard bargainer, Fisher and Ury told negotiators to "focus on interests, not positions" and to "invent options for mutual gain".

by Michael Watkins
Last Updated: 23 Jul 2013

Their ideas revolutionised the field of negotiation and laid the foundation of what might be called the 'optimist' school of negotiation, founded on the belief that negotiations could be transformed into exercises in joint problem-solving, if only the parties could truly understand and integrate their interests.

The rallying cry for the optimists became the pursuit of 'win-win' agreements. But what does it mean to seek win-win outcomes in high-stakes negotiations?

It can't mean that all sides walk away with everything they wanted at the outset because that doesn't happen in the real world. Does it mean negotiators should try to make everyone feel like a 'winner' at the end of a high-stakes negotiation? Surely not if this means giving up tangible value - money, power, property, identity - simply in order to make your counterparts feel good. It's unrealistic to expect people to so drastically curb their instinct for self-interest.

When examined closely, the idea of win-win negotiation is deeply flawed; advice to seek win-win agreements is Utopian and even dangerous. A more powerful alternative is the idea that effective negotiators should seek both to create value and capture value in negotiations.

This pragmatic view of negotiating was developed by the 'realist' school of negotiation, inspired by the work of Howard Raiffa and his students David Lax and Jim Sebenius. Creating value means identifying potentially complementary interests and exploiting them to make mutually beneficial trades. In this way, negotiators can enlarge the 'pie' rather than just fight over slices of a smaller one. Capturing value means making sure you get an acceptable slice of the pie.

Suppose, for example, that you are negotiating to purchase a house. Price is one important issue, but so is timing for closing. You are anxious to get settled and would be willing to pay an amount more in return for a speedy transfer of the property. If the owner has complementary interests - that is, if they are willing and able to accelerate transfer of the house to you in return for getting a somewhat higher price - then you have the basis for a mutually beneficial trade.

If this was all there was to it, we might declare a 'win-win' victory.

But it is not the end of the story, because you have to negotiate how much more you will have to pay to speed things up. You would, of course, prefer to pay as little as possible. The owner, on the other hand, would prefer you pay more. So creating value doesn't eliminate the need to capture value. The 'pie' of value that gets created through trades must be divided. Division happens in negotiation; it can't be avoided.

Value gets created in negotiations through identification of complementary interests. Value gets captured through the exchange of positions. You have an upper limit on the premium you are willing to pay to accelerate the transfer, and the owner of the house has a lower limit on what they are willing to accept. If these don't overlap, there is no basis for agreement. If they do, then there is a bargaining range.

Effective negotiators also recognise that there are different types of negotiations and match their strategies to the situation. A common mistake that ineffective negotiators make is to adopt a one-size-fits-all approach.

But the right balance of value creation and value capture depends a great deal on the issues to be negotiated. The key, therefore, is not merely to try to create and capture value, but also to understand when and how to shift your emphasis between value creation and value capture, depending on the type of negotiation you face.

Win-win has helped people to see that negotiation is about more than haggling, but it doesn't provide a practical basis for conducting real-world negotiations. Focus on creating value and capturing value in every negotiation you undertake.

- Michael Watkins is a professor of practice at INSEAD, and the author of Shaping the Game: the new leader's guide to effective negotiating (HBS Press, 2006)

FURTHER READING

Getting past no: negotiating your way from confrontation to cooperation, William Ury, Random House Business Books (1992)

The art and science of negotiation, Howard Raiffa, Harvard Business Press (1985)

Negotiation: Harvard business essentials, Michael Watkins, Harvard Business School Press (2003)

Closing the deal, Michael Wheeler, Harvard Business Review, April 2006

The hidden challenge of cross-border negotiation, James Sebenius, Harvard Business Review, March 2002

Turning negotiation into a corporate capability, Danny Ertel, Harvard Business Review, May 1999

BEST-SELLING CASES

Daily spring water, 505-032-1, W JianWei, C Schirman, SIMBA-Shanghai International MBA, 2005

Schmidtco (A), 9-904-080, J Hammond, Harvard Business School Publishing, 2004

Lyonnaise des Eaux Jakarta, 303-042-1, P Lasserre, C Ravix, INSEAD, 2003

All cases are available on www.ecch.com.

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