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Great Leaders Are Great Negotiators

Great Leaders Are Great Negotiators

Everyone thinks they know how to negotiate. Let’s face it, our negotiating skills are honed from birth, as we tussle with our parents to try to convince them to do what we want them to. We learn from a position of low power how to influence someone with greater power.

Despite this, I learned a number of years ago that my negotiation skills were not what I thought they were. I was humbled in a fairly straightforward mock negotiation at business school. It was a simple price and contingency negotiation exercise, and I allowed myself to be outmaneuvered. I made a bad deal, because I didn’t respond well to the time pressure.

But what I learned in the following weeks equipped me to negotiate and win several large contracts, worth billions of dollars in revenue, and to go on to resolve an incredibly complex commercial issue, where the parties had been in a stalemate for almost 10 years.

If you want to be a really skilled negotiator, there are a few fundamental principles and rules of thumb that you need to follow.

The first principle is to focus on the size of the prize. What can you do to increase the overall value of the deal for both parties? This should be your first instinct, before you start to worry about how much value you can claim for your side.

So, first, make the pie as big as you can. You can work out how to divide it up later.

The second principle is to understand the difference between negotiating and haggling. Negotiation is a sophisticated conversation, where you trade multiple terms to arrive at an agreeable solution. That’s how you maximize value for all parties. Haggling is just a one-dimensional process of finding a compromise on price – a zero-sum game!

The third principle is to know your reservation value. In simple terms, it’s the lowest price at which you are prepared to do a deal. You need to know yours really well, and you also need to have a pretty good idea of your counterpart’s reservation value.

The fourth principle is anchoring. There’s always a bit of speculation about whether or not you should make the first offer in any negotiation. Like the answer to all good questions, it depends. It’s important to know, though, that when the first offer is put on the table, it acts as an anchor point… a mental reference frame around which all the discussion tends to revolve. 

This is a classic tactic of labor unions when negotiating employment agreements. They make outlandish claims at the outset, to get the company negotiators to focus around that point. e.g. if you start arguing about a 10% pay rise every year for 5 years, then you might feel satisfied when you settle on a 7% rise over 3 years. It might feel like a win. But if you’d started with your anchor (3% for 5 years), you might not feel quite as happy.  

The fifth principle is to know your BATNA: the best alternative to a negotiated agreement. This can be different to your reservation value. For example, the negotiation might be time dependent: “If I can get a really good price now for this asset, I would consider selling it, otherwise, I’m happy to wait until the market improves”.

Your BATNA simply illustrates the gap between the value of the deal you can potentially have, and your fallback option if the deal isn’t finalized.

The sixth and final principle is ZOPA: another acronym, which stands for zone of possible agreement… Once you’ve established your own reservation value, and the reservation value of your counterpart, you can calculate the ZOPA.

It’s the range in which you perceive that a deal could potentially be consummated. e.g. “In the worst case, I would be prepared to sell my house for $1.25m, but in the best case scenario I think I can find a buyer who is willing to pay $1.5m for it.” So, your ZOPA is $1.25m to $1.5m.

Negotiation has a lot more to it, of course. And regardless of how well you approach it from a technical and skill standpoint, it’s equally important to have the right temperament, and a high level of emotional intelligence.

But all great leaders are also great negotiators… developing this skill will put a critical arrow in your quiver as you go up through the ranks

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