Are you at the top of your game and ready to take your negotiation skills to the next level? There has never been a great negotiator who was born great. Great negotiators, like great athletes, leaders or politicians, simply do the basics very well. The question is, what are the basics? I will share with you the three areas you need to focus on if you want to master your negotiation skills and outperform your counterparts:
- Business Acumen
- Negotiation Planning & Preparation
- Negotiation Engagement & Communication
My view on the subject isn’t theoretical or academic – it is rooted in over fifteen years of professional experience gained in 35 countries. This article will provide you with a simple yet practical and powerful framework that you can put to work immediately. The framework serves one purpose: it is to help you consistently achieve higher value, more rewarding negotiation outcomes.
I. BUSINESS ACUMEN
Business Acumen is about understanding the basic building blocks of a business and using that knowledge to make commercially sound decisions and convincingly communicate your ideas to persuade leaders, decision-makers, and counterparts.
To become a well-rounded negotiator and dealmaker you need to understand the key business drivers and their dynamics, you need to get a good grasp on how organizations make money and profits, and how leaders and decision makers measure value. A lot has been said and written about claiming and creating value in negotiations, and if you don’t get the concept of value, you are limiting your options to achieve more creative, higher profit agreements.
When you dissect any organization, however large or small, you will find the same key drivers that power any business: Cash, Profit, Assets, Growth, and Customers. Successful leaders focus on setting clear objectives and achieving results in these five areas to deliver on the most critical goal for any organization: long-term, sustainable profitability. The truth is your negotiated outcomes always directly influence at least one of the drivers above, and because each driver is dependent on all of the other drivers, your actions, commitments, and agreements always impact the entire spectrum. It is vital that, as negotiators, we contribute to the long-term profitability and growth of our businesses; hence we need to understand and master the art of making commercially viable decisions.
Let’s take a look at the five drivers and how each of them can be impacted through negotiation outcomes.
CASH is KING – Without cash you can not pay your bills. You can impact cash by:
– Increasing your company’s revenues – for example by conducting effective price negotiations, negotiating changes in scope effectively, upselling and cross-selling, establishing and protecting value in environments of aggressive price competition, etc.
– Cutting costs – by negotiating TCO rather than just the acquisition price, negotiating stronger partnerships with key strategic suppliers, improving SLA’s and KPI’s, eliminating overruns on projects through effective negotiating of scope, etc.
– Accelerating collection of money – by negotiating favorable payment terms etc.
Your ability to effectively engage in negotiations may strongly impact a cash position and cash flow of your organization. Every single concession you make, unless reciprocated, equals decreased revenues or/and increased costs. Don’t get to the negotiation without having identified your objectives, tradeables, and a walk away position. Having a solid trading plan where you know exactly how to protect margins and at the same time secure strong working relationships is a MUST in negotiations.
PROFIT – Do your commitments and tradeoffs in negotiations generate more revenue or increase costs? In simple terms: PROFIT = REVENUES – EXPENSES. Profits are increased by some combination of growing sales revenues and/or reducing costs. At the end of the day profitability of all the agreements you negotiate contribute to the overall profitability of your organization. There are many factors we need to keep in mind to ensure both: profitability of your negotiated agreements and the long-term profitability of your business:
– One of the toughest challenges that salespeople and business leaders face today is the battle against lower-priced competitors. How you tackle this challenge has a significant impact on your company’s bottom line, operating profits and its fortunes in general.
– Don’t just set prices – manage and negotiate them effectively – very small improvements in price translate into huge increases in operating profit. On the other hand, nothing will drop profits through the floor faster than letting price slip down a percentage point or two – an average of 1% price discount may decrease your operating profits by 8% to 10%
– If you lower your price, can you increase volume enough to generate more operating profit? A short answer is ‘NO’. The common arithmetic of decreasing price to increase volume to increase profits does not add up. Make sure that you understand how the price/volume/profit tradeoff works for you and you know price elasticities for your products and services.
