Let’s Work Together — The Goal of Contract Negotiations

I’ve been at this acquisition management profession for quite some time, but nothing gives me more pleasure than returning to the basic and necessary process that precedes the management part of contract and project management, which is contract negotiation.  I began as a negotiator as a young U.S. Navy Lieutenant when I was selected as one of the members of what was to be a Navy Procurement Corps.  Over the years politics–both intraservice and otherwise–undermined the Procurement Corps idea, which I still think was and is a good one, but that is the way it goes sometimes.  It has been more than thirty years since that time and the basics of negotiation have served me well over the years.

Negotiations, when they go well, are based on several factors:

a.  The understanding by the parties that each has a common interest or desired outcome that has sufficient value;

b.  Good will, respect, and trust among the parties;

c.  Effective communication;

d.  The ability of the parties to allow the facts or the data to both reveal the areas of mutual acceptability and those factors that are deal breakers;

e.  Flexibility in viewing the negotiation as a process of discovery;

f.  The parties possess the necessary authority to make the outcome of the negotiation binding;

g.  The outcome advances the interests of all parties in the negotiation.

When these factors are missing the negotiation will be difficult and often fail or fail to satisfy the needs or desires of the parties.  Aside from my own experiences, my colleagues in both government and industry often complain of failed or difficult negotiations and their experiences track my own.  The core barriers that undermine the factors listed above seem to most often fall into two main areas; cultural ones based on profession or line of business, and egocentric barriers.  Oftentimes they are one and the same.

Let’s take the cultural issue first.  The most frequent example that I run into that results in difficult or failed negotiations involves attorneys.  I counsel companies and individuals NOT to allow their attorney to drive a negotiation where a positive result is desired.  The reason for this condition lies in the nature of the legal profession as it is currently constituted in the United States (and has been since about 1960).

Attorneys are trained to deal with adversarial situations.  As such, the factors underlying the entire basis of successful negotiation are usually undermined.  I have been in negotiations with attorneys where their knee-jerk reaction in most cases is to approach negotiations as zero-sum games, or they use adversarial approaches in negotiation such as those found from game theory, such as tit-for-tat or the Prisoner’s Dilemma.  Such techniques are successful in avoiding conflict in an unequal or ostensibly competitive environment where the parties’ interests would otherwise dictate cooperation, but most seasoned negotiators will identify the technique pretty quickly, which will undermine trust.  Intimidation and manipulation are surefire recipes for breaking a promising deal, or producing something that satisfies none of the parties.

The difference in perspective between a professional negotiator and an attorney was most effectively summed up by a close personal friend who also happens to be a brilliant attorney.  “The problem,” he said, “is that when you walk out of the room at the end of the negotiation you measure your success by whether all of the parties are happy.  When I walk out of the room I measure my success by all of the parties being unhappy.”

Thus, the last factor in my list is the overriding one and the difference among professions.  As a negotiator I would never recommend that a client, customer, or my management execute a deal that undermined their interests.  An attorney will view the choices as the lesser of all evils. The negotiator is focused on the best of all positives.  A negotiation that is to result in a contract stands on its own merits.  Unlike the law, constructing a contact does not rest on stare decisis.  The process of negotiation is to uncover the facts and pitfalls of the prospective end result, withholding nothing material to the process.  The process of adversarial proceedings is to withhold essential information, especially that which undermines the position of the party being represented.

The other cultural issue that undermines effective negotiations arises in industries where there is a dysfunctional market dynamic, such as monopoly or oligopoly.  Employer-employee negotiations also tend to fall into this area, especially involving a labor union, though the law covering labor relations dictates the opposite behavior.  In these cases the position of the parties is so unequal that a meeting of the minds, absent intimidation and fear, is rarely achieved in reality.  Oftentimes the product of these negotiations will undermine the enterprise or disrupt an entire industry, creating havoc in its wake.  The recent conflict between Amazon and Hachette is a case in point.

The other main barrier, which oftentimes go hand-in-hand with the industry in which one engages is the factor of ego.  It is perfectly fine to drive a good bargain from one’s suppliers, but it is foolish to do so where the deal may drive that supplier (or set of suppliers) out of business.  Of course, that can only be the case if the supplier–and its product–is valued and respected.

It is incumbent on the negotiator to avoid these types of deals, and if one is left with only these terms during the negotiation to completely outline to the client or business the ramifications of signing a bad deal.  The experience of the high bankruptcy rate in certain consumer products industries due the effect of Walmart’s aggressiveness in dictating pricing, oftentimes below the cost of manufacture, is one example.

Ego, finally, is deadly to a successful negotiation.  Scalp-hunting and counting coup may do much for one’s self-esteem but it counts for little in crafting an effective deal.  The same is true for  hurt feelings and taking insult in a transaction that requires direct communication.  Ego blinds individuals to the opportunities within the structure of the negotiation and gets in the way of honest communication, undermining all of the factors for negotiation success.  It is why I recommend that a professional negotiator (who is not an attorney) handle the direct negotiation process, preferably with a similar professional on the other side.

For example, not too long ago I had the opportunity to engage in a lively negotiation where 90% of the terms and conditions were agreed to at a very quick pace.  Two or three areas of disagreement still remained to get the deal done.  In one of those areas the other negotiating team stated their position in very strong terms.  Those terms were a deal breaker–not because the position was unreasonable but because it undermined the economic structure–and the consequent economic justification–for the deal.  I identified this defect and came back to the negotiating team, strongly stating my position that their stance threatened the deal.  I then outlined alternatives that would repair the negotiating position.  The problem is that non-professionals also were present at the negotiation and came away quite alarmed at what appeared to them to be a “hostile” tone between the negotiators.

Nothing could be further from the truth.  The “dance” of negotiation is to clearly and directly state one’s position and to back it up with fact when discussions on the topic resumes.  I had a great deal of confidence and respect for my counterpart and it was apparent that he and his team had a similar amount of confidence and respect for me.  Having gotten preliminaries out of the way allowed us not to have to worry about hurt feelings or bruised egos.  We resolved the issue with some discussion of our respective positions by clearly demonstrating that each was based on a defensible rationale.  We then critiqued the rationales on the table and came up with a cohesive and defensible solution that we knew served the interests of both parties.  It came as an equal shock to the non-professional negotiators in the room that we came to agreement so quickly, with a good deal of mutual admiration expressed at the conclusion of the negotiation.

Our economic engine–in fact civil society itself–depends on honesty, good will, and ethical conduct in negotiation.  I will always remember the day that I was mocked by an attorney for making this assertion, apparently viewing me as a male incarnation of Blanche DuBois.  “How foolish you are,” he stated with absolute pride, ” to think that you can take someone at their word.”  Yes, at their word, prior to the point that the contract is signed, is how most of the world works–at least among those of us who are not thieves or sociopaths.  It is true that law and social pressure must be brought to bear sometimes to enforce this “arcane” practice.  But the alternative is lawlessness and anarchy.

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