Agile Negotiations in Theory and Practice
The integrative nature of Agile negotiations
We negotiate regularly, and many are proud of natural-born negotiator skills.Others turn to the literature on negotiation skills and techniques, which is overwhelming—game theory, Harvard techniques, cognitive manipulations, and so many more scholastic and practical tools are available to bargain, confront, convince, and make concessions.
Once again, you must have the guts to refuse to jump into a one-time negotiation, which is not a part of a well-crafted, longer-term approach. Don't let people forcing you into a kamikaze role prove they better manage that supplier.
In this post, we will summarize the negotiation tactics and strategy and suggest ways to exercise the Agile mindset to reach the integrative outcome, which makes everybody better.
Furthermore, Agile methodology realizes integrative negotiations by enabling iterative value delivery.
The meaning of negotiations
Negotiation is when two or more independent parties with competing interests cooperate to maximize individual negotiators' utility (wealth, security, satisfaction, happiness).
The ideal outcome of negotiations is a positional agreement that cannot be improved without compromising the utility of a single or both parties.
From the behavioral economics perspective, negotiations are a subset of choices and decisions under risk. Therefore, bounded rationality and prospect theory greatly explain negotiations.
Bounded rationality in negotiations
Negotiations are a collaborative decision-making process that comprises individual decisions and agreements.
Negotiators have to deal with the inherent complexity of human nature and overcome the cognitive biases of individual participants, who are subjected to the limitations of bounded rationality.
Since the 1960s, scientific research on the negotiation process has underlined the importance of developing accurate descriptions of opponents rather than assuming the other side to be entirely rational.
- on the one hand, support for increasing the rationality of an individual negotiator based on prescriptive theories like decision analysis or game theory,
- on the other hand, predicting the opponents' behavior must be based on insights into actual human behavior.
Heuristics and biases (prospect theory)
As we explained in other posts on bounded rationality, heuristics, and cognitive biases, our brain has two operating systems - 1 and 2, fast and slow, intuition and reasoning.
System 1 takes quick decisions based on our intuition, previous experiences, and cognitive patterns (so-called heuristics, or "the rules of thumb.")
System 2 analyzes and employs logic and rationality.
Under bounded rationality, when we don't have sufficient time, resources, and cognitive capabilities to make perfectly rational decisions, we predominantly operate system 1, i.e., heuristics. Mainly, this is how we multitask.
The extensive use of heuristics comes at the cost of cognitive biases, resulting in typical negotiating mistakes and conflicts.
Typical mistakes in negotiations by Bazerman
One of the prominent researchers of negotiations from the perspective of behavioral economics, Max Bazerman, summarized typical mistakes of negotiators subjected to the effects of bounded rationality and cognitive biases:
- being more concessionary to a positively framed specification of the negotiation than to a negatively framed specification;
- being inappropriately affected by lowball anchors in negotiation;
- being inappropriately affected by readily available information;
- being overconfident and overly optimistic about the likelihood of attaining outcomes that favor themselves;
- falsely assuming the fixed-pie negotiation and missing opportunities for win-win trade-offs between the parties;
- falsely assuming that their preferences on issues are incompatible with those of their opponent;
- escalating a conflict even when a rational analysis would dictate a change in strategy;
- ignoring the perspective of other parties;
- reactively devaluing any concession made by the other party.
6 negotiation mistakes in practice
Every buyer has a backlog of conceded negotiations, messed-up contracts, and supplier relationships that have gone south.
Let's see if our collection of failed negotiation experiences correlates with the ones by Bazerman.
David and Goliath negotiations
This is quite a natural situation for a medium-sized business, especially in a third-world country, with the likes of Microsoft, Oracle, or Salesforce.In that case, you would need to seek a reliable and business-minded local partner of that original supplier, as it is unlikely you'd be able to consolidate enough spending to attract those giants' interest.
The low profile of your company in supplier ranks
(even if that company isn't a dominant global supplier discussed above.)
Then, you would need to work more on the SRM front to improve the position in the Supplier Preference Model by applying the spend consolidation lever to enhance the commercial appeal.
Your end-users are derailing negotiations.
The supplier account team did a great job establishing cooperation with your business colleagues.
To install procurement in the value chain of end-users, you will have to do a lot of relationship work and watch for any preferential treatment of that vendor (e.g., tailored requirements or biased evaluations) to enforce the integrity of a sourcing process.
