The Human Resource Management and Organizational Behavior Collection

Stan Gully • Jean Phillips
Editors

The Five Golden Rules of Negotiation

Philippe Korda

www.businessexpertpress.com

Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Prologue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Part I Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Become an exPert: master the FIve Golden rules oF neGotIatIon . . . . . . 1 The Crucial Prerequisite . . . . . . . . . . . . . . . . . . . . . . . . 3 How to Set Your Initial Offer. . . . . . . . . . . . . . . . . . . . 13 How to Respond to the Other Party’s Initial Attacks . . 25 Never Make a Concession Without Getting Something in Return . . . . . . . . . . . . . . . . . . . . . . . . . . 33 How to Avoid Giving Away More Than Necessary. . . . 45 How to Guide Negotiations to a Successful Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Become a Guru: antIcIPate Your oPPonent’s moves . . . . . . . . . . . . . . . . . . . . . 65 How to Distinguish Apparent Demands From Real Demands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 How to Shift the Balance of Power Between Buyer and Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 How to Avoid the Traps of Professional Negotiators . . . 95

Part II Chapter 7 Chapter 8 Chapter 9

Chapter 10 How to Analyze and Exploit Decision-Making Processes . . . . . . . . . . . . . . . . . . . . 109 Part III Become a leGend: develoP excePtIonal neGotIatInG skIlls . . . . . . 127

Chapter 11 Get “the Enemy” on Your Side . . . . . . . . . . . . . . . . . . 129 Chapter 12 How to Handle Bluffs and Detect Lies . . . . . . . . . . . 141

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Chapter 13 Dealing With Difficult Discussions—Tactfully . . . . . 151 Chapter 14 “Take It or Leave It”: How to Break the Deadlock . . . 169 Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Appendix: Carl Ritchie Applies Margaret Peake’s Advice . . . . . . . . . . . 193 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

Foreword
I have been doing work on the topic of negotiation since the prehistoric era. Allow me to set the stage for the differences between the early books I wrote and the current book. In 1993 there were as many currencies as there were European countries, we watched films on video cassettes, mobile phones were like something out of science fiction, e-mail was in its infancy, cameras used films, and a road atlas, not a GPS, got you home. It was standard practice to smoke in meeting rooms, in aircraft, and even in elevators. In those days, the president of the United States was George Bush (and there was no need to add the word “Senior”). Nelson Mandela was fighting for the first free elections to be held in South Africa, and Tony Blair was a promising political newcomer. Global warming was almost an unknown concept. In business, China was a third-world agricultural nation that was largely cut off from the world, India and Brazil inspired sympathy, while Japan inspired fear. The most admired American corporations were not Google or Amazon, but General Motors and Kodak. In the absence of the Internet, information was a scarce commodity indeed. Trade negotiations had not yet been transformed by globalization, the technological revolution, or the information age. The changes that have transpired since my early work have been taken into account in the contents of this book. However, behind all that, many of the essentials have remained unchanged. The workings of commercial negotiations, the golden rules to be followed, and the tools and methods of the best negotiators are almost the same as they were 18 years ago, maybe even 18 centuries ago. So I have sought not to change the essence of this book but to further refine, expand, and simplify its content so as to ensure that it is more relevant, useful, and practical. I have resisted the temptation to include developments involving negotiations in a multicultural context. Indeed, experience has shown that in this highly complex field, ready-made solutions do not work well

