Reengineering Negotiations

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With reengineering has come a shift in the way managers and their staff negotiate both inside and outside their organizations. Managers must now devise new ways for employees to interact with each other, with suppliers, and with customers and clients more efficiently, more responsively, and more profitably.

Several years ago, Roger Fisher examined the impact of a government’s or nation’s internal negotiations on its external negotiations.1 Fisher asserted that “internal” discussions frequently compromise the effectiveness of external negotiations and consequently undermine the ability of designated negotiators to satisfy national interests. In this article, I extend Fisher’s analysis from the world of international diplomacy to the corporate world.

By examining the unique dynamics of multiparty negotiations inside and outside organizations, I hope to: (1) help managers think about the impact of their internal communication and negotiation procedures on their own and their staff’s external negotiations, and (2) identify ways to reengineer systems of coordinated discourse between internal and external parties in order to improve the efficiency and results of their organizations’ externally negotiated agreements.

Internal and External Negotiations at Alta Systems

To differentiate between internal and external negotiations, consider the case of an information technology consulting services company, Alta Systems, that works with clients to develop specialized applications and integrated system solutions. The client manager’s world might look something like that shown in Figure 1.

Every time an Alta client manager interacts with a client (whether trying to contain a project’s scope, muster project resources, or navigate the politics of a client’s organization), he or she must reconcile the competing interests of and “mini-negotiations” among a myriad of constituencies: within Alta —senior and junior employees; within the client organization — project coordinators, line-of-business sponsors, and IT resources; within a third-party vendor, contractor, solution provider, or partner organization — sales reps, consultants, programmers, and so on.

While this diagram represents a complex multiparty negotiation, let us first focus on a relatively simple negotiation in which a senior executive at Alta asks a senior manager to contract with a subcontractor, System Solution Packages (SSP), to help deliver special, high-visibility projects for significant clients like the new pharmaceutical company, Farmitol. If we break the negotiation down, we find at least six smaller negotiations within that single interaction:

  • External — between Alta manager and SSP sales representative.
  • Internal — between Alta manager and senior executive.
  • Internal — between Alta senior executive and CEO.
  • Internal — between SSP sales representative and manager.
  • External — between Alta manager and Farmitol sponsor.
  • Internal — between Farmitol sponsor and CIO.

As Alta’s senior manager and the SSP sales representative negotiate the project and contract to work together, both companies invest considerable time exploring the services needed and the best way to provide them. In doing so, they engage in something of a dance, discussing an array of issues including time frames, scope of services, assessment of risk, how they will work together and interact with Alta’s significant clients, and so forth. All the while, each conducts frequent internal meetings about the deal each hopes to strike and the services each wants to receive or provide at an acceptable price or cost. Rather than a single, discrete “at the table” negotiation, there is a series of conversations that occur over time; each is a negotiation within the context of a bigger negotiation.

Partly due to the increased number of small negotiations and partly due to changing organizational structures, the dynamic between internal and external negotiations has also changed. Unfortunately, managers’ reengineering of communication and negotiation procedures is not keeping pace with their structural transformation efforts. To understand the problems that arise when internal and external negotiations among multiple parties are not consciously managed, let’s examine the negotiation between Alta and its client, Farmitol.

The Alta Scenario

As the Alta Systems scenario unfolds, the senior manager and senior executive seem pleased with their deal with SSP and ready for the Farmitol client manager to share the news with the client, Farmitol. The client manager specifies that SSP will be doing a significant amount of work with Alta during the next five years, so the two companies will be working hand-in-hand on a number of projects. Although SSP is in the midst of some internal organizational change and needs to get up to speed on new systems technologies, Alta is certain it is the right partner to work with Farmitol over the long term. SSP’s team is very “hands on” — terrific when dealing with clients (like Farmitol) with a limited understanding of computer technology and limited resources.

The Alta senior manager has charged the client manager with the role of negotiator. The client manager calls Farmitol’s project manager and explains that SSP is now the subcontractor working on the Farmitol account. The two get into a heated debate. The client feels a lack of respect and argues that Farmitol is paying top dollar for what he feels are second-class resources; he insists he wants Alta staff people only and claims that Farmitol will walk away from the deal if Alta hands the work over to SSP. Alta’s client manager, threatened by this attack and fearful of losing this opportunity to a competitor, caves in. Due to what has transpired internally, the client manager doubts that Alta will be able to work as well for Farmitol without SSP’s involvement but is unwilling to risk blowing the whole deal. The senior manager had clearly said, “Close the Farmitol deal.”

