Post No.: 0124
In scenarios involving only two parties (as an example) – the ‘pie’ in negotiation contexts is the net combined benefit arising from the two parties reaching an agreement together, minus party A’s net benefit that it can achieve on its own and party B’s net benefit that it can achieve on its own, where the net benefit is the benefit remaining after paying for any costs. It’s basically what the parties stand to gain for coming together compared to going their own individual or alternative ways. If this value is positive then some kind of deal ought to be struck. The only question is then how this pie ought to be split.
With agreements that involve two parties – first analyse what this ‘pie’ is i.e. the part that’s actually at stake or in dispute (be it gains or savings) or what the parties can gain if they e.g. join forces, trade with each other, employ the other, compared to what they’d get if they went in separate ways. Then try to expand that pie before you begin trying to divide up that pie. Focusing on the pie helps us to not be distracted by irrelevant details because the pie is what we’re ultimately trying to split.
Naturally, if there’s no net combined benefit for coming to an agreement compared to the net combined benefit of each doing nothing, going alone or going their own alternative ways (i.e. depending on one’s BATNA, or ‘best alternative to a negotiated agreement’ e.g. a deal with a third party that’s even better for you; unless you can do both deals non-exclusively) then no collaboration should even be attempted. If the combined whole for making a deal won’t be better than the sum of the separate parts then there’s no point in striking a deal. But if there is any net combined benefit whatsoever then it makes sense to make a deal.
It’s better to talk about expanding the pie right from the start rather than when it seems to come down to just the price and an impasse forms. It’s a good strategy to begin negotiations by asking questions to better understand the interests and objectives of the other party. What are their aims for the deal and the future? What are their reservations about the deal? How can you help them to achieve their aims and/or relieve their reservations? Ask what motivates them, excites them, concerns them and causes them hesitation, in order to explore ways that the pie can be expanded so that a deal can work better for them, and do so at the beginning of the negotiation. To expand the pie, try to find items that are valuable to them but not so valuable to you, and vice-versa – a good win-win deal gives each party more of what they personally value (e.g. you want more free time and they want more money, so maybe they should take some of your workload).
This interaction also gets them invested in making a deal and helps them appreciate how big the opportunity or pie that can be created with you is. So expand the pie as a first resort rather than as a last resort. Negotiations can lead to a lot of frustration or even stonewalling, and this is another reason why it’s better to look for creative solutions at the start of a negotiation when everyone is fresh, more likely to be receptive and less time-pressured than if you all wait until the end. You’re ideally looking for solutions that are not zero-sum (e.g. things that cost you €1 but are worth more than €1 to the other party).
Now this is a potent piece of furry knowledge – note that even if the other party seemingly has more power than you (e.g. because they’re larger than you), they essentially need (smaller, ‘weaker’) you equally as much as you need them to reach an agreement i.e. you both really have equal power to agree to a deal or walk away, for which if either you or they walk away, no one will get any part of that pie at all (so if the smaller party walked away from a deal, the larger party would get none of that pie too, hence the parties need each other equally). When this is the case, it’s most arguably fair to split the pie 50:50. So if there’s a net combined benefit from doing a deal at all then make both parties half a pie better off. Each party should be made half a pie better off by doing a deal than they’d be on their own.
In such two party (with no other possible parties involved) negotiations, every argument about splitting the pie unevenly can be symmetrically flipped because none of their gains from an agreement could be made without you, and equally none of your gains from an agreement could be made without them i.e. there’s actually equal power and equal give-and-take benefits and/or cost savings. So even if they’re e.g. apparently helping you to increase the sales of your product, you could say that without your product existing and having this room for sales improvement in the first place then they wouldn’t be able to increase the sales of your product at all to increase the gains for the both of yous in a partnership, hence neither side would be able to gain anything at all from an agreement if it weren’t for your product, and hence the parties should evenly split the proceeds of any additional sales above and beyond what you would’ve done on your own. You provide the potential that they can then exploit. (And if someone argues, “Why are you fussing over a couple of thousand euros in this million euro deal?” then you could come back with, “If that amount is so little to you then I suppose you won’t mind conceding it to me!”)