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for those wishing to employ them in an unfamiliar environment. This subject might one day merit a second volume all its own. In this book I have included a chapter entitled “How to handle bluffs and detect lies” in order to answer relevant questions that I have been asked a thousand times. Also, my previous work has focused on teaching sellers how to negotiate and protect their margins. Since then I have realized that tens of thousands of readers have used my earlier books to prepare themselves for purchasing negotiations. This obliged them to perform intellectual contortions in order to adapt advice for sellers to their role as buyers. While working with our Korda & Partners teams to advise and train buyers on every continent, we realized that we needed to offer a book that specifically met their needs as well as those of sellers. Lastly, I wanted to provide a proper response to a question I have been asked thousands of times: “Do your golden rules of negotiating also apply to buyers?” Naturally, the fundamental rules of negotiating are the same, whichever side of the table you are on. However, they apply differently, with a logic that is often quite specific. That is why this book addresses commercial negotiations from both the seller’s and the buyer’s perspectives. Specific advice is given to each side to allow them to optimize their negotiating positions. Who knows, if one day both you and your counterpart have read this book, perhaps you will be able to conduct impressively fierce negotiations and end up with a wonderful win-win agreement. This book is structured to help you to gradually acquire the skills needed in order to become an excellent negotiator in today’s environment. In order to negotiate and to protect your margins, the most important thing is to acquire a thorough mastery of the basic rules of negotiating. That is the purpose of the first part of this book. I suggest that you read it in full. Once you have acquired that grounding, you will need to develop your ability to understand your opponent’s tactics: The second part of the book is entirely devoted to this, and you will be able to acquire a deeper understanding of those issues that concern you most directly. It is on these solid foundations (mastery of the “basics” and understanding of what lies behind negotiations) that you can then develop the talents that go toward making a great negotiator. It is then a question of

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earning the sympathy of the “enemy,” handling bluffs and detecting lies, tactfully leading discussions, asserting yourself in tense situations, and above all, overcoming deadlock. That is the challenge of the third part of this book. Thus you will be able to accept and handle confrontation and go on to transform it into cooperation and effectively resist adversaries so that they become partners, wherever and whenever possible. I wish you great success but also great pleasure in your future negotiations.

Prologue
This scene is set in a fashionable restaurant frequented by businesspeople. At a discreet corner table, two people are sitting opposite one another. The woman is about sixty, while the man is much younger, maybe between thirty-five and forty. The wine waiter comes and asks the man to taste the wine. Margaret PEAKE: It is strange for me to think that we shall never negotiate with one another again. I didn’t think that my retirement would come around so quickly! Anyway, we’ve had some great battles. You must have really hated me sometimes? Carl RITCHIE (smiling): Is that what you think? Not at all! Quite the contrary! Generally our discussions were quite easy, quite relaxed, quite friendly. Though I must confess that the word “quite” is important! (Suddenly he becomes serious again, almost embarrassed, after a pause) I wonder if, now, I could ask you a favor that I have long dreamed of asking. If you are willing, I would like you, with the benefit of hindsight, to offer me some advice, to enable me to become a better negotiator when I am dealing with buyers as tough as you were once with me. (Then, as if confiding a secret) I have very clear memories of situations with you, when I had thought that I was unable to clinch a sale, or clinched it on unsatisfactory terms. I would love to discuss those situations again, if you remember them. Margaret PEAKE: I think that I remember them perfectly.

PART I

Become an Expert: Master the Five Golden Rules of Negotiation
When you have absorbed and implemented part I, you will be well on your way to being professionally equipped to handle commercial negotiations. It’s a fact that 95% of poorly negotiated deals end up that way because someone fails to abide by one of the five essential rules or his “crucial prerequisites.” The rules are simple, but essential, when you are preparing for and conducting face-to-face negotiations. They will protect you from the major errors that can cost you dearly when handling important business deals. Look around you. Many people believe that they know these golden rules, but very few people have truly mastered them, even among the most senior managers in major corporations. Mastering these five golden rules is the hallmark of the successful negotiator.

ChAPTER 1

The Crucial Prerequisite
Carl RITCHIE: I’m keen for you to explain your negotiating tactics to me. Margaret PEAKE: My tactics . . . why?

Margaret Peake’s Office, 2 Years Earlier
Carl Ritchie is preparing to conduct some tricky negotiations. After discussions with senior management, it seems that the lowest price at which he can settle is $100, whereas the maximum price that he can reasonably quote at the start of the meeting is $110. So Carl Ritchie has quite a restricted “range.” Margaret Peake does not beat about the bush: Mr. Ritchie, you cannot be serious. You quote me a fantasy figure of $110, when currently the market price for such products is $98. You have a choice: Either you make me an offer very close to $98 or we are wasting our time. Carl Ritchie is in trouble. The price quoted is below the minimum price that he agreed to with senior management. Should he give ground and accept $98? Or, despite everything, should he try to seal the deal at $100? But how? He feels that the buyer is dictating the terms and he is meekly following along.

