Friday, March 18, 2011

Want Leverage? Pick Up a BATNA

“I am very intrigued by this concept of BATNA you raised the other day,” Verdi said to Tyler Gitou. “Can you explain to me how I would use it in a negotiation?”

“Before we go there let’s make sure we understand what a BATNA is,” Tyler said. “Let me explain it to you in a real life example: You can’t walk to work. It’s too far. So you have an interest in getting some form of transportation. You decide you want to look at cars. You go to the Ford dealership and negotiate to buy a new car. You can’t reach agreement. What do you do?”

“What do you mean?” Verdi asked.

“You are about to walk away from the negotiation table with the Ford salesman. What is your alternative to meet your interest? Where will you go now?

“Well,” Verdi said, “I could go to another Ford dealership.”

“Good. That is one alternative. What else? Is Ford the only company that makes cars?”

Verdi started to get it. “Oh, no. I could go to a Chevy dealer or some other car dealer.”

“What else? Does the car have to be new to meet your interest? Does it have to be a car? Could it be a scooter? Could it be a bicycle? Could it be the bus? Or carpool? Or could you get a job close enough to walk?”

“I see,” Verdi said. “I need to list every possible alternative and then measure it against my interests. So a bicycle would not work because I have to get on a highway. There is a bus but it takes longer, and so on.”

“Exactly. And when you look at all of those alternatives, one will emerge as the Best Alternative to a Negotiated Agreement or BATNA. Having a strong BATNA is what gives a negotiator a sense of confidence at the table. People use the terms “power” or “leverage” but what they really mean is the ability to walk away. The party who cares less about the deal on the table has the stronger position because the deal on the table has to get better and better to make him care more than he cares about his BATNA.”

“That makes good sense except what do I do if I don’t have a BATNA?”

Tyler laughed. “You always have a BATNA. Do nothing! Walk away from the deal. Some deals are so bad that you are better off not signing them because of the harm they might cause your company’s finances or reputation. What if a client pushes you to sign a deal that doesn’t make money or on which you won’t be able to deliver the product? Isn’t doing nothing better than a business loss or a breach of contract lawsuit? So your BATNA may not be great, but there is a point when doing nothing is better than doing harm.”

“I understand. So back to my question: how and when do I use my BATNA in a negotiation?"

“Now that we understand BATNA, let's talk about that after lunch."

Wednesday, March 2, 2011

Truly the Best Part II

Verdi was having a cup of coffee with Tyler Gitou. “You may recall we had a meeting with my client where we proposed a best and final price for the components they wanted?” Verdi asked.

Tyler nodded. “I do. You had offered the components for $1 million and the client said you had to reduce the price by 10 percent or they would go to another supplier.”

“That’s right,” Verdi said. “The only way we could reduce the price by 10 percent was to use lower-quality parts. So we told the client that and their negotiation lead said, ‘Well, you have to make it work.’ So what do I do now?”

“That’s the response I expected, Verdi. What the client is asking you to do is bid against yourself. You offered two options: quality for $1 million or less quality for $900,000 and the client has summarily rejected both and said, ‘come back with another answer.’ What do you think they are expecting to hear?”

Verdi thought for a moment. “I know this guy pretty well and have played his game on other deals. He is looking for me to say same quality, split the difference at $950,000.”

“Why do you think he’ll say that?”

“Because that’s how we’ve done business before.” Verdi said.

“So you’ve trained him that the way you negotiate is to say ‘no no no … yes’. And now you can’t afford to say ‘yes’ this time because you can’t deliver the components at the quality they want for $950,000.”

“I guess that’s right.”

“Let’s talk about their interests for a moment. Who is focused on quality? Is it the lead negotiator or someone in the business who actually needs the components?”

“It’s the vice president of manufacturing.”

“And what happens if you deliver components of a lesser quality?”

Verdi thought for a moment. “Well, his concern is that the failure rate for the product will go up. They pride themselves on the quality of what they sell. So if we provide lower quality parts in these machine components, he risks his company’s reputation because the product fails more often. That will have a big impact on his whole product line.”

“Do you think the lead negotiator knows that?” Tyler asked.

“Absolutely. He is the buyer for all the components for this line of products.”

“OK,” Tyler said. “So what’s the client’s BATNA?”

“Their what?”

“Their best alternative to a negotiated agreement. It’s a term that means where the other party will go when they walk away from you. If you can’t reach agreement on the price for the components, what alternative does the client have for filling the need for these components?”

“Gosh,” Verdi said. “They don’t have one. Our components are the only ones that meet this spec. They have to buy these from us.”

“So they are up against a wall. Why is the lead negotiator asking for the discount then?”

Verdi looked sheepish. “Because in the past I’ve always said ‘yes” after he asks enough times.”

“So you could go in and say, ‘No discount! Pay me $1 million’. But that would hurt your relationship. So you need a couple of options. First, you need to find a way to say you have no room to move on the $1 million. But it sounds like he’s put himself out on a limb by demanding the cut, so you need to find a ‘golden bridge’ for him to retreat over; some counterproposal he can say ‘yes’ to so he can save face.”

“Well,” Verdi said, “if he increases the order I can give him a volume discount of 3 percent.”

“Good!” Tyler said. “What else?”

“If we change the production cycle by two weeks I can produce the components more efficiently. That may drive another 2 percent.”

“Now you’re thinking. So what you need to do now is put together your most creative counterproposal to offer as another option for the $1 million deal. Your goal is to demonstrate your efforts to try and meet his interests of high quality at the best price you can offer. Providing transparency into the levers he can pull to change the price and provide discounts will help him understand you have done all you can and give him options for a better deal. This way you can build trust by showing your commitment to make him successful and begin to retrain the client to your new collaborative negotiation style. This is the end of ‘no no no … yes’!”