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Turning Negotiation intoa Corporate Capabilityby Danny Ertel

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the article:

• The Idea in Brief

• The Idea at Work

• Exploring Further. . .

P R O D U C T N U M B E R 5 3 9 4

Does your company

negotiate as if each deal

were a one-off? Here’s how

a negotiation system can

energize your partnerships

and boost your profits.

T H E I D E A

Your firm probably negotiates thousands oftimes every year—from special customer dealsto supplier contracts to joint-venture partnering.

A single deal may not greatly impact your com-pany’s fortunes. But taken together, they canmake or break your bottom line. If individualnegotiators see each deal as separate, they canunknowingly undermine other efforts; for exam-ple, a creative response to one customer’s needsmay hamstring a broader product strategy.

To avoid this problem, you need a coordinatedapproach to negotiation. By making some mod-est but systematic changes, you can help yournegotiators share information and start eachdeal understanding how it supports the firm’sgoals. The pay-offs? Smarter deals, strongerrelationships with outside partners, and moreefficient and productive negotiators.

Turning Negotiation into a Corporate Capability

Buil d your firm’s negotiation capability by:

• Creating a negotiation infrastructure. Onenegotiation’s outcome should not hingesolely on an individual negotiator’s skills.Instead, give all negotiators better andmore information, including lessons frompast negotiations and corporate priorities.

E X A M P L E :When Serfin, a large Mexican bank, faced loandefaults after Mexico’s 1994 currency crisis, itdecided to standardize its negotiation processes. Itlaunched a negotiation-training curriculum, cre-ated a categorization scheme rating each debtorand matching that rating to a negotiation strategy,and established a system for sharing negotiationsuccesses.

• Broadening your measures of success.Don’t judge negotiations only by financialmeasures. Evaluate other key benefits aswell—e.g., better communication with sup-pliers, fresher solutions, and more workablecommitments. Then, explicitly link thosemeasures to negotiators’ incentives.

E X A M P L E :Many companies base sales reps’ compensation onthe longevity of their customer relationships, inno-vations that those relationships have generated,customers’ own evaluation of the relationships,and referral business.

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• Distinguishing between the deal and therelationship. Drawing a line between a dealand the longer-term relationship starts avir-tuous cycle. You build a stronger rela-tionship and trust. Both sides share moreinformation, leading to more creative andvaluable agreements.

E X A M P L E :When Eastman Kodak transferred its data centeroperations to IBM, key managers created two listsof issues—one related to the specific deal, theother to the overall relationship. They agreed notto resolve problems from one list (e.g., pricing) byexacting concessions on issues from the other(e.g., mutual respect). Their relationship is aparagon of effective partnering.

• Learning to walk away from a deal. Alwaysdefine the best alternatives to closing a deal—and think them through before you beginnegotiating. Then carefully evaluate theproposed negotiation against the best alter-native. If the alternative is better, walk away.

E X A M P L E :Colbún SA, Chile’s third largest electric-power com-pany, often has to bargain with larger companiesfor capacity such as transmission lines.Colbún’s policy requiring negotiators to definealternatives to every deal prompted the companyto break off some negotiations—because its ownalternatives proved more profitable. That done,it is no longer at the mercy of its competitors.

T H E I D E A A T W O R K

I N B R I E F

ners. It’s difficult to think of any business initiativethat does not require some form of negotiation.

Although the outcome of any single negotiationmay not have much effect on a business’s fortunes,the thousands of negotiations a typical companyundertakes have, in combination, an enormous im-pact on its strategy and its bottom line. In my yearsof consulting on negotiations, however, I havefound that companies rarely think systematically

very company today exists in a complex web of relationships, and the shape of that web is formed, one thread at a time, through negoti-

ations. Purchasing and outsourcing contracts are negotiated with suppliers. Marketing arrangementsare negotiated with domestic and foreign distribu-tors. The contents of product and service bundlesare negotiated with customers. Product develop-ment pacts are negotiated with joint-venture part-

artwork by david johnson Copyright © 1999 by the President and Fellows of Harvard College. All rights reserved.

I D E A S AT W O R K

Danny Ertel is a founder and director of Vantage Partners, a consulting firm in Cambridge, Massachusetts. Heis the coauthor, with Roger Fisher, of Getting Ready to Negotiate: The Getting to Yes Workbook (Penguin, 1995).