In the Restaurant
Carl RITCHIE: It was awful, but what more could I have done? Margaret PEAKE: Let us imagine that you are preparing for the same negotiation, but this time you set a specific target price,

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to take account of the market, your competitors, your production costs, and your sales policy. Carl RITCHIE: Let’s say, $102. Margaret PEAKE: You tell yourself that it will not be easy, but that is your target outcome. Carl RITCHIE: As usual, I also calculate a minimum price—for example, $100—and a maximum price that I could present at the start of the discussions—$110, for example. Margaret PEAKE: Then let us imagine that I start the discussions with the same statement as before: “Mr. Ritchie, you cannot be serious. You quote me a fantasy figure of $110, when currently the market price for such products is $98. You have a choice: Either you make me an offer very close to $98 or we are wasting our time.” Carl RITCHIE: Knowing that I’m aiming for $102 changes everything! It’s light years away from those awful negotiations! Margaret PEAKE (amused): Really? Carl RITCHIE: This time I don’t feel like I’ve been undermined. I know that my true target is to clinch a deal at $102. I have quoted $110, which is all part of the game. You have responded with $98—and that’s part of the game, too. Margaret PEAKE: So what happens now? Carl RITCHIE: I’ll gradually try to convince you to accept a price of $102 at the end of the negotiations. Margaret PEAKE: You see, Carl, just by setting a precise target figure, this time you feel that you are in a much stronger position. You are fighting the buyer on equal terms. Carl RITCHIE: In other words, you need to know what you want. Margaret PEAKE: That is the crucial prerequisite for all successful negotiations.

The Crucial Prerequisite: Know What You Want
When you are faced with tricky commercial negotiations, you really must know how to establish your priorities and set your objectives. Here are a few practical tips to help you.

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5

Prepare the Ground This involves identifying all the components of the agreement that you are seeking and that may be negotiated. Generally the agreement will need to specify the following: • Logistical factors: schedules, deadlines, transport, organization • Technical factors: product and service specifications (main and secondary products/services) • Legal factors: the nature of reciprocal undertakings, terms and conditions applicable in the event of subsequent disputes • Financial factors: price but also method and terms of payment • Commercial factors It is important to take a broad view of the agreement in order to properly identify the principal aspects that are at stake as well as to anticipate additional issues that could be involved in the negotiations with your customer. Rank Your Priorities As we shall see in detail in a later chapter, you need to understand what the other party “really wants”: her true priorities, her major concerns, and her essential objectives. Likewise, you must analyze what is at stake in the negotiations for your own business: What, above all, are you seeking to achieve? For a seller, one set of negotiations may be particularly important for the volumes that the deal will generate, another may be crucial because the deal will help the business develop fresh expertise, while another may help the business gain a foothold in a growth market. Indeed, protecting price levels is not generally a priority per se. When the seller wants to protect her price, she may have several very different priorities. If her priority is to ensure that the contract is profitable, protecting price levels is not the only potential strategy. Depending on what the customer “really wants,” the seller may prefer to agree to a small price reduction offset by, for example,

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• generating a much larger sales volume, • identifying compensatory measures that generate savings (grouping orders and deliveries, simplification of a product or packaging). If her priority is to avoid any “slippage” in the market and ensure the protection of a benchmark price levied on all customers, she may refuse to make any concessions on price but may, if necessary, grant her customer nonprice concessions such as cooperation agreements or extra services. For a buyer, properly defining priorities is even more important, as you usually have a choice from among several suppliers who meet expectations to varying degrees. This can be difficult to achieve because there is a risk that unpleasant and unforeseeable surprises will arise during the purchasing process, and these are, by definition, almost impossible to assess in advance.
Business Objectives Matrix, First Column Issues subject to negotiation
Price Payment quantity Etc.

