Negotiation

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ARTICLE REPRINT NO. N0408D

Accept or Reject?
BY D EEP A K MA L H O T R A

This document is authorized for use only in Miguel Angel Pimentel's Negociacion Comercial course at Universidad del Pacifico, from August 2017 to January 2018.
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 A C R O S S T H E TA B L E

Accept or Reject?
Sometimes the hardest part of negotiation is knowing when to walk away.

BY D EEP A K MA L H O T R A

I After building a profitable

of a business partnership gone awry.
T WAS A CLASSIC CASE
construction company to-
3. Establish your BATNA. Choose a course of action
that would have the highest expected value for you.
gether over several decades, Larry Stevenson and Jim Sha- This is your BATNA—the course you should pursue
piro recognized that their differences had become if the current negotiation fails.
irreconcilable. Stevenson wanted to buy out Shapiro, who
4. Calculate your reservation value. Now that you
was willing to sell for the right price. After months of hag-
know your BATNA, calculate your reservation
gling and legal maneuvering, Stevenson made his final of-
value—the lowest-valued deal you are willing to ac-
fer: $8.5 million for Shapiro’s shares in the company.
cept. If the value of the deal proposed to you is lower
The company is worth about $20 million, Shapiro
than your reservation value, you’ll be better off re-
thought to himself. I own 49% of the shares. Heck, I helped
jecting the offer and pursuing your BATNA. If the
build this company. I’m not going to accept anything less
final offer is higher than your reservation value, you
than my fair share—$10 million. I’d rather fight in court
should accept it.
than accept $8.5 million. Shapiro rejected the offer, and
each party prepared for a trial.
To assess his BATNA, Shapiro first should have ob-
Shapiro’s rationale for rejecting Stevenson’s offer seemed
tained the following information from his lawyers: esti-
reasonable enough. Furthermore, Shapiro’s lawyers assured
mated litigation costs, $500,000; his likelihood of winning
him, a court ruling very likely would be in his favor.
in court, approximately 70%; and the fact that if he won,
In fact, as we will see, Shapiro made the wrong choice.
he would receive $10 million for his shares, whereas if he
He could have figured this out if he had assessed his
lost, he likely would receive only $3 million.
BATNA—his best alternative to a negotiated agreement. A
Next, Shapiro should have used this formula to deter-
negotiator’s BATNA is the course of action he will pursue
mine the actual value of his BATNA:
if the current negotiation results in an impasse. An evalua-
tion of your best alternative to a deal is critical if you are to (0.7 x $10MM)
establish the threshold at which you will reject an offer. Value if he wins in court
Effective negotiators determine their BATNAs before + (0.3 x $3MM)
talks begin. When you fail to do so, you’re liable to make a Value if he loses in court
costly mistake—rejecting a deal you should have accepted – $500,000
or accepting one you’d have been wise to reject. In negotia- Cost of litigation
tion, it’s important to have high aspirations and to fight
hard for a good outcome. But it’s just as critical to establish $7.4MM
a walkaway point that is firmly grounded in reality.
Shapiro should then have determined his reservation
value for the negotiation with Stevenson: What is the least
Assessing your BATNA he would accept? It’s worth noting that, after the trial was
To determine your BATNA in a given negotiation, follow
well under way, Shapiro came to believe that he should not
these four steps:
have rejected Stevenson’s offer. “I still think the offer
1. List your alternatives. Think about all the alterna- should have been higher,” he said, “but if I could go back,
tives available to you if the current negotiation ends I’d accept it. Righteous indignation is worth something,
in an impasse. What are your no-deal options? but it’s not worth $1.1 million.”
Now that we have covered the basics, let’s consider two
2. Evaluate your alternatives. Examine each option
common BATNA-related mistakes that even savvy negoti-
and calculate the value of pursuing each one.
ators who have assessed their BATNAs sometimes make.