E

TURN I NG

Negotiation I NTO A

CORPORATE

CAPABI LITY

by Danny Ertel

Many

companies view

each negotiation as a

separate situation. But

companies that take

a more coordinated

approach are making

better deals and forging

stronger relationships.

about their negotiating activities as awhole. Rather, they take a situationalview, seeing each negotiation as aseparate event, with its own goals,its own tactics, and its own measuresof success. That approach can pro-duce good results in particular instances, but it can turn out to becounterproductive when viewedfrom a higher, more strategic plane.Hammering out advantageous termson a procurement contract may, forexample, torpedo an important long-term relationship with a supplier. Orcoming up with a creative responseto one customer’s unusual needsmay undermine a broad market orproduct strategy.

It’s easy to understand why com-panies take a piecemeal view of ne-gotiation. Each negotiating situationtends to be highly complicated in its own right. A negotiator has tobalance a welter of contending fac-tors relating to both the substanceand the tactics of the negotiation.How much can I bend on price togain a larger order? Should I strive to establish a long-term relation-ship, or should I concentrate on clos-ing a short-term deal? Should I makethe first offer, or should I wait for theother side to show its hand? Can I salvage this deal, or should I walkaway now? It’s so hard to make wisetrade-offs in any one negotiationthat trying to think about coordinat-ing all your negotiations can seemoverwhelming.

But as partnerships, alliances, andother agreements become more im-portant in business, the pressure totreat negotiation as an institutionalcapability, rather than as a series ofdiscrete events, grows stronger. Inresponse, a number of companieshave begun to take a fresh look at the way they negotiate. They havefound that building a strong negotia-tion capability is not a matter of cre-ating a set of hard-and-fast rules forall negotiations –putting negotiatorsin bureaucratic straitjackets won’twork. Rather, it requires a different,more coordinated approach to orga-nizing and managing negotiations.Executives have to move away fromthe situational view of negotiation –they have to see that negotiation canbe managed at a corporate level.

In my experience, the companiesthat have successfully built a negoti-ation capability have done so throughfour broad changes in practice andperspective. First, they have put a companywide negotiation infra-structure in place, ensuring that negotiators’ priorities remain tightlylinked to the company’s priorities.Second, they have broadened themeasures used to evaluate negotia-

tors’ performance beyond matters ofcost and price. Third, they draw aclear distinction between individualdeals and ongoing relationships. And,finally, they make their negotiatorsfeel comfortable walking away froma deal that is not in the company’soverall best interest.

Creating a NegotiationInfrastructureNegotiation is one of the few func-tions in the modern corporation thathas resisted the trend toward stan-dardizing processes and streamliningwork. While companies have reengi-neered customer service, manufactur-ing, and even research and develop-ment, they have allowed negotiationto remain the realm of the individ-ual. Each negotiation is viewed as aseparate event, and its outcome isthought to depend on the negotia-tor’s personal judgment, timing, andexperience.

Negotiators, of course, have avested interest in the notion thatevery negotiation is unique. It iso-lates them from interference andcriticism. If the negotiation is a suc-cess, they reap all the praise. If it’s a failure, they can shrug and say,

“You had to be there.” And when amanager, trying to be supportive,pats the negotiator on the back andsays, “Put it behind you; you’ll getthem next time,” the manager be-comes an unwitting coconspirator inperpetuating the situational view.

In fact, the outcome of a negotia-tion does not hinge solely on the negotiator’s individual skills. Nego-tiation can be coordinated and sup-

Financiero Serfin, one of Mexico’s

out during a time of extreme hard-ship. Like most other Mexican banks,Serfin faced a large number of loandefaults in the wake of the country’s1994 currency crisis. In response,Serfin’s negotiating teams followedthe pattern typical of loan workouts:They sat down with each debtor andtraded concessions over what per-centage of the loan would be repaid,when, and with what conditions.They backed up their positions withoccasional threats of legal action.But despite the bank’s considerableinvestments in hiring additional staffand providing some basic training,the negotiations did not succeed inimproving the overall health of thebank’s loan portfolio.

Desperate to improve the perfor-mance of the negotiators, the bankdecided to take a new tack. It lookedfor opportunities to standardize andcodify its negotiation processes, toimpose some management controls,and to change the negotiators’ con-cession-oriented culture. In short, itset about to build a corporate infra-structure for negotiations.

As a first step, Serfin developedand rolled out an improved negotia-tion-training curriculum that fo-cused on putting trainees into real-world situations. But then the bankwent much further. It required thatnegotiation considerations be incor-porated into the initial financialanalysis of each workout case. Col-laborating closely with the responsi-ble negotiating team, Serfin’s ana-lysts defined the bank’s variousinterests in the case, put them in or-der of priority, developed an under-standing of each of the debtor’s in-terests, laid out a set of creativeoptions for resolving the case, and

4 harvard business review May–June 1999

negotiation as a corporate capabil ityI D E A S AT W O R K

Executives have to

move away from

the situational view

of negotiation to

see that it can be

managed at the

corporate level.

ported like any other function. Grupo

largest banks, recently found that

assessed the debtor’s and the bank’salternatives to reaching a negotiatedsettlement. The entire analysis ofthe case became a blueprint for itseventual negotiation.