Inherent in this scenario are several obstacles that can undermine the value derived in negotiations. The obstacles that emerge here typically surface when organizations are balancing internal and external negotiations:

  1. Negotiators may walk away from good deals because the deals do not match the organization’s articulated position.
  2. Negotiators may agree to suboptimal deals because the organization perceives any agreement as better than no agreement.
  3. Making demands and arguing over positions inhibit useful discussions about the many parties’ underlying interests.
  4. Negotiators’ roles are defined and understood as advocates rather than as joint problem solvers.
  5. Internal and external negotiations are compartmentalized.
  6. The parties do not discuss the process explicitly, apart from the substance of the negotiation.
Negotiation Speak »

Tips for Managers of Negotiators »

Given these obstacles, how can managers improve their processes so that their external negotiators can systematically achieve more profitable agreements? To answer this question, we must first understand the nature of the obstacles. See sidebar.

Obstacles 1 and 2: Walking Away from a Deal

The possibility of an optimal outcome for both Alta and Farmitol is threatened by tactical games (threats and concessions) between the two external negotiators. Farmitol risks walking away from an excellent vendor and months of investment because Alta’s proposed agreement does not match its stated position. At the same time, Alta risks accepting a deal that would undermine its ability to serve Farmitol and other clients in the best way possible.

One internal norm that promotes these games and inhibits parties from jointly discussing their mutual concerns is people’s tendency to engage in a series of informal, one-on-one conversations that are independent and discrete. While it is important for a range of parties to be consulted in a decision-making process, managers often neglect to systematically survey each constituency’s interests and priorities. Without clear discussions about underlying interests, what emerges from these seemingly innocuous conversations among internal groups is a single “lowest common denominator” position — a deal to which all parties who were consulted can agree.

At Farmitol, a series of independent discussions may have caused the negotiator to insist that all work must be done by Alta. For instance, the IT manager may have warned, “We need to minimize the number of contacts we have,” and the CFO may have said, “As soon as third parties are brought in, the price increases enormously. I can guarantee we’ll pay a surcharge.” Then the line-of-business manager may have insisted, “Be careful about getting hooked into a third party. I’ve had bad experiences in the past. And, if this project runs amok because of subcontractors, don’t come crying to me. It’s on your shoulders.” With those internal conversations in the background, the Farmitol negotiator is certainly going to insist that Alta do all the work.

While Alta’s performance of all work may be the appropriate outcome, the decision on whether Farmitol’s negotiator or any other external negotiator walks away from a deal is best based on an in-depth understanding of the company’s and constituencies’ interests and ability to satisfy those needs through some alternative to the negotiated agreement. Neither negotiator deeply explored underlying interests, and neither used that understanding to evaluate the option on the table compared to the “best alternative to a negotiated agreement.” This internal shortcoming pushes external negotiators to form hasty, ill-informed conclusions.

Choose Wisely between Options and Alternatives

Any agreement that a negotiator makes should be better than the company’s walk-away alternative. Without understanding their organization’s best alternative, negotiators cannot make wise choices about when to walk away. Negotiators should have as much information as possible about the strengths and weaknesses of their best alternative in order to effectively use it as a benchmark to evaluate options (possible solutions requiring both parties’ agreement). An important goal of internal negotiations is, therefore, to agree on what the organization will do if forced to break a deal. Furthermore, managers should ensure that the internal team continues to explore ways to improve the organization’s best alternative so the negotiator’s benchmark is as high as possible. In that way, the organization will eventually choose the best option or alternative possible. Such conversations promote internal alignment, so that if and when the other side tries to go over one negotiator’s head to solicit a preferred response from someone more senior, the negotiator will have some backup.