– Profitability comes to those who realize margins – you can protect your margins and sell at margins higher than your competitors by negotiating on value not price.
– The more complex the negotiated agreements, the higher the risk of the value leaking out of your hard-won contracts. At least 30% of annual contract value is at stake when it comes to how outsourcing relationships, mergers and acquisitions and strategic partnerships are negotiated, governed and how relationships are managed. Make sure you deploy a fit-for-purpose relationship governance model and strategy to protect value at stake.
– World-class negotiating organizations create mechanisms and infrastructure to enable cross-functional collaboration to protect the profitability of contracts throughout the entire lifecycle of interactions with their customers, suppliers and business partners. Create a cross-functional alignment to ensure all relevant stakeholders have a solid operational understanding of the negotiated agreement.
– Develop and implement cost containment strategies. Ensure Value for Money in your supplier negotiations and make sure that short-term cost reductions translate into real cost savings.
ASSETS – Assets include anything of value, tangible or intangible, used to produce revenue or profit or that can be converted to cash. You can improve a Return on Assets by getting more productivity from existing assets, making business processes more efficient (e.g., negotiation processes, cross-functional collaboration) and by working to use personal time more effectively. (e.g., through enhancing your prospecting, qualification and negotiation skills). There are limitations to what you can do to impact the return on capital assets through negotiations; however, a lot can be done to improve individual performance and results delivered by the most critical asset in any organization, its people:
– The use of human and capital assets can be optimized and improved through effective internal negotiations and cross-functional collaboration
– Negotiation cycles and deal pursuits can be optimized by equipping all relevant stakeholders with best-practice-based negotiation preparation and engagement methodologies, processes and tools. Some self-reflection questions that can help:
- Do you pursue opportunities that deliver the most ROI? – Deals with a low probability of closing and little likelihood of realizing the full value of the agreement represent a waste of time and energy. Don’t just chase any lead with a heartbeat.
- Do you engage with the right prospects and clients?
- Do you ensure maximum return on your investment, time, and effort vested in negotiations?
- Do you negotiate with the right people who have the mandate to make decisions?
– Improving your walk-away alternatives may give you leverage in negotiations, shorten negotiation cycles and improve results.
GROWTH – Growth is vital to prosperity, and it has to be profitable and sustainable. Every function in your organization can contribute to reducing costs to improve profits, to driving quality improvement, and to improving customer service, all of which contribute to either top-line or bottom line growth. As a business negotiator, you can support the growth of your organization by:
– Aiming to create maximum value in negotiations by identifying and realizing all opportunities
– Offering value-add solutions and selling more to existing clients at margins that earn you a profit
– Successfully renewing existing contracts and renegotiating more profitable agreements
– Successfully negotiating mergers and acquisitions transactions (bear in mind that all available research puts the failure rate of mergers and acquisitions somewhere between 70% and 90%)
– Ensuring a profitable growth of your organization in a way that can continue – What is currently growing faster in your business: expenses or sales revenues? Are you generating or consuming cash? Is your profit margin increasing or decreasing?
CUSTOMERS – Customers are the lifeblood of any organization – they are the source of revenue and cash flow. Anticipating and innovating to meet present and future customer needs is a key to long-term competitiveness. In our work, we challenge the commonly taught deal-making approach where negotiators are focused mainly on closing a deal, rather than what is required to realize 100% of the anticipated contract value over time. The latter requires a more strategic approach to negotiations and customer relationship management. It builds loyalty and makes contract renewal much easier and the ongoing relationship much more rewarding.
Developing business acumen and understanding how each of the business drivers is shaped will enable you to make well-informed decisions and ensure your focus is on what matters the most: the long-term profitability and growth. If you want to influence the thinking and decisions of your counterparts, you need to be able to address the topics that senior leaders are concerned about.
II. NEGOTIATION PREPARATION & PLANNING
Time after time, I hear from negotiators: ‘I don’t have time to prepare’ or ‘I should have spent more time preparing’. Negotiation results are a direct reflection of our preparation, but still, more than 70% of organizations have no formal tools and processes for negotiation planning and preparation.