To aid in the analysis, the bankalso created a categorization scheme,rating each debtor according to fourcriteria: the debtor’s ability to repayits loans over both the short and thelong term, the quality of its relation-ship with the bank, the quality of itscollateral, and the quality of thebank’s best alternative to reaching asettlement. The category into whicha debtor falls suggests an appropriatenegotiation strategy. For example, adebtor who has a good relationshipwith the bank and whose ability torepay stands to improve over time,but whose collateral is weak, wouldwarrant a highly collaborative, cre-ative approach. A debtor whose rela-tionship with the bank is strainedbut whose collateral and ability torepay are strong would require an ap-proach that focuses on strengthen-ing the underlying relationship. Adebtor whose ability to repay is weakand who has a poor relationship withthe bank would warrant a more con-frontational approach, with a strongthreat of foreclosure.

To help the negotiating teams carryout their strategies, the company setup a system for sharing successfulpractices. Negotiators in each of thebank’s five workout divisions wereasked to identify their 20 toughestcases. The team responsible for eachcase then gathered with negotiatorsfrom the other divisions, and, to-gether with a negotiation coach, theyreviewed the case in depth, analyz-ing what had happened to date andwhat they might do next. The ses-sions produced a set of lessons thatwas shared with all the bank’s nego-tiators and was also used to refinethe categorization scheme. This exer-cise not only helped the negotiatorsconduct subsequent negotiationsbut also reinforced the idea that ne-gotiation is an institutional processthat can be evaluated and fine-tunedsystematically.

Serfin’s efforts to establish a nego-tiation infrastructure dramaticallychanged the way its negotiatorsviewed their roles and did their jobs.

Far from being a straitjacket, the infrastructure led to a burst of cre-ativity. Guided by the bank’s over-all interests, Serfin’s workout teamsbecame innovative problem solvers,working in partnership with debtors.One exemplary case involved a largeloan to a manufacturer that had longbeen a major borrower. The negoti-ating team worked with the debtor’smanagers to find a third-party in-vestor who was willing to take anequity stake in the company. Byshoring up the company’s finances,the negotiators were able to help itback to health, not only saving theloan but reinvigorating the lendingrelationship. In the past, the negoti-ating team would simply havebought time by restructuring thedebt, knowing that the companywould soon be in default again. As aresult of its innovative practices,Serfin’s workout division is todayconsidered the best in the country, amodel for other institutions.

There are many other equallystraightforward ways to begin build-ing a negotiation infrastructure. Oneprominent professional-services

firm is developing a centralized data-base to help its project managers ne-gotiate scope-and-fee agreementswith clients. Every time a managernegotiates with a client, he or shewill now be expected to fill out abrief questionnaire that captures the approaches taken, the resultsachieved, and the lessons learned.The answers will be entered into thedatabase, which other project man-agers can then tap into when pre-paring for their own negotiations.Rather than acting as lone wolves,project managers will be able to in-

form their own strategies and ac-tions with the collective wisdom oftheir colleagues. They will also beable to use the database as a “negoti-ation yellow pages,” identifying col-leagues with useful experience andexpertise. As an added benefit, thedatabase will generate periodic re-ports for management highlightingthe tactics and outcomes of negotia-tions, and these reports will enablethe firm to further refine its under-standing of what works and whatdoesn’t in bargaining with clients.

The management tools don’t haveto be high tech. At another profes-sional-services firm – one of the BigFive accountancies –every partner isexpected to engage at least one otherpartner in a pricing consultation be-fore negotiating fees on any majornew engagement. The partners helpeach other get ready for the negotia-tion, and they share experiencesabout the success or failure of priornegotiations conducted under simi-lar circumstances.

At one highly successful softwarecompany, the senior vice presidentof sales has established a set of nego-tiation protocols for all sales repre-sentatives. The protocols lay outsteps to be taken in preparing for andconducting negotiations, and theyrequire that the reps be debriefed after each negotiation, ensuring thatthe company captures important in-formation. The protocols include es-tablishing both sides’ options in or-der of priority, considering multipleoptions in the course of the negotia-tion, and using a set of objective cri-teria to shape the discussion.