Particularly in diplomacy, excellent negotiators are characterized by their seeming flexibility on certain secondary issues as a counterweight to absolute firmness on key issues. It is therefore essential to know what the true priorities are—both the other party’s and your own. If everything is a priority, then you have no true priorities! Ask yourself these questions: • What is really important for me in these negotiations? • What will enable me to say, a year from now, that I negotiated well today?

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Do Not Make Do With a Price Range: Specify Precise Objectives The Roman philosopher Seneca said, “There is no such thing as a favorable wind for those that do not know where they are going.” Thus, for each element of your proposal (price, volume, deadlines, etc.), you need to define precisely the figures you seek. For the seller, this definition of objectives must be undertaken well before the offer is presented to the customer. This is a crucial point and the source of many errors in practice: Too often, the seller starts by making an offer, and only when faced with pressure from the customer does the seller wonder what he needs to achieve and where he can give ground. You need to reverse this logic and define precise objectives before you do anything else. In certain sectors there is a tradition of laying out a suitable product or service offer according to the customer’s budget. Here we shall address the most common instance of this, the one where the supplier starts by establishing the product or service offer according to the customer’s needs—and then the price. For businesses selling simple, standardized, or commonplace products, the price may be determined by two criteria: production cost and knowledge of the prices charged by competitors. Where more complex products or services are being sold, the price may also include the “perceived value” compared with competitors. For this, you need to identify your main competitors and collect and analyze as much objective data as possible to allow you to calculate • the probable offer price level, • the main strengths and weaknesses of that offer compared to the one that you are compiling. It is then a case of quantifying the value of each relative advantage of your offer, as perceived by the customer. For example, during a particular set of negotiations, you might believe that a technical solution that can be implemented 2 months earlier might represent a perceptible advantage for the customer, amounting to some $200,000. Likewise, you can quantify the perceived cost of each relative disadvantage of your offer compared with that of your main competitor.

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Lastly, account needs to be taken of the “value added” that your customer may attach to one or other supplier for reasons of trust, perception, or relationship. The “perceived value” of the offer is therefore estimated price of the leading competitor + estimated value of our offer’s relative advantages – estimated cost of our offer’s relative disadvantages ± difference in “value added.” Naturally this “perceived value” plays only an indicative role. It must be compared with recorded market prices and with the business’s average selling price for comparable products or services in order to enable you to define your target price. You also need to study production costs thoroughly and examine the profitability of the transaction if it is completed at the “target” price.
Business Objectives Matrix, Second Column Issues subject to negotiation
Price Payment quantity Etc.

Targets

$102 30 days net 100 Etc.

A buyer also needs to define precise objectives. It is true that it is generally up to the seller to “reveal her hand” first. Furthermore, the objectives may also change depending on the information gleaned during negotiations (e.g., the appearance of new offers even more attractive than those anticipated). Yet knowing what you want is one of the keys to negotiating both a purchase and a sale. Above all, you need to assess the overall consistency of negotiating objectives: Taking account of the other party and his expectations and considering the market, production costs, and your business’s policies, are your targets acceptable? Are they realistic? Do they form a consistent whole?

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Do Not Confuse Targets With the Limit Points Prepare yourself for the worst, including market conditions that are less favorable than anticipated and even stronger pressure than expected from your counterpart for terms lower than your specified targets. It is essential that you are clear about your limit points (commonly known as your bottom line). If you are not, you run the risk of agreeing to concessions in the heat of the moment that you will later regret. Thus, for each element of your offer, you need to determine acceptable limit points by calculating, if possible, the cost of concessions envisaged (resulting from the difference between the target set and the limit points). For certain items, at this stage there may be a need to anticipate “terms of access to limit points.” For example, a seller may need to sell a certain product volume in order to agree to a particular price level below the target price. A buyer may anticipate concessions on the purchase price, provided that the contract comes with extra guarantees. Naturally, since buyers are “obliged to settle” with one or another of their potential suppliers, it is more difficult for them to set their own absolute limit points. They must set barriers beyond which they will not allow themselves to go, at least until such time as they have exhausted all other negotiating options.
Business Objectives Matrix, Third Column Issues subject to negotiation
Price Payment quantity Etc.