When reengineering the internal negotiation process, managers should use internal prenegotiation conversations to gain alignment on the best alternatives and to clarify the negotiator’s role and authority with respect to gathering information, sharing interests and alternatives, and quitting the deal or committing. As managers attempt to define the negotiator’s role in committing or walking away, they should consider the tension between a negotiator’s power to commit to a deal on the table and his or her ability to generate creative options. The more authority that negotiators have to commit to an option or position, the less practical ability they have to constructively brainstorm options — the key to optimizing value in negotiation. Conservative managers tightly confine the exercise of individuals’ power in order to protect themselves against poor judgment calls. The following guidelines can help managers avoid this pitfall:

  • Give negotiators full authority to explore and discuss interests, options, decision criteria, relationships, communication processes, and alternatives, as they see fit (based on understanding of internal interests).
  • Limit negotiators’ authority to commit to a position (at least early in the negotiation).
  • Encourage negotiators to determine whether to walk away solely on the basis of comparison to the organization’s alternative.

By limiting the authority of Alta’s and Farmitol’s negotiators to commit to an option early in the negotiation, the managers will, in effect, enhance their negotiators’ abilities to explore interests and generate optimal agreements later. The two will surely commit in the future, after exploring many options.

Obstacles 3 and 4: Poorly Defined Mission and Role

In the Alta case, the client manager is in the midst of negotiations with Farmitol. Alta has caved in and agreed to staff the project with Alta resources only. Had Alta insisted it would do the work only in conjunction with SSP, the two parties might have deadlocked, each waiting to see who would flinch or make the first move. Each party’s failure to examine interests internally undermined each one’s ability to decide wisely when to walk away from or commit to the deal. Another mistake is Alta’s failure to discuss interests externally. By sticking to positions and staking claims (i.e., Alta insisted on using SSP, Farmitol insisted Alta must do all the work), the two parties became locked into positions. They lost the capacity to see the other’s perspective and the ability to examine other creative ways to satisfy their range of similar, compatible, and differing interests.

Frequently, negotiators fall into this situation because managers create internal processes in which they conduct a lot of research and analysis early on and arrive at a solution they know is reasonable, workable, and safe. The problem rests in the inherent difficulty to create an optimal solution with only half a picture. That is, without full knowledge or understanding of both sides’ interests, negotiators cannot be relied on to achieve extraordinary, or even consistent, results.

Managers and negotiators tend to stake out an opening position so that they can: (1) structure plenty of negotiating room (that is, state an extreme opening position that can be adjusted as negotiations proceed through each party’s trading of concessions), and (2) know that their representatives are clearly advocates of the organization’s best interests. While these tendencies are understandable, they can be counterproductive in enabling a manager to achieve the goal. Trading concessions, for instance, causes an already fixed pie to quickly get eaten away, minimizing the amount of value that negotiators are able to derive from the deal. Also, advocates, skilled in not budging from what may be a reasonable position, may never discover a key solution. A key solution for Alta’s and Farmitol’s advocates would be one that gives the client a feeling of security, top resources, and instant access to help. However, in arguing for their positions and advocating their single perspectives, the two negotiators would never uncover a solution. Furthermore, the negotiators’ focus on their own interests and concerns would likely undermine their attention to the interests of the other parties they represent — a common mistake in multiparty negotiations.

Change Negotiator’s Role

What can a manager do differently to enable negotiators to find creative solutions? Managers need to treat negotiators as “handymen,” asking them to undertake different tasks at different times. This takes a transformation of internal and external negotiation processes.

When reengineering the internal process, managers and negotiators must recognize all the parties involved and engage in broad prenegotiation discussions to clarify the negotiator’s role and the types of information sharing, exchange, or commitment to strive for at different junctures during external interactions. In addition to articulating individual and shared goals, interests, and fears, a prenegotiation meeting should produce a negotiation strategy. Alta’s strategy statement might specify, for example:

  • Building a relationship by establishing the ground rules and a timeline for negotiations.
  • Defining all constituencies’ interests.
  • Brainstorming a range of options to meet all parties’ objectives.
  • Narrowing the range of options.
  • Formulating a final commitment.

Because the internal and external processes are integrally linked, the internal process redesign should be followed by an adjustment in the negotiator’s role vis-à-vis the external world. If a manager believes he or she has all the answers and charges negotiators with defending that position, their efforts will be ones of persuasion and coercion. Alternatively, if the manager engages negotiators as meeting facilitators or joint problem-solvers, then they should conduct external conversations according to the strategy defined during the internal prenegotiation strategy discussions (see Figure 2).

