A few weeks ago, I had the opportunity to join Kison Patel, CEO, and Founder of M&A Science, as his guest on the M&A Science podcast. Kison and I spent over an hour talking about negotiation strategies and tactics in an episode titled, How to Negotiate Like a Pro. I think you will enjoy the discussion and most important, find some valuable nuggets to help improve your and your team’s negotiation effectiveness.
If you work in the business arena, negotiation is usually part of your job description. And this is especially true in sales and procurement. You are negotiating price, terms, delivery, product specifications and many other items, including subtle factors like whether your prospect considers you a business peer or subservient. I’ve been practicing and teaching business negotiations for several decades and still find the subject fascinating.
It’s important to understand the specific types of negotiations you undertake, including problem-solving and adversarial negotiations. In reality, there are elements of both that permeate almost every negotiation. The problem-solving value-based approach is all about discovering and understanding the other side’s interests. You then negotiate to those interests so you can move your negotiation counterpart closer to your way of thinking. This is where the principle of leverage comes into play.
The Critical Importance of Leverage
A lot of people struggle with the concept of leverage. In the context of negotiations and interpersonal relations, “leverage” is a term that only exists in English. The term actually comes from physics – the ability to move objects of heavier mass with less force. That’s what levers give you. The more levers in a pulley system, the easier it is to move objects of heavier mass with less force.
Similarly, leverage in interpersonal relations is the ability to move people closer to your way of thinking and vice versa. And by applying value-based leverage, or what I call positive-leverage, people move voluntarily. They move voluntarily because you’re doing something for them and it’s in their interest to move. Contrast this with negative leverage, where people may move because they have to, not voluntarily. Taxes and utilities are examples of negative leverage. You cooperate because the consequences of not doing so are unacceptable.
The value of positive- and negative-leverage is illustrated on the Leverage Slope™, which is a simple mathematical model that shows unique value on the X-axis and price and terms on the Y-axis. Unique value, combined with less competition, equals greater leverage on the part of the seller. Conversely, lack of unique value and more options creates a commodity scenario (real or perceived) and more leverage for the buyer.
The point is that you need to know where you are on the Leverage Slope and why. This enables you to formulate value arguments that create positive leverage which is generally better received when you are trying to achieve long-term business relationships. But you also have to remember negative leverage – what people will lose when they fail to act with you – since people will act with more urgency in relation to risk. Negative leverage can be very important to the negotiation scenario when used appropriately to create a sense of urgency.
When I enter negotiations on behalf of a client, I want to put all these pieces on the table as we formulate our strategy. This includes a thorough understanding of not only our own leverage but that of the potential clients as well. Obviously, we have something to sell and the prospect has a need to fill, and they may have various options for filling their needs.
Risk Reward Analysis
These dichotomies lead us to the Risk Reward and Action tool. What are the rewards the prospect receives by taking the action I am asking them to take, which is usually purchasing our solution, and what are the risks if they do not act? For that matter, what risk is the prospect taking when they purchase from me? The answers to these questions provide a good feeling for what leverage you do or don’t have in the negotiation process.
Simply stated, if the risks of action for the other side, or for you, in entering into an agreement (whether it’s a partnership, purchase or sale agreement), are not overcome by the risks mitigated and the rewards gained by taking the action, the deal should not and probably will not happen, especially in the current environment. This is why you need to be deliberate and clear about addressing risks and highlighting rewards, especially for your negotiation counterparts who may be stressed or nervous about some aspects of the potential deal.
And by the way, aren’t we all just a bit stressed about making purchases in our non-business lives, such as a new house, car or really anything of consequence? The Risk Reward Analysis is played out constantly, whether consciously or subconsciously. As a negotiation pro, understanding the risks and rewards, and being able to articulate them in a way that is reassuring to the prospect, is a key component in maintaining positive leverage throughout the negotiation process.
This is just a sample of what Kison Patel and I covered in the M&A Science podcast. Click here to hear the rest of the story.