Such ties cannot be erased overnight, so be prepared to refuse or concede if you were thrown into a topical negotiation and not given enough time and power to settle the ground problem.
Bottleneck suppliers
They are the kings of the bargaining table, and they know it. You need to work on the substantive strategy with end-users – not necessarily replacing a supplier but avoiding an impasse.Once again, you must have the guts to refuse to jump into a one-time negotiation, which is not a part of a well-crafted, longer-term approach. Don't let people forcing you into a kamikaze role prove they better manage that supplier.
Unreasonable requirements in your negotiation strategy
You might have overcooked your negotiation strategy and set the bar too high, so a supplier may not be able to agree. Don't be shy, accepting that no one's perfect.
Executive intrusion
Are you C-officers looking for some glory by occasionally interfering or intercepting the procurement-led process entirely? Just step aside and try to establish a rapport with them. Mediate with intel and analysis, guiding them to settle the best deal.
Three ideas to keep in mind when you lose in negotiations
Don't be discouraged by the temporary shortcomings of your negotiations. Keep in mind these three ideas - dead obvious but always helpful:
- Remember that your job is not a single encounter – it's a campaign. Leaders arise from ashes and win wars.
- Negotiate with an Agile mindset.
- Be strategic, systematic, and persuasive, and wait for the tide to turn.
Different types of negotiations
The number of negotiated issues is essential to distinguishing different negotiation settings.
Some negotiations (or simply bargains) are centered upon only one issue - usually, commodity price.
Others cover multiple issues, such as important contract clauses, delivery terms, payment terms, warranties, etc.
Distributive negotiations or bargaining
Single-issue haggling, by definition, involves a conflict of interests.
It's based on the belief that there are limited resources to share ("fixed pie"). Single-issue negotiations thus are distributive or win-lose.
The sides to distributive negotiations claim value by presenting their position statement and supporting arguments.
Integrative negotiations
Multi-issue negotiations offer additional potential for integrative behavior because the parties may grow their utilities by leveraging multiple resources.
Eventually, if appropriately managed, integrative negotiations can make everybody better off.
The sides to integrative negotiations aim to create value by identifying mutually beneficial improvements. They operate multi-issue offers, creative persuasions, and other actions that increase both sides' joint utility (win-win.)
The following graphs present the differences between distributive and integrative negotiations.
The latter assumes the opportunity to gradually grow the utilities of parties by exploring perks across different aspects of the negotiation scope.
Negotiations shouldn't always mean bargaining.
The prime aspect of Agile negotiations is the mutual understanding that the parties would grow a larger pie instead of fighting for a fixed one. That understanding should come from the perspective of fairness and relationship development.
The adversarial nature of the fixed-pie situation in negotiations results from bounded rationality and cognitive biases.
We need to be receptive to rational arguments, which can be achieved by traditional conflict-resolution techniques, such as awareness of biases, open and substantive exchange of information, a cooperative mindset free of mental patterns, and a standardized reasoning process.
It is rightfully said that negotiation types can be distinguished by the parties' ability and willingness to provide information and process it.
The exchange of rich information is sometimes risky and may disadvantage a party. It is also costly and time-consuming.
Some people may engage in distributive negotiation because they consider the possible improvement of an integrative compromise over a distributive one to require too much effort and time.
Integrative negotiations are the perfect example of Agile value realization. They are based on trust and commitment to incremental growth of mutual utilities despite perceived challenges and cost and time limitations.
P.S. Two great books on mastering Agile negotiations.
I strongly recommend reading these two great books for those who want to develop the Agile mindset and master the art of Agile negotiations.
Daniel Kahneman's "Thinking: Fast and Slow"
The Nobel Prize winner Daniel Kahneman explains our thinking processes, rational and non-rational motivations, cognitive biases, and the prospect theory, which alone should be the basic knowledge of any educated person (I only read it recently, but I insist :))
Without understanding what happens inside our brain that motivates and ignites us to think and act outside the box, there is no reason to delve into innovation, disruption, or transformation.
Max Bazerman's "Negotiating rationally."
Maz Baserman is a Professor at Harvard Business School and a renowned expert in behavioral economics and its applications to negotiations. His book explains ways to overcome the effects of bounded rationality and thus avoid the most common negotiation mistakes.
More information on this and other exciting topics can be found in "The Technology Procurement Handbook." It represents 23 years of experience, billions of dollars worth of successful sourcing projects, and 1000s of hours spent on research, analysis, and content creation for the most demanding professional readers.
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