Copyright
This © 2004
document is by Harvard Business
authorized for useSchool
onlyPublishing
in MiguelCorporation. Negociacion Comercial course at Universidad del Pacifico, from August 2017 to January 2018.3
All rights reserved.
Angel Pimentel's
Knowing When to Walk Away (continued)
Failing to monitor your changing BATNA
Two computer software companies, Technolink and
Ethermax, were battling over the acquisition of an offshore
development firm, Soft Servers. An acquisition of Soft
Servers would help Technolink integrate vertically, realiz-
ing significant cost savings. For these reasons, Technolink
valued Soft Servers at $150 million.
Meanwhile, Ethermax, a new start-up, saw acquiring
Soft Servers as a way to enter Technolink’s market. As a re-
sult, Technolink was willing to pay more than Soft Servers
was worth—an additional $50 million, or up to $200 mil-
lion—if the acquisition could prevent Ethermax from
emerging as a formidable competitor.
The bidding war opened high at $120 million and
heated up quickly. After Ethermax put in its third bid,
$158 million, Technolink made an offer of $163 million.
At this point, Soft Servers informed Technolink that if it
raised its offer to $170 million, Soft Servers would close
the auction and guarantee the acquisition to Technolink.
Technolink’s top management met overnight and, the
next morning, offered Soft Servers $168 million. The offer
was accepted, and executives from both companies were
thrilled with the deal. Yet, interestingly enough, Ether-
max’s top management was even more ecstatic.
Why? Unbeknown to Technolink, after Ethermax offered
$158 million for Soft Servers, it retreated from the bidding
war and quickly (and quietly) acquired ProxyServe, one of
Soft Servers’ competitors. Having recently been acquired by
a company called ConsumerWare, ProxyServe was off most
industry players’ radar. But impending antitrust litigation
had forced ConsumerWare to relinquish its hold on Proxy-
Serve. Unlike Technolink, Ethermax had closely monitored
the deal and the antitrust proceedings.
The end result? Ethermax won on all fronts: it acquired
ProxyServe at a relatively low price, it entered Technolink’s
industry, and it forced Technolink to overpay for Soft
Servers. Technolink had shelled out $168 million for a
company that it now valued at only $150 million. The mo-
ment that Ethermax found a new way to enter the market,
Technolink’s initial BATNA analysis became moot. Instead
of monitoring moves away from the table and reevaluating
its BATNA accordingly, Technolink accepted a deal that it
should have rejected.
Negotiations take time. Some last months, even years.
Throughout the process, good negotiators stay focused on
the other side of the table. Great negotiators stay equally
alert to what happens away from the table. New competi-
tors enter the industry. Laws and regulations pass or ex-
pire. Power shifts from one political party to another;
alternatives shift or disappear.
Negotiation
4This document is authorized forAugust 2004
use only in Miguel Angel Pimentel's Negociacion Comercial course at Universidad del Pacifico, from August 2017 to January 2018.
DON’T FORGET ABOUT THE OTHER
SIDE’S BATNA
Imagine you’re the CEO of a small financial services
firm. Due to a series of misunderstandings—and, you
suspect, some deceit—you wish to end your business
relationship with a longtime contractor. Before you
part ways, the two of you decide to discuss whether
your relationship can be salvaged.
As an experienced negotiator, you sit down to assess
your BATNA before the meeting. You calculate the
cost of finding and hiring a new contractor, the
amount of time it will take that contractor to get up to
speed, and so on. You decide that, if your old contrac-
tor does not agree to a minimum number of improve-
ments to your existing contract, you’ll walk away from
the negotiation and take your business elsewhere.
Unfortunately, the meeting doesn’t go so well.
When the contractor refuses to make any substantive
concessions, you announce that you’re terminating
the relationship. You shake hands and part company.
The next morning, your lawyer calls with terrible
news: Your contractor is suing you for breach of con-
tract. Clearly, your BATNA was not as simple as you
thought it was. While you gave a lot of thought to
what you would do in the event of an impasse, you ig-
nored an equally critical question: What would the
contractor do if you failed to reach a deal?
In the absence of a deal, all parties are likely to pur-
sue their respective BATNAs. You must take the time
