In a previous article we discussed Negotiation Leverage in the long-running, but recently settled Qualcomm/Nokia patent dispute. Setting leverage aside, let’s look at just one of the reported terms of that agreement as an illustration of one of K&R’s Six Principles of Negotiation.
The principle is this: “Terms Cost Money, Someone Pays the Tab (expense).”
What the principle means is that as you negotiate, you should consider that every term in the final agreement will cost one side or the other money. You should therefore be careful when altering your terms. Mistakes can be expensive.
This does not mean, however, that the cost to each party is the same.
First example: in the Qualcomm/Nokia case, the agreement included an up-front payment and then per-unit royalties from Nokia to Qualcomm. The payments will be a total of “up-font” + “per/unit” x “units”. The two companies made estimates of what volume would be in private, and separately. Versus a straight per-unit royalty, if Nokia ships more product than Qualcomm had estimated, this could result in lower total revenue to Qualcomm than a strict per unit contract term. If Nokia ships less, the total could be higher. This is an example of the K&R Principle – Terms cost money.
In addition, Qualcomm probably determined an amount that they desired up-front as a flat fee (which becomes mostly risk-free), and what amount they would allow to be variable. Among other things, this expresses a degree of Qualcomm’s tolerance for risk. Nokia made the same calculation, but from their own perspective. As a negotiator, you should try to determine what is important to the other side. A desire for lower risk from Qualcomm, or a desire for the patent expense to be a fixed fee and known per-unit cost for Nokia will affect the way they negotiate the terms of the agreement.
This principle does not mean that the value, or cost, to each party is the same. For example, if you imagined that Nokia was going to have a bad quarter, and they chose to follow the principle of clumping all the bad news together, they could consolidate their costs into a bad quarter via the lump sum. If Qualcomm had been about to negotiate loan financing, which they no longer had to do because of the lump sum payment, it could be more valuable to them. Your knowledge of the interests of the other side will affect your negotiation.
The values are different, the costs are different. To be a good negotiator, you should be aware of 4 things:
1. The cost to your side of the term
2. The value to your side of the term
3. The (estimated) cost to their side of the term
4. The (estimated) value to their side of the term
When you negotiate, remember: Terms Cost Money, Someone Pays the Tab (Expense). (td)