Improving your negotiation performance starts with a robust process for preparation.
The negotiation checklist that we present below is a systematic way to make sure you are well prepared before you walk into your next negotiation. This checklist doesn’t address the entire complexity of negotiations but instead directs your attention to the most critical areas of negotiation preparation. Should you wish to receive a full and comprehensive BNA Negotiation Preparation & Engagement Checklist, contact us at email@example.com
The following checklist presents a series of questions you should review prior to meeting with your counterpart:
- What is your overall goal? What are you trying to achieve?
- Negotiation SWOT Analysis:
- Strengths: aspects you can emphasize in your negotiations
- Weaknesses: where do your vulnerabilities lie?
- Threats: where does your counterpart’s power come from? What is beyond your control?
- Opportunities: what are you going to do to maintain or improve your leverage
- Interests & Needs – What interests do parties want to satisfy?
- What do you care about?
- Explore your counterpart’s personal, organizational, tangible, intangible, short-, medium-, and long-term interests and needs – If you were in their shoes, what would you worry or care about? Prepare a list of questions you will ask your counterpart.
- Organizational interests are often linked to key business drivers (e.g., increased profits, reduced costs, increased market share, etc.). Identify the other side’s priorities and why they are in a negotiation with you. Make sure that you know your counterpart’s real pain – the reason they’re negotiating with you
- Identify assumptions you will need to validate and what you need to learn early in your conversation with the other side – prepare questions you will use to verify your assumptions
Here is the fact: In negotiation, your counterparts will be more likely to accept and follow your recommendations if you:
- Identify their key organizational and personal interests, drivers and motivators
- Demonstrate to them what they stand to gain if they follow your recommendations (other words, how their interests will be satisfied and key business drivers impacted positively)
- Show them what they stand to lose if they do not follow your recommendations and a negative impact on their key business drivers
- BATNA & CNA – Best Alternative to a Negotiated Agreement & Consequences of No Agreement
- What can you do to satisfy your interests if you do not reach an agreement? What will you really do if no agreement is reached? – this is your BATNA
- What can you do to improve your BATNA? The better your alternatives, the more demanding you can be in negotiations.
- Explore options available to your counterpart. How can you make their BATNA less attractive (more costly, harder to pursue, etc.)
- Conducting the CNA analysis requires you to answer two questions: what are the possible consequences if there is no agreement? What are the costs and benefits associated with those consequences?
- What are the issues? – What specific issues/items must be negotiated for the final agreement to meet your overall goal? Sample Issues: price, volume, delivery schedules, duration of a contract, product upgrades, delay clauses, quality, customer support, terms and conditions, SLAs, KPIs.
- The more you include, the more potential trades you can make
- How important is each issue to you and your counterpart?
- Which issue do you need to discuss first?
- What is your opening position and resistance point per issue? (resistance point is, e.g., your minimum acceptable value if you are selling or the maximum you are prepared to pay if you are buying). Make sure you always give yourself room for concessions.
- Define a trading plan (concession strategy) – what concessions are you prepared to make and what will you ask for in return? A Trading plan is a single most important aspect of any negotiation. Why? Because like nothing else, your trades and concessions carry the power to influence all five business drivers.
- Negotiation Plan – based on the SWOT Analysis, your understanding of interests and needs, BATNA and CNA analysis, analysis of issues and their importance, what is the best approach to achieve the desired business outcome? Your negotiation plan should answer the following:
- What do I want and how do I present my expectations? – prepare a strong framing statement that supports your vision, objectives and the achievement of common goals.
- Where do I start? What do I open with, and how do I begin? – prepare your strategy on how and where to start out.
- How do I maintain momentum? Where do I move? How do I respond? – be prepared to manage the concession process actively, and effectively respond to objections and negotiation tactics.