Arguing in favor of one set of interests is less than half the task. Two negotiators acting on behalf of their respective companies have the joint responsibility of efficiently producing a workable agreement that reconciles, as well as possible, the interests of the two groups in a manner acceptable to both. If one side’s interests are not well served by an agreement, that side might have an incentive to break the agreement or comply with it only half-heartedly. Sharing interests, however, does not necessitate an organization’s full disclosure of its most well-kept secrets to the other side. In fact, managers may consciously choose not to disclose the exact nature of their organization’s interests and preferences. Still, managers must work with negotiators to make wise decisions about whether, and how, to disclose interests by balancing the risk with the possibility of improving the deal. Each negotiator is both joint problem solver and advocate.

Obstacle 5: Gap between Internal and External Negotiations

To understand the risk of compartmentalizing internal and external negotiations, consider the Alta situation. After the Alta manager commits to using only Alta resources, during the course of the project, the work team has difficulty involving Farmitol in the day-today management of the project. The senior sponsor is, by now, somewhat detached from the project and leaves the work to a team leader and the small team he designated well before the work began. Each time the Alta manager approaches Farmitol about the need for support and resources, the team leader says: “Listen, I don’t have the time to help you. I am trying to do my job and the jobs of two other people in my department who are on leave. I cannot take another job on, nor can anyone else on this ‘appointed’ team. Besides, you’re the one getting paid for this, not me.”

In addition, when the manager approaches the team leader to ask about talking with the information services department and some end-users, the team leader says: “We are paying Alta top dollar to figure things out and do the job, so do it and come back with results. If you need more people to work on the project, bring them in from Alta. If you can’t do the work and don’t have the expertise to make this project a success, we’ll call it quits and find help elsewhere.”

Alta’s client manager understands how the team leader feels but also knows that without Farmitol’s cooperation and active participation, the project will take much longer and its chances of success will be limited. Alta’s client manager and Farmitol’s team leader have neglected to discuss their constituencies’ underlying interests. A variety of internal conversations might have transpired at the two corporate headquarters. Perhaps Alta’s engineers discussed internally their need to talk with IS and end users in order to finalize system specs and create useful reports and interfaces. Perhaps Farmitol’s internal discussions centered around the organization’s internal reorganization and turmoil or the IS group’s attempts to claim ownership of the project. Fearful that Alta will take Farmitol for all it’s worth because of internal difficulties, a corporate mission to reevaluate all new technology initiatives, and an inability to rely on IS, Farmitol instead does nothing. And, because none of these discussions has surfaced between client manager and team leader, the two companies will likely never address the underlying problems.

Consequently, Alta’s client manager may perceive Farmitol’s resistance to putting its own resources on the project as a lack of commitment. Both parties should be faulted for the miscommunication; the team leader is not aware of the message he is inadvertently sending; the client manager is attributing intent to incomplete communication. Together, their failure to share interests and concerns across the organizations — e.g., the compartmentalization of internal and external conversations — has created poor feelings and set them off on the wrong foot.

Organizations frequently keep private negotiations wholly distinct from their external conversations with clients, vendors, or partners because: (1) they don’t want to expose their lack of knowledge; (2) they don’t want to expose their shortcomings or dirty laundry; (3) managers fear that sharing their concerns about the risk of a certain project or endeavor will jeopardize it; (4) multiple parties need to work out differing perspectives before external parties are brought into the mix; and (5) internal teams are unable to come to agreement. Each rationale may be warranted and appropriate in certain circumstances.

Still, managers should know that compartmentalizing internal and external conversations can also exacerbate confusion, waste time, and send mixed messages to the other side. Outsiders, wholly unaware of internal negotiations and rationales, may attribute wrong intent or motives to actions or statements they don’t understand and don’t like, thereby causing both parties to mistrust one another and sadly sabotage their working agreements and relationships.

Integrate Internal and External Negotiations

Highly structured divisions between internal and external negotiations tend to restrict the negotiators’ ability to create synergistic solutions. To produce optimal outcomes, managers should institute more flexible processes that:

  • Permit people to build on each other’s knowledge, skills, and interests, and take into account their constraints.
  • Use prenegotiation sessions to survey the interests of all parties.
  • Continually facilitate communication among affected parties in ongoing discussions (bring together large groups or create joint subcommittees, joint fact-finding teams, brainstorming sessions, or small working groups of specialists).