to assess the other side’s BATNA, which can affect
your alternatives and the values associated with them.
Ignoring the relationship between your BATNA and
the other party’s BATNA can be extremely costly.
Throughout a negotiation, think about whether you’re
considering all the factors that affect your BATNA—and
whether it may have changed.
Confusing your BATNA with what you think is fair
Negotiators usually have strong feelings about fairness.
Unfortunately, our fairness perceptions tend to be biased
in a self-serving manner. Research has shown that, at the
end of a negotiation, most people feel they were more co-
operative than the other side, that they deserved more
than they got, and that the other side made fewer conces-
sions than they did.
Such distorted beliefs can lead to overly rigid bargain-
ing positions and unrealistic demands. As talks drag on, a
 Knowing When to Walk Away (continued)
negotiator can become fixated on what he considers to be
fair and, in the process, lose sight of his BATNA. We saw
what happened to Shapiro when he was unwilling to ac-
cept anything less than his “fair share” ($10 million) de-
spite the fact that his BATNA (going to court) was worth
considerably less than that.
In negotiation, it’s important to evaluate how much
your fairness concerns are worth to you. Sometimes you
may be willing to sacrifice money in the pursuit of fairness.
But vague, self-serving notions about fairness can cloud
your BATNA analyses and decision making. Shapiro, for
example, was quite sure that he didn’t want to pay more
than a million dollars to stake a fairness claim, yet that’s
exactly what he ended up doing.
Interestingly, our beliefs about fairness can also induce
us to accept deals we should reject. A trip to the car dealer-
ship is a classic case. Suppose that, after test-driving a few
different cars, Olivia decides that she wants to buy car X,
which has a sticker price of $34,000. Her BATNA is to buy
the cheaper, somewhat less appealing car Y from a differ-
ent dealership. She conducts a simple analysis to come up
with her reservation value:
Estimated cost of car Y: $26,500
+ Extra value associated with having car X: $4,500
Maximum willingness to pay for car X: $31,000
At the dealership, Olivia haggles with the salesperson,
who grudgingly lowers the price to $33,000. Not good
enough, Olivia tells him with a friendly smile. After going
off to “consult with the manager,” the salesperson tells
Olivia that, with great difficulty, he has obtained approval
to reduce the price by $750. After 20 more minutes of
This document is authorized for use only in Miguel Angel Pimentel's Negociacion Comercial course at Universidad del Pacifico, from August 2017August 2004 2018.5
painstaking negotiation, Olivia secures an absolutely final,
“we’re not even really allowed to do this” concession—an
additional $250 reduction. The final offer is $2,000 below
the sticker price. Should she take the car or run?
Regardless of whether the salesperson truly has gone as
low as he can, the car costs $1,000 more than Olivia was
willing to pay for it when she walked into the dealership.
Yet for several reasons, she’s likely to feel pressured to ac-
cept the deal. First, because the salesperson made some
concessions, Olivia may feel obliged to reciprocate. Sec-
ond, by the end of a grueling negotiation, Olivia may well
have forgotten all about her reservation value. Finally, the
salesperson has appealed to Olivia’s sense of “fairness,” ar-
guing that he’s given her a “steal” deal.
When a final offer does not meet your reservation
value, none of these reasons is relevant to the decision of
whether to walk away. If your BATNA analysis hasn’t
changed, your reservation value shouldn’t, either.
A critical first step in any negotiation is to assess your
BATNA and the point at which you should walk away. It’s
also important to analyze the other side’s BATNA: What
will she do if you reach an impasse, and how will her be-
havior affect you? (See the sidebar “Don’t Forget About the
Other Side’s BATNA,” on page 4.) Aim high once talks
commence, but keep an eye on your potentially changing
BATNA, and do what you can to keep and strengthen your
no-deal alternatives. ✧
Deepak Malhotra is an assistant professor at Harvard Business
School. His research interests include trust development,
conflict escalation, and issues related to international
and ethnopolitical conflict. He can be reached
at negotiation@hbsp.harvard.edu.
Negotiation
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