Author: Julia

Adapted from “Uncover Hidden Value with a Post-settlement Settlement,” first published in the Negotiation newsletter.

You’ve reached an agreement that you find satisfactory and your counterpart does as well-but you can’t shake the sense that you could have done even better. For example, you might be happy with the price you achieved in a purchasing contract but wonder if you could have factored better delivery terms into the equation.

After reaching a verbal agreement or ink­ing a contract, negotiators may be able to generate even more value by engaging in a post-settlement settlement (PSS) process, according to Harvard Business School and Harvard Kennedy School professor emeritus Howard Raiffa. During a PSS process, parties try to negotiate better terms on certain issues while remaining free to return to the existing agreement if either one of them is ultimately dissatisfied with the new arrangement.

Here’s how it works. If you’re not 100% satis­fied with the result of a recent negotiation, suggest to your counterpart that the two of you spend a little more time discussing potential improvements that might increase the value of the deal to every­one involved. Be sure to clarify that the discussion is informal and will not alter the existing deal unless you both believe it’s superior to the one you just signed.

Secure in the knowledge that you have a successful fallback, you and your counter­part may be able to invent novel terms that you hadn’t imagined during your initial deal making. One reason a PSS process can be so successful is that it capitalizes on the trust and goodwill you gener­ated during your negotiation.

But beware that your counterpart may view your suggestion of a PSS process as your attempt to cap­ture last-minute concessions. Be sure to stress that your PSS will replace the current deal only if it’s fully supported and desired by both parties.

Adapted from “Set off a Chain Reaction,” by Michael Wheeler (professor, Harvard Business School), first published in the Negotiation newsletter.

Artful sequencing in negotiation means lining up deals so that each agreement increases the odds of nailing down the next one. A hedge fund manager might find that certain investors will decline to put their money in a new fund if approached early on, for example, yet gladly jump on board once others sign up. When embarking on a linked negotiation, start by probing the changing state of the market, the interests of key parties, the nature of important relationships, and the presence of potential spoilers.

Consider how this principle played out in the site acquisition of the Citicorp Center in midtown Manhattan. The sharply angled tower is now a feature of the New York skyline, but, for many years, the block on Lexington Avenue between 53rd and 54th streets was occupied by much smaller residential and commercial buildings, as well as an old Gothic church. More than a dozen different organizations, trusts, and individuals owned the various properties. How these separate parcels were acquired and assembled was recounted in instructive and entertaining detail by Peter Hellman in a 1974 article for New York magazine.

In 1968, Don Schnabel, a real estate broker, was hired by St. Peter’s Lutheran Church to appraise what its 15,000-square-foot plot might fetch in what was then a hot real estate market. Disappointed by Schnabel’s estimate, the church’s governing board decided not to sell. That would have been the end of it, but Schnabel’s research convinced him that, even if there couldn’t be a satisfactory sale of the church property in its own right, a handsome deal might be made if all of the Lexington Avenue parcels could be acquired. In a win-win-win outcome, the current owners would get a premium over market value, a major corporation could erect a landmark building, and-oh, yes-whoever brokered the deal would make a very handsome commission.

Schnabel began by probing his options. First, he quietly elicited from First National City Corp. (as Citicorp was then called) what its interest would be in buying the entire block, if he could assemble it. Next, he tested the market. Rather than pounce on key corner parcels, Schnabel researched three properties on a cross street. He was shocked to discover that another real estate operator had snapped them up just days earlier. With the bank’s encouragement, Schnabel paid a premium to buy out the new owner. He also wangled security to keep the competitor from popping up elsewhere on the block.

Schnabel learned what it would take for longtime owners to sell their properties. For a restaurant owner, it was assurances that employees would be retained for at least a year. Elderly apartment dwellers needed help in moving to California. Doctors who owned a medical arts building weren’t interested in selling until Schnabel crafted a stock-swap deal that minimized taxes.

Schnabel couldn’t have foreseen the specifics of these transactions; he had to get into the trenches to learn what was important to different people. Getting all the parcels took creativity, patience, and hard bargaining. The total cost of the 1973 land acquisition was $40 million-then the highest real-estate sale in New York’s history. The process wasn’t easy, but each puzzle piece taught the developer more about how they all could fit together.