In the case of Alta and Farmitol, the companies might have an explicit conversation about the advantages and disadvantages of including IS on the project team, the nature of Farmitol’s reevaluation of technology projects, and so on. The Alta manager and Farmitol team leader might jointly invite a member of Farmitol’s redesign task force to a meeting so they can discuss the repercussions of the organizational initiative on the project. These actions, in addition to improving the trust and the relationship between the manager and the team leader, might yield a creative solution in which Alta managers discuss the project with higher level executives, adjust the project specs to employ technological solutions to eliminate the inefficiencies, and so forth.

In the reengineered model, managers plan and encourage contact among internal and external groups. Negotiators, in turn, continually promote ongoing interaction within their internal and external teams. In doing so, they more effectively generate solutions that optimize value.

Obstacle 6: Lack of Process Discussions

Just as Alta’s manager approaches the negotiation with Farmitol with a preconceived understanding about which underlying substantive interests are appropriate for discussion, negotiators frequently come to negotiations with set notions about the process protocols to abide by (who leads the discussion, what roles people have, what topics to discuss, and so forth). For instance, when Alta insisted on bringing in SSP and Farmitol threatened to walk out on the deal, the two negotiators didn’t discuss their process of negotiation. They never articulated, even to themselves, the ramifications of their negotiation styles — i.e., haggling, threats, agreeing too easily — on their substantive outcome. It makes sense, then, that neither negotiator recommended an alternative way to resolve the issue. Instead, each waited to react to the other’s behavior, hoping not to have to act first.

Two problems arise here that are typical in corporate negotiations. First, individuals tend to react to the other party’s tone or process, rather than proactively establish their own tone and agenda. In this case, the rationale might be that Alta respects the Farmitol project manager’s experience and seniority, or Farmitol assumes this is the way to deal with vendors. The result is that, with little systematic thinking, the two fall into familiar patterns of interaction. Second, individuals seldom articulate, to themselves or each other, the process they are engaged in, or explicitly negotiate over alternative processes or agendas. For Alta’s and Farmitol’s representatives, this may simply be unfamiliar territory, or it may be considered rude to engage in such discussions because that would overstep established bounds. Whatever the reason, the two negotiators are left with suboptimal outcomes because of their inability to change the dynamics of the process by which they are interacting.

Introduce and Explicitly Discuss the Process

While the tendency not to discuss process issues primarily affects external negotiations, an internal preparation procedure that encourages and rewards negotiators for jointly taking control of the negotiation process could achieve improved negotiation results. Managers working with negotiators to proactively plan a process for moving negotiations forward might encourage them to:

  • Set meeting agendas that focus on meeting goals and purposes.
  • Set long-term meeting plans.
  • Plan long-term relationship goals.
  • Anticipate challenges from the other party.

For Alta’s and Farmitol’s negotiators, just raising process discussions is difficult. But what if Alta’s manager proactively says, “The way we’re going about these negotiations isn’t working. I’m afraid we will both leave the table with a compromised agreement,” and Farmitol’s team leader defensively responds, “Well, I’m going to get what I want, or else.” Such challenges to a negotiator’s attempts to raise new and sensitive topics are to be expected. Managers can’t make those challenges go away, but they can work with negotiators to improve their ability to deal with them productively. A manager reengineering internal negotiation procedures might carve out some time to act out difficult conversations with a negotiator, so the two can anticipate some of the challenges and strategize how to deal with them.

As managers consider how they can support their negotiators and enable them to do better, they must recognize that process preparation is as critical to the outcome as substantive preparation.

Conclusion

Too often organizations’ informal internal communication systems inhibit success in external negotiations. In a complete reengineering effort, managers should conduct a comprehensive internal audit that explores everything that might have an impact on negotiations — underlying assumptions, stated and unstated goals and values, people management skills, negotiation styles, methods for preparation and review, and so on — in order to identify other ways that organizational systems and procedures might disempower negotiators. Even without those exhaustive efforts, managers’ awareness of the need to align internal and external negotiations to better prepare negotiators representing the company’s multiple constituencies and interests will improve results (see the sidebar). As coaches, mentors, and evaluators, managers are in a unique position to influence the amount of value their negotiators derive in any agreement.

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References

1. See R. Fisher, “Negotiating Inside Out: What Are the Best Ways to Relate Internal Negotiations to External Ones?,” Negotiation Journal: On the Process of Dispute Settlement, volume 5 (New York: Plenum Press, January 1989), pp. 33–42.

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