Bargaining Power: Getting the edge in negotiations

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marketing-gyan.jpgThe relationship between the negotiator and the client can be a crucial factor in deciding a company’s success. The negotiator can make or break deals and hence his role is more important than the CEO’s.

The study of negotiations today has become vital to the formulation of agreements and contracts. One of the biggest challenges of business negotiations is to gain an edge in terms of bargaining power. There are several reasons why a party with less negotiating power at the start of the process has sometimes emerged the “winner” at the end. One such factor: the relationship between the party and the negotiator representing it.

THE GENESIS OF NEGOTIATIONS

The agent: In negotiation theory, a negotiator is known as an “agent” and the party whom he is representing is known as a “constituency”. The opposing party’s negotiator can be termed as “counter-agent”.

Typically, the agent is an individual who enjoys the trust of the constituency at least for the reason of representation at the negotiating table. And, the tactics and competency of the negotiators or mediators are important factors for success in the negotiation process.

The agent-constituency relationship: It can be said that an agent is related to the constituency on emotional, ideological, ethnic or monetary grounds. And, the strength of this bond is responsible for the loyalty of the agent.

Negotiator’s dilemma: However, during the process of protracted negotiations, often a strange bond forms between the negotiators representing opposing interests. The strength of this bond is often, thought to be (often inversely) correlated to the way in which the agent is bound to his own constituency.

Let’s say A is a salesman of TY Ltd. Locked in a price negotiation with B who is the purchasing manager of company CH Ltd. ‘A’ wants to extend a certain discount in the larger interest of clinching the sale but his company does not permit him to do so. B tells A that he needs the price discount to convince his company about the purchase.

‘A’ experiences the negotiator’s dilemma: should he refuse the discount since ‘company policy’ says so, or should he extend a discount in the larger interests of the negotiation which will benefit his firm in the long run.

NEGOTIATORY ROLES

Agents/negotiators in two-party negotiations can be classified into five categories, based on the style and their relationship.

marketinggyan53.jpgAbsolutist: The “absolutist” agent is a negotiator who is more powerful than the constituency he represents. The absolutist projects an image of ‘being in control at home’. The ‘absolutist’ role in negotiations is essayed by agents who are totalitarian by nature. In a business negotiation, you would often see the founder-promoter of a private limited company essaying this role.

Democrat: The Democrat is responsible to powerful lobbies of peers and even empowered subordinates. He often ‘appeals’ to the other negotiator in order to induce a ‘negotiator’s dilemma’ that will work out in his favour. An example of the Democrat role is seen in the PM Manmohan Singh’s confession to President Musharraf of Pakistan during a recent meeting: “Please do not expect commitments. I am accountable to a lot of people in India”. After a deal has been reached in the negotiations, a democrat will usually ask for flexibility in terms of time in implementing the terms. Think of the purchase manager who asks for time to give you the cheque citing inevitable delays in his finance section.

Diplomat: The ‘Diplomat’ negotiator has independence of negotiation, but not independence of commitment. If you are sitting across the table from a ‘Diplomat’, you should be prepared for a long protracted process. The Diplomat is most skillful when it comes to buying time; to consult his constituency (while maybe buying time to recoup his forces or to review his tactics). Think of the client who bargains very hard; and finally when you give him the best-possible offer, he says “I’ll get back to you after talking to my boss”.

Mercenary: This type of negotiator is employed exclusively for performing the negotiation. The mercenary is usually an expert negotiator or a domain expert on the topic. He/she has a clear mandate from his constituency, on what he can and what he cannot do. More often than not, he is able to dictate terms and obtain a high degree of freedom. Negotiating with a ‘Mercenary’ has its own share of advantages. A commitment extracted from a mercenary is unlikely to face a revision/ risk of dishonour leading to a dispute.

Guardian: This is an agent who claims to represent the company since it is incapable of negotiating by itself. He wields an enormous amount of clout, second only to the absolutist. He is however, mindful of his own gains. Sometimes, you may feel it is easier to convince the opposite party en masse than the representing ‘guardian’. Historical examples include nations like Uganda which speak for less developed African states at international forums such as the WTO.

..during the process of protracted negotiations, often a strange bond forms between the negotiators representing opposing interests.

 

The attitude of an agent to work towards mutually fruitful solution during negotiations is called ‘to cooperate’. Anything contrary, such as a confrontationist approach is called ‘to compete’. The ability to cooperate for an agent is directly related to the autonomy of the agent as provided by the constituency. The graph illustrates the relative bargaining power of an agent in each of the roles.

As seen above, greater the bargaining power of the agent, the less the affect of pressure on the agent by the constituency. And this translates to greater bargaining power of the agent with respect to the opposing party’s negotiator. In real-time negotiations, successful negotiators tend to move between different styles as the situation warrants.

ROLE - PLAY STRATEGY

There are several instances in history of negotiations where this shift of roles has happened. There are three ways in which this shift is fundamentally seen to happen:

marketinggyan253.jpg1. Actual change: This involves an actual (though temporary) change in relationship between agent and constituency. For example, a manager in a merger negotiation maybe given authority so that he is on par in status with the senior executives from the opposing party.

2. Projected change: No actual change takes place but the agent projects his relationship with his constituency in a certain manner, to the counter-agent, hoping to get concessions. For instance, a sales manager may have designation on his business card higher than his actual status in his organization.

3. Reflected change: In other words, this change is effected by a negotiator wants to increase his strength relative to his constituency. For instance, take a merger negotiation by a company’s CEO who is discontent about his powers. So, he switches his role from absolutist to diplomat. The opposing agent is disappointed and threatens to withdraw from the negotiation. The CEO talks to his board about the threat and asks for greater powers and to contain damage. Eager to save the negotiation process, the board accepts his demands.

Conclusion

If a negotiator is able to do the right negotiatory roles, and based on the reaction of the counter-agent, and his own objectives, he is able to change his negotiatory role, his chances of success in negotiations are greatly enhanced.

The author negotiates for strategic alliances with industry majors such as IBM, Oracle, HP. He is also an alumnus of the Indian Institute of Foreign Trade and the NDA, Khadakwasla. Mail: marketinggyan@businessgyan.com
 

Issue BG53 Aug05