So it doesn’t matter if you’re a relative start-up and you’re potentially dealing with an existing multi-billion euro corporation – you’ve got an equal claim to the pie if there’s a positive pie to be split (assuming that you have no alternative parties who are looking for a deal with your business too, and they have no alternative parties who can give them what they’re looking for apart from you). Woof!
Now if the gains for cooperation are unilateral (one-sided) even though there is a net combined benefit in making a deal, then the profiting party would have to actually pay the other party to enter into an agreement (e.g. if you had a voucher to claim €1M but in order to claim it you must partner up with another person, then that other person would need to be paid a portion of this €1M. If there could only be one person in the entire world you could claim this voucher with then this person would be entitled to 50% of the pie. But (to divert from two-party-only scenarios for a moment) if you could choose any partner in the world you want, then they’d be entitled to proportionally less than 50% (proportional to how many other people you could ask) because you’ll have far more possibly better alternative options than any particular potential partner, if any potential partner demands too much of the pie.
No matter how good you are as a negotiator, you will do even better if you have more alternative options than the other party – it’s having more (equally good or better) alternative options that give a party more power. (Hence monopolies are really bad for buyers, and monopsonies are really bad for sellers, in the marketplace. And it’s really why rich people have more power than poorer people – there logically cannot be equality of opportunities without equality of wealth. If beggars can’t be choosers then richer people, including those born into wealth, have more options overall in life.)
In these kinds of two-party deals, if the other side finds a way to expand the pie – make sure that you share in those gains too otherwise they could claim all of it whilst making it look like you’d be no worse off than before i.e. don’t just concentrate on your own gains but the other party’s too! It’s another reason why one should care about helping the other side get (more of) what they want, as well as of course understanding what you really want too.
So the absolute key is to expand the pie as much as you can – even if this means that you or the other party doesn’t seem to initially share in these extra gains – because if the pie is enlarged, that extra bit of pie can be divided through negotiation, just like the original-sized pie, so that all the parties will benefit from it (e.g. imagine two siblings who equally like and want as many sweets as possible (which isn’t hard to imagine!) They can stand to get an equal share of some sweets from their parents if they clean the house together, but if they also both wash the car together then their parents will give only sibling A some extra sweets. Sibling B may therefore think there’s no point in helping to wash the car because he/she’s not going to get anything extra for it – but if these two siblings agree in private to both wash the car together and then split those extra sweets 50:50 then they’ll both gain some extra sweets, which is better for them than not getting those extra sweets at all. Clever huh!) Note also that, with a few exceptions (e.g. if the relative market share is more important to you) – more critical than the share of the pie is how much one is going to get in absolute terms (e.g. getting 50% of €100 is better than 75% of €60) so don’t lose sight of this.
These scenarios do assume that both parties transparently know each other’s expected values from a deal if they go together and if they each go separately though, which is not always the case in real-world scenarios (e.g. it’s hard to predict future sales, exchange rates and events accurately). And it gets complicated quite quickly if there are more than two parties involved because the alternative options to an agreement is not just for all the parties to go their own separate ways but there could instead be possible deals made between a subset number of parties in many different permutations with different BATNAs, hence splitting the pie between the agreeing parties evenly is not always fair, and ‘fair’ solutions become even more debateable (although working out the Shapley Value is a good start. Here, if there are more than two parties, the division of the pie depends on how much value each of the parties bring to the group – the Shapley Value takes the average of how much value a party brings to the group across all permutations of orderings of them joining the group).
Woof. All this talk about pies is making my tummy rumble with hunger! Please use the Twitter comment button below to tell us about any negotiations you’ve been proud of, or not so proud of and have learnt from!