These three rules of negotiation can mean the difference between your business’s success and failure.


To illustrate the power of these rules, we use the example of a simple negotiation between a small business without apparent leverage and a much larger business with immense leverage. These rules are also highly effective in transactions of much greater complexity and scope, in any industry, and with parties of differing size, interests, needs and challenges.

THE THREE RULES OF NEGOTIATION

Saul Winsten
The Winsten Group.Trusted Counsel LLC
www.thewinstengroup.com

Copyright 2018 Saul Winsten , all rights retained and reserved

These three rules of negotiation can mean the difference between your business’s success and failure.

Contracts are a means to establish and define commercial relationships, increase profitability and reduce risk. These three rules, when properly applied to contract negotiation, also can produce competitive advantage, enduring collaborative relationships, protection of intellectual property rights and business interests, and a wealth of other benefits for your organization.

To illustrate the power of these rules, we use the example of a simple negotiation between a small business without apparent leverage and a much larger business with immense leverage. These rules are also highly effective in transactions of much greater complexity and scope, in any industry, and with parties of differing size, interests, needs and challenges.

Rule One: Start with the End.

Wasn’t it Yogi Berra who said, “If you don’t know where you’re going, you’ll end up somewhere else?” He’s got something there.

Whether problem solving, negotiating a contract or resolving a dispute, you gain a decisive advantage when you begin your negotiation with the end in mind. Then build your strategy and action from there. Not taking the time up front to think through where you need to end up and how you will get there – making it up as you go along – is a mistake too often made.

Our client, a well-established EU-based business with a new USA subsidiary, designs and produces zero-defect, highly engineered products and is a Tier 1 supplier to large multinational manufacturers. It had just been selected by a much larger USA-based multinational Original Equipment Manufacturer (OEM) to negotiate a contract for production and supply of a component for the OEM’s engines. This OEM had earned a reputation for being tough on small suppliers. The OEM enjoyed its size, financial strength and market share, employing that clout in all negotiations. Our client knew that it would be difficult to obtain a profitable contract and retained us to assist in negotiations.

At the beginning of the process, we determined our client’s objectives, our end:
• to obtain a profitable exclusive contract for design and manufacture of highly engineered products in high volume,
• to protect our intellectual property and reduce our risk, and
• to establish and strengthen a new long-term, mutually beneficial relationship with this OEM and its affiliates.

Because our end was to build a productive long-term relationship, we approached negotiations as a collaborative problem-solving exercise, not an adversarial process with a single winner and a single loser. Every piece of correspondence, every interaction between the parties and negotiators, was intended to build trust and confidence.

Next, we identified and assessed our risks and opportunities, and strengths and weaknesses that might impact our ability to obtain the end we sought.

From there we identified our terms:
• what final terms we
needed, and why
• what terms we wanted
• how best to reach our end

Of course, need and want are very different things, not to be confused and never to be lost sight of. What we needed determined what our “walk away” points must be.

Here’s where Yogi comes in. If you don’t know what your objectives are and commit to them from the beginning, you will find yourself in negotiations being pushed or led back from one position to another. The end will be different from the one you hoped for.

Rule Two: Prepare. Prepare. Prepare.

Sun Tzu, the ancient Chinese military strategist and philosopher, said that the true master of the Art of War is one who wins the battle before it has started.

Likewise, the most successful negotiations are those for which careful research and planning begin well before the formal negotiations.

Before sitting down at the negotiating table, it is essential that you thoroughly know and understand the other party, its needs and its goals. Also learn as much as you can about its playbook, the persons with whom you will negotiate and the ultimate decision makers.

When you know yourself and you know your opponent – and apply that knowledge – you gain a significant advantage.

Back to our example:
Prior to our first meeting with the OEM leaders and negotiators, we learned all we could about the other party, its business, its product needs, its sources of competitive product supply, and its processes that might involve our product. Our USA president (an established and knowledgeable engineer), European executives (also established and knowledgeable engineers) and others in the company were in regular contact with the OEM’s engineers and procurement personnel. Through industry knowledge and contacts, we gained more information about the OEM’s negotiators and decision makers, their tactics and demands in similar negotiations, as well as how the OEM treated other suppliers and their intellectual property. And, of course, we carefully reviewed the OEM’s proposed procurement agreement.

When we sat down together, it was apparent the OEM hadn’t expended much effort to learn about us or develop a strategy for this contract. The OEM had bigger deals to think about and was confident that, with its strong leverage, we would accept its demands.

Based on our research, we anticipated that at the very end of negotiations – when we, the smaller party, would happily think the deal was done – the OEM would ask for more.