The actions these companies havetaken are for the most part modest –providing more and better informa-tion to negotiators, drawing lessonsfrom past negotiations, setting upcategorization and prioritizationschemes to guide negotiators in se-lecting their strategies, conductingregular evaluations using standardcriteria. But by creating a broadlysupportive infrastructure, they pro-duce powerful results. They don’tjust improve the outcomes of indi-vidual negotiations; they break downthe assumption that every negotia-tion is unique and immune to coor-dination and control. They form the

In reality, the

outcome of a

negotiation does

not hinge solely on

the negotiator’s

individual skills.

negotiation as a corporate capabil ity I D E A S AT W O R K

harvard business review May–June 1999 5

basis for more collaboration, creativ-ity, and efficiency – not to mentionmore accountability – throughout acompany’s negotiation activities.

Broadening the Measures of SuccessThe way a company measures thesuccess of a negotiation guides theway a negotiator approaches andconducts the negotiation. Althoughmany companies have begun tostress the importance of forging part-nerships with key suppliers and cus-tomers, in most cases this goal re-mains a high-level aspiration thathas not been translated into clearperformance measures for negotia-tions. Most measures still center ongaining the best price or achievingthe lowest cost. Dollars and cents,after all, are the easiest things tomeasure, and they form a concretebasis for setting budget goals and for linking negotiators’ pay to theirperformance.

Emphasizing financial measuresnaturally leads negotiators to focuson cost issues. Consider what hap-pens in most procurement depart-ments. Each year, budget goals areestablished that assume certain(usually fairly aggressive) price tar-gets will be met for goods purchased.Knowing that they’ll be judged ac-cording to how well they meet orbeat these targets, department man-agers instruct the purchasing agentsto get the best possible prices fromsuppliers, and they evaluate eachdeal according to some measure ofprice – the discount from the list orthe prevailing market price, for in-stance. Knowing they’ll be judged on the price breaks they achieve, the purchasers view negotiation as a zero-sum game – for them to win,the other side has to lose. Even if thecompany espouses a win-win ap-proach in dealing with vendors, thepurchasers know that their man-agers will be amply satisfied if theycan bring home a big discount.

Focusing on discounts has an in-sidious effect on purchasing agents’behavior. It leads them to ignore op-portunities to be innovative in work-ing with suppliers to create newvalue by, for example, reducing in-ventories, developing higher-quality

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negotiation as a corporate capabil ityI D E A S AT W O R K

A New Set of Measures

One large engineering and architectural-servicescompany has gotten more out of its negotiations bybroadening the way it defines success. Rather thanaiming simply to book more business at higherhourly rates, the company uses seven criteria in re-viewing negotiations:

Relationship: Does the negotiation process help build the

kind of relationship that will enable us and our clients to

work effectively together over the project’s life cycle?

Communication: Do our negotiations help create an envi-

ronment in which both parties can engage in constructive

conversations aimed at solving problems?

Interests: Have we crafted a deal that satisfies our inter-

ests well at the same time that it satisfies our client’s in-

terests to at least an acceptable level and the interests of

any relevant third parties (government regulators, envi-

ronmental groups, and so on) to at least a tolerable level?

Options: As part of the negotiation process, have we

searched for innovative, elegant, and efficient solutions

that might offer joint gains?

Legitimacy: After brainstorming a variety of options, have

we used objective criteria to evaluate and choose an op-

tion that could be justified by both sides?

BATNA: Have we measured the proposed deal against our

Best Alternative to Negotiated Agreement, and are we

confident that it satisfies our interests better than our

BATNA does?

Commitment: Have we generated a set of well-planned,

realistic, and workable commitments that both sides un-

derstand and are prepared to implement?

Taken together, these criteria serve not only as stan-dards for evaluating the success of any negotiationbut also as a checklist that the company’s deal mak-ers can use in preparing for negotiations.

components, or communicatingelectronically. That can hamstring acompany’s attempts to make strate-gic changes that require new, morecollaborative relationships withsuppliers, such as moving to a build-to-order manufacturing system. Fur-thermore, it undermines the parties’ability to deal effectively with unex-pected problems. If a supplier feelsthat it lost out in a negotiation witha customer – that it was squeezed bythe customer – then when the cus-tomer has a problem later on, thesupplier is likely to respond with indifference at best and downrighthostility at worst.

One large engineering and archi-tectural-services company – I’ll callit Acme Engineering – has adopted abroader way of measuring success innegotiations. It evaluates a negotia-tion according to seven diverse stan-dards that focus as much on processas on outcome. (See the insert “ANew Set of Measures.”) To be judgedsuccessful, negotiators have toshow, for example, that they estab-lished a climate of open communi-cation with the other party, thatthey explicitly discussed several cre-ative alternatives, that they used ob-jective criteria to choose among thealternatives, and that the final dealfulfills not only the company’s inter-ests but the other parties’ as well.

