“How can we use our large size and power to get our best deal, yet still avoid alienating smaller companies with whom we want a future relationship? After all, we value our reputation and don’t want them to feel we’re just imposing our terms.”
This question, posed by a client from a very large company, raises issues all negotiators should understand.
Initially, recognize that negotiation power is not solely dependent on conventional notions of economic strength.
What most consider to be negotiation power — leverage — actually relates to two factors: how much each party needs that deal relative to the other, and the relative value of each party’s best alternative to that deal.
For instance, consider who had stronger leverage in the negotiations between the U.S. government and housing contractors after Hurricane Katrina.
By any measure of conventional strength — financial, economic, military — there is no more powerful entity in the world than the U.S. government. And yet, just after Katrina, the government also was desperate for housing for those displaced. Housing contractors, in contrast, were not nearly as desperate. Most were doing fine at the time.
The government was getting publicly beaten up each day it failed to provide housing for those displaced. In other words, it had a weak alternative to deals with those contractors — and it was getting worse each day. But the contractors already had regular customers — decent alternatives to doing deals with the government.
So don’t assume a party has more power just because it is big. Of course, size can have a significant impact. A company’s size may lessen its level of need for any one deal, and may allow it to develop better alternatives to a deal with the smaller company.
But even if a large company has the leverage, should it simply impose its preferences? Not if it cares about a relationship with that smaller company, and about its reputation.
Instead, do the following (which also can apply to small companies with very strong leverage):
1. Value your reputation as a goal.
Explicitly value your reputation as a goal and measure success — in part — based on how your counterpart views you after the negotiation. And evaluate your front-line negotiators in part on how well they achieve this.
If your counterpart feels you unfairly imposed your solution and the deal involves an ongoing relationship, this will have a cost to you. Measure and evaluate it.
2. Downplay your leverage.
Large companies get overly aggressive reputations when they discuss how little they need the deal and overtly point out their great alternatives. If you invite five vendors to your office, put them in adjoining rooms and work them against each other, they likely will leave with a bad taste in their mouths. It’s a blatant leverage play that signals you only really care about price for their commodity and don’t much care about the relationship.
On the other hand, assuming you value the relationship, you often can develop better alternatives and increase your leverage without being overtly aggressive. In fact, smaller parties may already understand their weak leverage, so explicitly raising the subject may itself be overkill.
3. Emphasize “fair” standards.
Consistently emphasize the fairness and reasonableness of your terms with applicable standards such as market value, industry precedent, an expert’s opinion, tradition, etc. Focusing on helpful standards depersonalizes the environment and helps your counterpart believe your terms are objectively fair, independent of your size and leverage.
4. Concede some items.
Initially build in some terms you can and will concede. Don’t go to the mat on minor issues. And be the one to make the last concession, which should be on a minor point.
By making these concessions, you will give your counterpart significant psychological “wins” at a very low cost to you. The value of that feeling to your counterpart likely will be more important to you than the value of the conceded items.
5. Don’t impose your agenda.
Finally, parties often react negatively when a big party with strong leverage overtly imposes its agenda. This especially includes requiring short deadlines, which increase pressure and tension.
Instead, control the agenda in a subtle or informal way, perhaps by soliciting their input on what to address. Then incorporate some of it, avoiding short deadlines.
Also consider going to their office or to a neutral site to conduct any in-person negotiations. While sometimes going to their “turf” puts you at a disadvantage, the psychological benefit to you of their increased comfort level may be worth this possible cost.
Size doesn’t always matter. But when it does, and you care how others perceive you, strategically exercise your leverage. You may not always be the stronger one.
Published April 6, 2007 The Business Journal