Because we knew what the OEM had demanded of other suppliers, we anticipated that we would be asked to warehouse our finished product at our sole expense, with payment by the OEM only after it took possession. This consignment arrangement would produce cost savings for the OEM, but it would burden us with additional costs and risk. We also knew the OEM had existing warehousing capacity and financial resources to easily handle its own storage of small components for just-in-time use.

We determined in advance that we would not accept this last-minute demand unless we were adequately compensated. We formulated a response consistent with our advantages (the OEM could not obtain a truly competitive product at this price on this timeline) and what the OEM viewed as our weakness (our size, and eagerness to enter this contract). In this case, we were going to try to turn a perceived weakness into an advantage.

Rule Three: Pay Attention and Seize Opportunity.

Sun Tzu instructed his generals to occupy the field of battle first. In doing so, they could secure the best ground from which to wait for the opposing army’s arrival, watch its moves, and quickly adapt to those moves to achieve victory.

When you apply the first two rules, you may have a better opportunity to occupy the field of battle first. You likely are prepared for engagement before and better than the other party. Thus, you can recognize and utilize favorable opportunities that arise. Some of these opportunities might be subtle, such as cues picked up by the behavior, body language and voice of the other parties.

Turning an opportunity to our advantage:
We arrived for formal negotiations at the OEM’s mammoth headquarters and were ushered into a large conference room dominated by a long, dark table. The OEM had already placed its negotiator, multiple procurement and engineering staff, other assistants, computers and paperwork at their end of the table. We were pointed to seats at the extreme other end. Clearly, the OEM was ready for its traditional adversarial negotiations.

We were prepared to change the dynamics.

We asked to move toward their end of the table, as it would be more conducive to discussion. They agreed. Throughout that day, we worked to create a dynamic of non-adversarial negotiations, of collaborative problem solving.

We already knew a great deal about what the OEM needed to meet its goals and schedules, its current product sourcing, and its supplier challenges. We knew our product capabilities and could calculate our design and production costs to a fraction of a cent. We also had a good idea of the performance, cost and availability of competitive products. With this knowledge, we were able to meet most of the OEM’s demands on terms that also benefitted us, or propose others that were acceptable to us. Our own demands fit the OEM’s budget and were for the most part easily accommodated. Protection of our intellectual property, particularly trade secret information, was crucial for us, and we pressed our requirements until the OEM agreed.

By the end of the second day, the OEM seemed satisfied with the results of negotiations. It now had a reliable supplier of a superior, highly engineered component, in desired volume, at desired cost, with a production and delivery schedule that fit its needs. We, too, were satisfied that the negotiated contract achieved our desired end. It was a classic win-win.

As anticipated, the OEM’s general counsel made the consignment demand after all else had been agreed to. We were prepared. We did not directly reject it, nor we did accept it. Instead, we followed our prepared script. We repeated calmly and deliberately that our product was measurably superior to anything they could procure elsewhere, was at an acceptable price, and would be produced and delivered on a schedule that allowed them to fulfill their customer commitments We used our small size to our advantage, repeating that this new demand would place burdensome costs and risks on us.

Then we said nothing.

Now, you know we wanted that contract. We wanted it signed before we left the OEM’s headquarters. We did not want to risk losing this contract or this new client. In fact, our European chairman and USA president had decided in advance that if push came to shove, the consignment arrangement could be acceptable if we were appropriately compensated. The OEM of course did not know that.

The OEM’s general counsel waited for us to respond. When we did not, he cleared his throat, shifted slightly in his chair, rounded his shoulders a bit and looked down. His voice was softer and of a different pitch when he said, “Well, that’s our final offer.”

It just didn’t look or sound like a final, take-it-or-leave-it demand. It looked like an opportunity for us to seize.

Our company chairman was tired. He began to shift in his seat and was about to speak. He later confirmed that he was about to accept their demand. However, at the last second, he took the cue to wait. He said nothing.

The silence following the “final offer” could not have lasted more than a few seconds. Our chairman thought it seemed longer.

Then the OEM negotiator sighed. “Well, okay. No consignment,” he said.

We all shook hands.

Deal done.

It was the single most profitable agreement ever obtained by our multinational client in its long history.

Saul Winsten is General Counsel of The Winsten Group.Trusted Counsel, LLC a leading legal, strategic and corporate affairs firm. He has served as General Counsel, executive, and trusted outside counsel of US and multinational businesses, non-profit organizations, and strategic alliances. Saul has also served with distinction as a member and leader of Boards of Directors.

*The Three Rules article above was excerpted and adapted from speeches, workshops, and presentations provided to leaders, lawyers, Boards of Directors, senior executive groups, business groups, trade associations and others.