New Tools For Negotiators

New tools for Negotiators

A few simple ideas make it possible to construct powerful strategies for even the most complex deals.

Negotiations are the stuff of business life, and volumes of advice tell managers how to prepare for and conduct them. But most of the advice applies to deals that are simpler than those pursued today. Negotiations now typically involve many parties that have an interest in the outcome--the "stakeholders"--and require decisions on many complex issues. Immense sums of money may ride on the outcome.

Sophisticated support for negotiators is available--for example, computer simulation models based on dynamic game theory. These models can predict the behavior of stakeholders in multiparty deals and guide negotiators to winning strategies. As yet, however, few business leaders feel comfortable surrendering their personal judgment on such crucial issues to a "black box."

We have therefore been developing a middle way: a set of readily understood tools to help decision makers in complex multiparty negotiations. With the help of these tools, negotiators can develop strategies that are not only favorable to them but also palatable to the other parties. This method rests on the same logic as sophisticated simulation tools but doesn't require an elaborate computer model. It has been used so far to develop strategies for several real-life negotiations and is appropriate whenever many stakeholders have different goals on a number of issues and the final decision emerges from bargaining among those stakeholders. The tools are therefore relevant to mergers and acquisitions, partnerships and alliances, regulatory rulings, litigation, and labor disputes--in short, to many of the items at the top of a chief executive officer's agenda.

Who are a deal maker's allies and enemies? What is the chance that a particular outcome will stick?

Applying the tools at the start of a deal should answer many crucial questions. Who are a deal maker's true allies and enemies? What is the chance that a particular outcome will stick? Who is worth lobbying for support on particular issues? What bargaining chips can be traded for that support? Used together, these fact-based tools suggest effective strategies for arriving at decisions that all parties can accept, and they help negotiators refine their plan of action as circumstances change. To see how the tools operate, consider how they helped negotiators in two real situations.

Power play

A European government decided to liberalize its electricity generation and supply industry. One major move in carrying out that plan was the privatization of a near-monopoly utility, which we will call Power. Negotiations had to be conducted on several issues, including the level of end-customer tariffs that Power could charge, the wholesale-market structure most appropriate for competition, and the possible forced sale of Power's generating plants.

Power's first task was to identify the key issues and the range of possible outcomes for each. On the tariff issue, for example, the regulator proposed a one-off cut of 15 percent in tariffs charged to end customers. Power, by contrast, aimed to keep the existing tariff levels. In addition to such obvious issues, Power considered several others, such as "green" subsidies: higher tariffs for electricity produced at environmentally friendly plants. Some of the additional issues at first seemed immaterial but later turned out to be important.

Next, Power had to identify all of the stakeholders that might influence the decision on any issue and to understand the objectives of each. It identified a total of 16 parties, including the regulator, the Ministry of Industry, the Treasury, labor unions, competitors, the free-market system operator, and Power itself. Although the number of parties was large, a negotiator using our tools requires only three pieces of information about stakeholders to predict their behavior on any issue.

1. Position: What is the stakeholder's preferred outcome on the issue? Is the stakeholder arguing for one of the extremes on the range of possible outcomes, for example? For a stakeholder who hasn't stated a position on a particular issue, what would the rational position be?

2. Salience: How important is this issue to the stakeholder as compared with all other issues? For example, would the stakeholder drop everything else to attend a meeting on this issue? What do we know about this person's past interest in the issue--for instance, his or her willingness to spend resources on it?

3. Clout: As compared with other players, how much power does the stakeholder have to influence the decision on this issue? In the case of Power's future tariffs, for example, the regulator had the highest clout, followed by Power and the Treasury.

It is helpful to express this information by assigning a number from 0 to 100 to represent each stakeholder's position. On tariffs, Power chose 0 to represent its own position and 100 for the regulator's. The other stakeholders fell somewhere between these two extremes (Exhibit 1). As for salience, a rating of 100 means that this is the most important issue for the stakeholder, a rating of 50 that it is one of several important issues but not the most important, and a rating of 0 that it is unimportant. To express clout, the stakeholder with the greatest influence on an issue--in the case of tariffs, the regulator--would get a rating of 100; the others would get fewer points.

The task of gathering all of this information may seem daunting. In our experience, however, it is possible to find people who can provide answers based on their dealings with the stakeholders and their knowledge of the current negotiations. If so, a day or two will suffice to question these people carefully, preferably in a workshop setting; to calibrate their inputs; and to arrive at consensus estimates. Recording the results in an electronic format will be useful for later analysis.

The first cut

Having undertaken this preparatory work, Power was ready to see how the negotiations might pan out on each issue. The first tool, called an outcome continuum, graphs each stakeholder's position on a given issue relative to the two extremes. By weighting the players' positions according to salience and clout and then calculating the average, you can foretell the result of a pure compromise "vote," with no bargaining among the parties. This