- How do I conclude? – be ready to deal with difficult people, deadlocks, and threats. Prepare statement and questions that focus on solutions rather than problems and get both sides to a resolution.
- Negotiate the agenda before you start the actual negotiation – learn to control what you can: the negotiation process, your behavior, and activities
In principle, preparations for negotiation should lead to a plan, which is simple and specific, yet flexible – be flexible on tactics but maintain a constant vision of the ultimate goal. People who plan and prepare are more effective and efficient, those who don’t plan go from problem to problem. Always remember to keep your eye on the ball in terms of goals and progress toward achieving them.
III. NEGOTIATION ENGAGEMENT & COMMUNICATION
In simple terms, Negotiation Engagement is about turning your Negotiation Preparation & Planning into an effective and successful interaction with your negotiation counterparts. It is about doing the right thing at the right time:
– Building rapport – in the 1980s, an experiment was conducted in London, where a man approached random people offering them a ten pound note in exchange for a five pound note – a great deal for the passers-by you would hope. Most of them, however, did not take up on the offer. It was too good to be true, and they didn’t know the man who was offering them a 100% profit for nothing. In a face-to-face negotiation one of the priorities is to build a relationship of trust and rapport. We communicate and influence people through three main channels: body language, the tone of voice and the words we use. Use them to your benefit.
– Setting and managing the agenda – suggesting an agenda for each meeting/negotiation is a powerful way of managing the frame and sequence of the discussion. You can ensure that time is spent on shared interests in the 1st instance before moving on to potential conflicting issues.
- Negotiate an agenda before you start the real negotiation
- Make an effort to propose the agenda to your counterpart
- Aim to cover your priorities at the beginning
- If possible, schedule a preliminary meeting/call to validate assumptions, discuss your counterpart’s interests and priorities, and get a grasp on their decision-making processes
– Making offers and counter-offers effectively – who goes first on price and non-price issues? First of all, make sure you establish the value for your products, services or solutions before you negotiate price; otherwise, they will be ‘too expensive’.
Who goes first makes a difference because the initial demands, offers or requests tend to have a strong anchoring effect, influencing the other side’s perception about the situation, the value at stake and the final outcome. The power of anchors is invaluable. If you are in a position to provide the rationale for your initial offer, and you have sufficient information about the other side, go first. If there is little information available to support your case, or you’re negotiating with someone you haven’t negotiated before, or you need to spend the time to acquire information from your counterpart, let them go first, and:
- 1. Set aside their initial offer/demand (ignore the anchor) if it is not in line with your expectations, 2. ask questions to acquire necessary information, 3. make an anchored counteroffer and provide justification, or
- 1. Ask questions to improve your position and gain more leverage, 2. make an anchored counteroffer, provide justification and negotiate a more rewarding agreement, if their initial offer is better than what you would have asked for
- Always negotiate!
– Asking the right questions to extract information and validate assumptions – sometimes the less you talk in negotiations, the better off you are – when you don’t speak you are not making concessions! Questions and silence are a cornerstone of negotiation success. Good questions get good information. Good questions build rapport and understanding with counterparts. With questions, you build up as clear an idea of your counterpart’s needs as possible, in the counterpart’s terms. In the preparation phase you should create a list of all questions you want to ask and here is a sample list you can use to identify the other side’s interests:
- What are your long-term objectives for the business?
- What are your short-, medium-term goals?
- What are you aiming to get from this deal…?
- To make sure that we can offer a solution that meets your requirements, please help me understand …
- What is important to you?
- Why is it important…?
- What are the key elements of the deal that you are looking for?
- How will you measure success?
– Handling objections – to increase your effectiveness in negotiations you should anticipate all possible objections and practice multiple ways of responding to them, especially when it comes to price negotiation. Remember that people buy from you and negotiate because your product or service solves their problem (other words it satisfies their needs and interests). Make sure you understand what those needs are, how your solutions and products help to solve customer’s problems because cost their cost will be contingent on the value the customer puts on those products or services. Below is a simple 4-step strategy for dealing with any objection:
- Step 1 – Hear them out entirely and acknowledge the objection: ‘I completely understand how you feel..’
