Post No.: 0319
The art of negotiation is such an interesting topic to both Furrywisepuppy and me, so I will help continue our journey into learning more about it…
‘Added value’ is equal to the size of the pie when you’re in the game minus the size of the pie when you’re not in the game i.e. it’s simply what you add to the game, or deal, for being a part of it. No player should receive more than their added value because if that were about to happen then they should obviously get kicked out of the deal.
As a contrived illustration, if someone else was offering you $10 and you were only offering them $9 then they should refuse to make that deal with you. This means that no one should be able to get more than what they’re offering or adding. (Players may receive less than their added value though.) Whilst you should never accept anything less than your BATNA, you should never expect to receive more than your added value. (Post No.: 0273 looked at BATNAs, or the ‘best alternative to a negotiated agreement’.)
Note that it’s not so much about how much actual added value you can bring to the table but what the other party or parties perceive you can bring to the table that matters in a negotiation. A party’s added value is related to how much power they’ll have in a negotiation.
Imagine a scenario where there are 10 treasure chests each with $100 inside, and 10 use-once-only keys that’ll open any one of those chests. You alone possess all of the 10 chests, and 10 other people possess 1 key each. You’ll therefore need to cooperate with those 10 people to get a share of those $100 bonanzas inside each chest.
On the initial face of it, it seems like you hold all of the fluffy power because all of those 10 people must deal with you in order to get hold of any money. However, with more critical thought, they actually each have a 50:50 negotiating power with you because you need each of them equally as much as each of them need you to access any of the money at all, because you’ll get $0 on your own i.e. your added value is $1,000 and their collective added value is $1,000 too, or $100 each.
But what if you dumped one of those chests into the middle of the sea? You’ll now have greater power to ask for a greater share than $50 per chest because there are now only 9 chests and 10 keys i.e. one of those 10 people is going to get $0 if they refuse to accept a deal from you, and none of those 10 people will want to be that dumb dumb! And, taking into account any costs for bothering, they should rationally accept even just $1 out of the $100 inside the chest they’d open with their key because if anyone refuses such a split then you could just go to the next person, and the person who refuses that deal will get $0, which is worse than $1. None of those 10 people will want to be that one person left with no deal and $0 because there are only 9 chests for 10 keys. (Note that you can repeatedly come back to a person who refused a deal with you here.)
So in this scenario, you’ve effectively reduced the pie from $1,000 to $900, and reduced your added value from $1,000 to $900 too, but any single one of those other 10 people’s added values have each been reduced from $100 to essentially $0 because if any one of those people refused to do a deal with you then you’d still be able to make all 9 deals with the other 9 people i.e. you can still bag up to (although not including) $900 for yourself without that last person who refuses. So you’ve wiped out $1,000 of added value on the other side of the negotiation table by wiping out $100 of your own added value!
Power is relative so even if you lose a bit, as long as the other party loses a lot more then you’ll have gained power relative to them. Although watch out in other contexts in reality because third parties might gain power relative to you if you play this gambit (e.g. if your country and another country are locked in a bilateral trade war, that might help other countries you’re not keeping an eye on).
What those 10 people should rationally do here is to unionise to improve their collective bargaining power with you. For example, if 5 people got together then their collective added value will go from $0 to $400. And the larger the size of the union then the greater their added value and bargaining power. Meow.
Onto another scenario. If you start a business that’s looking for contracts with other businesses, there are at least two occasions you can look for a negotiation with them – one is when you’ve already set up your business and are now looking for contracts, and the other is before you’ve even spent any money on setting up your business and are looking for contracts in advance to see if it’s worth your investment to start your business at all. The latter strategy is better (and demonstrates the benefits of good business planning too).
For example, if another firm holds a patent for an artificial sweetener that’s about to expire, and you’re thinking of entering the market with a generic/your own brand of that sweetener, and that sweetener is only really used in soft drinks by the leading soft drinks manufacturers, then it’s no good spending millions on building your factory and then looking for contracts with those soft drinks manufacturers. This is because those drinks manufacturers will thank you for acting as competition in the market to help reduce the licensing costs they pay to the original patent holder for their supply of this sweetener; plus they’ll likely just stick with that original patent holder for already having a working relationship with them but now with a better bargaining power over them than before, thus leaving you with no deal at all. Doh(!)