Targets

Limit points

$102 30 days net 100 Etc.

$100 60 days net 50 Etc.

At this stage you have prepared the ground (all those items subject to negotiation), ranked what is at stake (priorities and risks), determined your negotiating objectives, and clarified your limit points.

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What Do You Do When Things Get Difficult?
Sometimes it is not easy to determine your negotiating objectives. How should you proceed? When You Lack Information It may be that you have to enter negotiations in an almost unknown market, with no real information about the price expectations of the other party or about other goods and services available in the market. If it has not yet been possible to conduct any market research, those initial negotiations constitute a means of finding out about the market. Thus you need to set a reasonable objective according to the limited information at your disposal. Yet how can you obtain such information? Whether you are a supplier or a customer, you can, for example, use research to consult other potential customers and, among other questions, you can pose one concerning the price at which they buy products equivalent to the one that is of interest to you. You can also ask colleagues or other experts in the market. But what if there is no precedent? Under these circumstances, it may be useful for the seller to allow the customer to “speak first,” provided that he does so well in advance of the negotiations, during an exploratory phase when there is a chance that the customer might respond honestly and not “play games” with the seller. It is also possible to allow the customer to “speak first” by indicating that you are not prepared to open negotiations: “Let me know your probable budget. I’ll look into it and will tell you whether or not we can help.” If the customer is interested in your product, this tactic will dissuade her from quoting a ridiculous price so she does not risk losing the opportunity to make the purchase. Then, of course, whatever price the customer quotes, there is no rule against trying to initiate negotiations. If you are the buyer, you need to assess your supplier’s “business model” to understand his cost structure. Identifying a supplier’s sources, calculating the breakdown of his fixed and variable costs, and determining a credible production cost range are tasks that are becoming ever more familiar to buyers.

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When the Other Party’s Demands Change During Negotiations • You are negotiating the sale of 10 units when the customer announces that she is actually prepared to buy 50. • You are negotiating the sale of machine A when the customer suddenly switches his interest to machine B. • You are negotiating a purchase: The supplier suddenly drops a demand that seemed almost nonnegotiable but makes a new, completely unexpected request. Under all these circumstances, there is a clear risk that the negotiations will break down because you improvise a new strategy without really considering it in advance. You prepare for negotiations using basic data that primarily relate to your expectations of the other party. If those expectations change markedly, new negotiations are needed, and you need to be able to negotiate a preparatory period for these. When You Do Not Have Clear Guidance From Above It is quite easy to prepare for negotiations when you have been given clear instructions, including priorities, negotiating objectives, and limit points. However, executives and managers often give negotiators comparatively little information. In the case of sellers, they very rarely know their true bottom line since senior management will avoid revealing this for fear that sellers may too quickly agree to it with the customer. Yet if you cannot set negotiating objectives, you cannot negotiate effectively. So there is a need for a minimum amount of dialog in order to analyze your counterpart’s situation, market conditions, and your business’s key aims to reach mutual agreement internally over the objectives to be pursued. At the very least, it is essential to clarify the nature of the figures quoted by senior management when it comes to price and terms and conditions: Do these constitute the outcome that is to be achieved, or are they limits that must not be exceeded under any circumstances?

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Key Points to Memorize
• End with an agreement that meets the priorities of both the buyer and seller. • Define all the elements of the agreement that is to be reached. • Define your priorities: What is really important? • Determine very precise targets; do not be content with a “price range.” • Set a “bottom line” below which there is no deal.

Some Sensible Questions to Ask Yourself
• What is really important for me in these negotiations? And for the other party? • A year from now, what might tell me that I have negotiated well today? • Which items are subject to possible negotiation? • Have I defined a precise objective for each item? • Are these objectives consistent as a whole? Are they realistic, given the other party, the market, production costs, and company policy?