Adapted from “Entitlement in Negotiation,” first published in the Negotiation newsletter.

Simon Gachter of the University of St. Gallen in Switzerland and Arno Riedl of the University of Amsterdam studied the tendency of negotiators to maintain allegiance to past norms concerning entitlement, even when those norms are unrelated to the parties’ real bargaining power. The researchers use the term moral property rights to refer to this adherence to past norms.

In a fascinating experiment, the researchers had pairs of participants compete in a general knowledge test. The higher scorer was named the “winner” and the lower scorer was named the “loser.” The pairs were told that past winners had received 1,660 points (which they were told earned them $14), and that losers had received 830 points (worth $7). A roll of dice then determined whether that payout would go into effect or the parties would be given only 2,050 points to negotiate between themselves. In the latter case, if they could not agree on the distribution, both sides would receive nothing.

The key results concern pairs in the second condition. Notice that 2,050 points do not allow each party his or her historic entitlement and that parties have equal bargaining power, since they both would get nothing if they failed to reach an agreement. A rational analysis would suggest that, on average, the winner and loser would each get 50% of the 2,050 points. Instead, the most common distribution among pairs was two-thirds to one-third, consistent with the historic entitlement! Negotiators adhered to past norms that were not warranted by current economic conditions.

The researchers cite real-world examples of this phenomenon, from the wealthy seeking rent control over their apartments to the historic claims of Israelis and Palestinians. Negotiators would be well advised to consider whether they are over weighing past entitlements when making decisions.

Adapted from “How High Should You Aim?”, first published in the Negotiation newsletter.

Research shows that moderately difficult goals can energize people and increase their performance. In negotiation, parties with relatively high aspirations often negotiate higher individual payoffs. But there can be a downside: impasse and unethical behavior may be more likely.

In a study conducted by Hannah Riley Bowles of Harvard’s Kennedy School of Government and Linda C. Babcock and Lei Lai of the Heinz School of Public Policy and Management at Carnegie Mellon University, 134 participants acted as either the buyer or seller in a price negotiation. Buyers were given more ambitious or less ambitious aspirations. As expected, buyers with more ambitious aspirations negotiated better terms. Yet the sellers paired with buyers who negotiated a good price were less generous toward counterparts when allocating money in a subsequent exercise, increasing the risk of impasse.

Recent corporate scandals suggest that goal setting can contribute to unethical behavior. Research supports this view. In one experiment, Maurice Schweitzer of the University of Pennsylvania’s Wharton School, Lisa Ordóñez of the University of Arizona’s Eller College of Management, and Bambi Douma of the University of Montana’s School of Business Administration found that when negotiators failed to achieve preset goals easily, they were much more likely to engage in unethical behavior than were negotiators who were asked simply to do their best. This effect was strongest when negotiators believed they would fall just short of their goals unless they behaved unethically.

As a collaboration between UST School of Law and the Program on Negotiation at Harvard Law School, the following is the transcript of a conversation between the creator of the multi-door courthouse, Harvard Law Professor Frank E.A. Sander, and the executive director and founder of the University of St. Thomas (UST) International ADR [Alternative Dispute Resolution] Research Network, Professor Mariana Hernandez Crespo.

The UST International ADR Research Network is a research program designed to create inclusive problem-solving models that utilize social capital and consensus-building techniques (i.e., dispute-resolution processes that include the voices of all stakeholders, especially the disenfranchised members of a community). In a pilot project in Brazil, participants examined the different options available to maximize the dispute-resolution process, including the multi-door courthouse conceived by Frank Sander. The multi-door courthouse is an innovative institution that routes incoming court cases to the most appropriate methods of dispute resolution, which saves time and money for both the courts and the participants or litigants. In our Brazilian pilot project, participants met in a virtual forum following the consensus-building methodology designed by Professor Lawrence Susskind of MIT and Harvard Law School. The project was implemented under the direction of Professor Hernandez Crespo, together with a team of Brazilians, global experts and collaborators.

Click here to dowload the full article.