- Step 2 – Ask thought-provoking questions about needs and priorities, and isolate the objection before answering it: ‘Just to clarify my thinking, what do you mean when you say that the price is too high?’, ‘Just to make sure we are on the same page let me ask you a question…’
- Step 3 – Answer the objection: ‘I can see what you are concerned about, other people had indicated something similar, and someone with your experience knows that the sweetness of low price is quickly forgotten when you have to deal day after day with the bitterness of low quality and poor customer service.
- Step 4 – Aim for the agreement: ‘If I could structure the payments on this to fit within your current budget and spread the other payments into your next budget period, would that make it easier to get started with this? How does this sound?
– Dealing with difficult people and situations – How do you get to ‘yes’ when your counterpart keeps saying ‘no’? How do you negotiate successfully with a problematic counterpart who is using dirty tricks, personal attacks, or stonewalling? Your first objective should be to keep the negotiation going long enough to move from a face-to-face confrontation to a side-by-side collaboration.
- Do not react – do not attack right back, give in, or break off the relationship. Instead, step back, buy time to think and don’t make important decisions on the spot.
- Step to their side – do the opposite of what the other party expects of you. Listen actively, paraphrase, agree where you can, acknowledge their point of view and express your opinions as an addition to, rather than a direct contradiction of your opponent’s point of view.
- Change the game – put a problem-solving frame around your counterpart’s positional statements, ask problem-solving questions, and propose options
- Make it easy for them to say ‘Yes’ – involve the other side in shaping the solution, help them save face and help them present the outcome as a victory.
- Make it hard to say ‘No’ – use power to educate and let your counterpart know the consequences of no agreement.
– Applying negotiation techniques and countering negotiation tactics – you will inevitably negotiate with people who want to push your buttons to gain free concessions and reduce your ability to respond thoughtfully and effectively. It is essential to be able to identify tactics and develop the skills to counter them effectively. The truth is more than 90% of negotiation tactics are predictable and what it means is you can prepare to respond to them effectively. Below is a list of 30 commonly used tactics. You can find information on how to use and counter them on our blog pages.
– Implementing the trading plan (concession strategy) – a solid trading plan will help you keep all the elements of the deal in context and move away from a single-issue negotiation to a creative exchange of value. In negotiations, like in life, nothing is black or white, but a general rule of thumb is that you should never make free concessions – always ask for something in return.
- Make concessions that are of value to your counterpart but demand reciprocity
- Label your concessions – make sure it is clear to the other side how much it costs you to deliver on your commitments
– Distinguishing between the Deal and the Relationship – there is a common myth that one can either have a good relationship, or a good deal, but not both. That kind of thinking often puts negotiators in a box. They become stuck in a continuous cycle of concessions hoping that those concessions will keep their counterparts happy and the relationship will be preserved. It is a little bit like throwing meat to tigers hoping that the tigers will one day become vegetarians. The more free concessions you make, the more demanding your counterparts will be, because why not? Negotiators allow for the relationship to be held hostage by counterparts as they skillfully extract valuable concessions: ‘We want X, or we’ll work with your competitor’, ‘You either give us XYZ, or we terminate the contract’. This happens all too often, and in result, organizations end up with customer accounts that are neither profitable, nor there is any professional satisfaction from working with them and servicing demands.
A better approach is to carefully distinguish between the terms of the deal (pricing, volume, SLA’s, T&C’s) and the nature of the relationship (trust, reliability, problem-solving and escalation, governance, communication, etc.)
As you know negotiating is quite complex, and many factors influence the final outcome. For anyone who is trying to make a deal, close a sale, or negotiate in other everyday situation, understanding how organizations make profits, learning how to prepare and plan effectively, and engaging strategically in negotiations is a surefire way to create and extract maximum value from your transactions.
Watch this space for more insights, negotiation techniques, strategies and best practices.