Therefore your power comes if you negotiate deals with those soft drinks manufacturers before you build your factory and enter the game – by stating that you’ll be able to reduce their licensing costs if you enter the market as a competitor to the original patent holder, you can claim a slice of this pie (the licensing cost savings the drinks manufacturers will make). If they say, “No” then they’ll miss out on these savings and you’ll just not enter this business. If they say, “Yes” (which they rationally should, all else being equal) then you and them should equally split the licensing costs-savings pie – which could be in the form of them paying for the factory, giving you a guaranteed contract, or them paying you a percentage of any cost savings they’ll be able to make as a result of a renegotiated deal with the original patent holder for you entering the market, for instance. Of course, the soft drinks manufacturers might decide to backward integrate and manufacture their own artificial sweeteners to cut supply chain costs. But there might be scale reasons why this won’t be worth it for them.
Your power in this scenario is your ability to change another party’s ability to negotiate with other parties – you’re about to give another party more power that can be used against a third party, and so you should seek something in return for this. However, if your power is in changing someone else’s negotiation then you’d better do your negotiation with them ahead of time and before you’ve entered and changed the game.
In the above scenario, if you did happen to enter the sweetener market without a contract and no soft drinks manufacturer will give you a deal to make continuing this business of yours worthwhile then (if you are the sole competitor to the original holder of the sweetener patent that has just expired) you should threaten to leave the marketplace and thus decrease competition and increase the licensing costs for the drinks manufacturers using that sweetener once more – and therefore seek long-term contracts from them to make you stay! You can therefore get paid to stay for threatening to leave, which is better than just leaving with nothing; although this won’t likely be a better position than getting paid to play from the very start. Relationships built upon threats aren’t great either.
To sum this up – if you are not in a strong enough position to win a deal but your presence in the game makes one or more other parties better off, you should ask them to compensate you for entering the game. If you don’t have any direct added value then you can still be compensated for improving the game for someone else – but you’ll have to get paid by this party upfront before you enter the game (i.e. get paid to play, as it were). However, you cannot pay a party not to play or expect to get paid not to play because this would be anti-competitive behaviour and illegal!
The holder of the sweetener patent, just before it expires, could consider paying potential competitors not to enter the market at all, but that would open them up to being exploited by absolutely anyone who threatened to enter the market! Plus it’s against competition or antitrust laws. So paying parties to enter a market isn’t as troublesome as paying parties to not enter a market.
This is all also true if you’re a subcontractor, such as an architect or advertising agency, and are asked to come up with bids where you may or may not get the contract (e.g. they might just end up copying your ideas and doing it themselves hence all that proposal work could be a complete waste of your time). In such cases, you should get paid upfront for your bids or proposals before you do and submit any work if they truly value your participation in the game. This’ll unlikely be in the form of cash but something else, such as information that’ll help them to be successful working with you and thus make your bid strong, or access to people such as the CFO so that you can convince her/him that the price shouldn’t be the only factor to consider i.e. something that’ll either gain some added value for your own bid, or allow you to get rewarded for helping them get a better deal from their existing suppliers because you’re acting as a competing bidder who can drive the price down for them.
Basically, if you will help someone else in any way then you should seek a slice of that expanded pie, and do so before you’ve helped them. If they’re going to learn a lot from your proposal then they should help cover the cost of preparing that proposal. And if they refuse then you’ll learn that they didn’t genuinely care about your input thus the chances of you getting the contract after you’ve prepared your bid would’ve been about zero anyway – if so, just focus your efforts on other cases where parties will or do value your input. You don’t want to be merely used to help them negotiate a better deal with their existing or another supplier – you should be rewarded for that.
So whenever you offer some added value then you have some power and so should recognise that you have an ability to get something out of the game. And if you don’t offer any added value then you shouldn’t expect to get anything when it comes to bargaining.
…Useful stuff to know I’d say.