Adapted from “Power Plays,” by professors Adam D. Galinsky (Northwestern University) and Joe C. Magee (New York University), first published in the Negotiation newsletter.

For many people, thinking about the role of power in negotiation can be paralyzing. In fact, the same people who are anxious about negotiating in general tend to be anxious about exerting their power during negotiation. Why? Perhaps because most of us realize that power, even when not explicitly discussed, is often the precipitating and driving force of negotiation processes and outcomes. Obviously, power can generate competition and conflict. But when channeled effectively in negotiations, it can be a catalyst for win-win outcomes.

Here’s an extreme example from global politics of how power can insulate you in negotiation. Ratko Mladic, a Serbian military commander in the conflict with Bosnia-Herzegovina, was notorious for adopting a negotiation style characterized by angry eruptions and emotional diatribes. This strategy apparently worked only when Mladic, who was eventually charged with war crimes, dealt with his subordinates; more powerful negotiators, including those from other countries, were uncowed by his displays of anger. Why? Power offers protective armor against the treacherous behavior of your opponents; the powerful are not easily manipulated.

Researcher Gerben Van Kleef of the University of Amsterdam found that only low-power negotiators were strongly influenced by their opponent’s expressions of anger; they made larger concessions than when no anger was expressed. High-power negotiators barely seemed to notice the other side’s emotions; they identified their own true bargaining interests and offered only the concessions necessary to reach a good deal.

How can you gain this advantage? Immediately before negotiating with someone you know to be emotional and demanding, reflect on a time when you negotiated with a strong best alternative to a negotiated agreement, or BATNA. Recall your sense of confidence and control. Generating psychological power can immunize you from your opponent’s angry tactics.

Adapted from “Knowledge of Biases as an Influence Tool,” first published in the Negotiation newsletter.

Articles in Negotiation have highlighted many of the cognitive biases likely to confront negotiators. Work by researchers Russell B. Korobkin of UCLA and Chris P. Guthrie of Vanderbilt University suggests how to turn knowledge of four specific biases into tools of persuasion.

First, they argue that by effectively anchoring the negotiation with an extreme offer, you will not only influence the negotiation, but also actually change the other side’s beliefs about the nature of an appropriate agreement.

Second, you can try to influence the other side’s judgments through her susceptibility to the availability bias—the tendency to rely on readily available information. By carefully choosing comparisons to the current situation, you can persuade the other party about the appropriate settlement. In a legal context, when defendants can cite similar cases where a judicial award was very small, they sometimes can influence the judge’s or jury’s assessment of the value of the case.

Third, Korobkin and Guthrie suggest that when trying to reach agreement, you should frame the negotiation in terms of potential gains for the other party. Doing so persuades the other party to become risk averse, or reluctant to forfeit gains; the other side will be tempted to reduce this risk by reaching agreement.

Fourth, the researchers highlight the use of contrast effects as a persuasion tool. For example, rather than making a flat offer of $30,000 to settle a case, a defendant could offer a choice among $30,000 immediately, $10,000 annually for the next three years, or a $30,000 payment to charity. When compared with the other two options, the $30,000 cash offer is likely to appear more attractive than when it is the only offer on the table. A plaintiff may very well compare the options offered rather than comparing the $30,000 to the option of holding out for more money.

Overall, Korobkin and Guthrie’s ideas can help you use your knowledge of biases to influence your counterpart’s judgments.

Adapted from “Wheeling and Dealing,” by Guhan Subramanian (professor, Harvard Business School and Harvard Law School), first published in the Negotiation newsletter.

How can you negotiate the best possible price for a new car? This is a common negotiation question, and naturally so. A car is one of the most significant purchases you’ll ever make—and the price is almost always negotiable. Here are a few tips to improve your performance:

1. Prepare, prepare, prepare. Due to the vast amount of information available on the Internet, walking into a car dealership without having done some online research would be a big mistake. Online, you typically can find out the actual dealer cost, or invoice price, of a car—the dealer’s walk-away point in his negotiation with you. Some Web sites also allow you to pick the precise options you want and even tell you what other buyers in your region are paying for the same car. (Note that details such as dealer “holdbacks,” or money paid back to a dealer by the manufacturer, could prevent you from pinning down the dealer’s reservation price definitively.)

2. Choose the right process. In the car-buying context, you can enter a dealership and negotiate with a salesperson, or you can put out a request for bids on the Web. One key factor in this decision is how well you know what you want. If you’ve picked out a car down to the very last option, then by all means let the Internet do the haggling for you. (But beware: some dealers may tempt you with a lowball price and then try to renegotiate in person.) If your final decision will depend on cost, then negotiating face-to-face at a dealership is probably the better choice.

3. Use the threat of walking away. One middle-ground option that Richard Zeckhauser and Guhan Subramanian have identified is a negotiation-auction hybrid, or negotiauction. Merge the strategies described above by visiting dealerships to determine what you want and then hold an online auction to determine who will give you the best price. Eventually, of course, you’ll have to close the deal in person, but this will be a straightforward encounter if you’ve worked out the price in advance.

It’s a different matter if issues remain on the table. In private-equity deals, experienced negotiators use exclusivity as a bargaining chip, a tactic you can use when buying a car. Consider the salesperson’s situation: if you walk out the door without signing on the dotted line, the deal is probably dead. Therefore, you can exercise your option to walk away to extract further concessions. One buyer recently shopped for a car alone and, after negotiating a deal, told the salesperson that he wanted go home and discuss it with his wife. The salesperson asked what kind of price reduction the buyer needed to sign the deal right away. The answer: a $900 price cut, which the salesperson agreed to after the inevitable consultation with his manager. Back at home, the buyer’s wife was thrilled to hear about the final price.

If you still feel stressed about car buying, consider the big picture: you have lots of alternatives, but the salesperson’s alternative to a deal with you is forgone profit. And while you have access to substantial information about his position, he can estimate only how much you are willing to pay.

Professor Guhan Subramanian was featured in Forbes India in April 2010. Professor Subramanian discusses his latest book Negotiauctions: New Dealmaking Strategies for a Competitive Marketplace, which was published in February 2010.

Click here to read the full article.

Professor Subramanian will be teaching Advanced Negotiation: Deal Design and Implementation at the Harvard Negotiation Institute June 14-18. For more information, or to register, click here.

Winners of Harvard Law School’s 57th annual Williston Competition, Harvard’s annual contract negotiation and drafting competition for first-year law students, were announced on Monday, April 5.

This year’s winners were:

Best Contract Overall: Russell Herman, David Roth, Kristi Jobson and Aaron Dalnoot

Best Representation of Save Our Square: Fentress Jamal Fulton and Betny Townsend

Best Representation of McMillin’s: Adam David Lander and Matthew Walsh

The Williston Competition presents participants with a complex business problem and charges them with representing a client in negotiations, trying to arrive at an agreement that they then reduce to writing.

This year’s problem involved a negotiation between a community group, Save Our Square, and an international fast-food chain, McMillin’s, which were trying to come to an agreement over the terms of the chain’s establishment of a franchise in the local community.

The competition presented participants with the opportunity to try out their contract negotiation and drafting skills.

“We were drafting right up to the deadline on the last day of the competition,” said Russell Herman, who represented McMillin’s. “It was difficult drafting the contract so that all four of us were satisfied with the language.”

It was not all work and no play for the competitors, though.

“The most fun part of the negotiation was brainstorming with the other side,” Herman added.  “Both sides brought really creative ideas about how to address each of the issues, and since we had a good working relationship, both sides felt comfortable sharing them.”

His counterpart representing Save Our Square, Kristi Jobson, agreed.

“The four of us worked so well together,” Jobson said, “and were similarly invested in finding an outcome that worked for both sides.”

The Williston Competition is run jointly by the Board of Student Advisers and Harvard Negotiators, under the supervision of Professor Robert Bordone, Director of Harvard’s Negotiation and Mediation Clinical Program.

This year’s competition was judged by Sarah Jelsema (Class of 2011) Andrew Madsen (Class of 2011) and Jonathan Lackow (Associate, Ropes & Gray, HLS Class of 2007).