It might be argued that these kindsof measures are soft and difficult toquantify – but that’s just the point.Because they’re not cut-and-dried,they force negotiators and theirmanagers to think more broadly andcreatively about negotiations, bothwhen strategies are initially estab-lished and as the bargaining unfolds.When negotiations become compli-cated or difficult, negotiators can’tsimply fall back to trading conces-sions. They have to balance a host ofconsiderations, which leads them toexplore more options and to holdwider-ranging discussions.

Of course, establishing the rightmeasures is only half the challenge.You also have to link those measuresto the incentives that will actuallygovern negotiators’ behavior. To en-courage broader, more creative nego-tiations, a number of companies areexpanding the criteria they use to de-

termine purchasing agents’ and sales-people’s bonuses and commissions.On the procurement side, they areseeking to tie incentives not to theprice discounts achieved but to thetotal cost of ownership of the pur-chased good, taking into account theoperating efficiencies gained throughusing the supplier, the reductions indefects achieved by the supplier, andeven the supplier’s role in develop-ing product or service innovations.

ways to base a significant portion of

sales reps’ compensation on thelongevity of their customer relation-ships, the innovations that have re-sulted from their interactions withcustomers, customers’ own evalua-tions of those relationships, and thereferral business that can be tracedto those customers.

Motivation can come from non-financial rewards as well. In recentyears, many companies have set upprograms to capture and share knowl-edge. To encourage employees toparticipate, they frequently give outvarious kinds of prizes – even some-thing as simple as a mousepad – toanyone who contributes to or drawson the knowledge banks. Such to-kens of appreciation signal the im-portance management places on theeffort and, in time, help build a cul-ture in which sharing knowledge isthe norm. Companies may want tothink about giving similar awards to those whose day-to-day negotia-tions with customers, suppliers, andothers generate new ideas or other-wise create unusual value. Anythingthat can jar people out of the conces-sion-bargaining mind-set should beviewed as useful.

Distinguishing Between theDeal and the Relationship

Broader performance measures canget negotiators to look beyond theimmediate deal to the larger rela-tionship. But if they don’t draw aclear distinction between the com-ponents of the deal and the compo-nents of the relationship, they canstill run into trouble. It’s commonfor negotiators to confuse the dealand the relationship. They fear thatif they push too hard to get the bestdeal possible today, they may jeopar-dize their company’s ability to dobusiness with the other party in thefuture. Or they fear that if they paytoo much attention to the relation-ship, they’ll end up giving away toomuch and make a lousy deal. Thoughnatural, such confusion is danger-ous. It leaves the negotiator open tomanipulation by the other side.

Look at what routinely happens toaccounting firms. A big client willtell its accountant that the firm hasto cut its fees or else the work will be put out to bid. In the face of such athreat, the accountant, after defend-ing the quality of the firm’s servicesand pointing out the cost of switch-ing auditors, will offer up at least asmall price break for the sake of therelationship. The discount may beenough to enable the firm to hangonto the account in the short run,but that’s rarely the end of the story.In another year or two, the clientwill be demanding another price cutin exchange for its continued busi-ness. And, having established aprecedent, the accountant will onceagain give in.

Over the years, I have asked hun-dreds of executives to reflect on theirbusiness relationships and to askthemselves which kinds of cus-tomers they make more concessionsto, do more costly favors for, andgenerally give away more value to. Isit their good customers or their diffi-cult customers? The vast majorityrespond, with some chagrin, “Thedifficult ones, of course. I’m hopingto improve the relationship.” Butthat hope is almost always in vain:once customers find that they canget discounts and favors by holding arelationship hostage, why should

Without realizing it,

many companies

have systematically

taught their

customers the art

of blackmail.

negotiation as a corporate capabil ity I D E A S AT W O R K

harvard business review May–June 1999 7

On the sales side, they are exploring

they change? Without realizing it,many companies have systematicallytaught their customers the art ofblackmail.

The source of the problem lies inthe notion that the relationship andthe deal function like a seesaw: toimprove one, you have to be willingto sacrifice the other. The reality isthat while relationships and dealsare indeed linked, they are morelikely to move up or down in tan-dem. A strong relationship createstrust, which allows the parties toshare information more freely, whichin turn leads to more creative andvaluable agreements and to a greaterwillingness to continue working together. But when a deal is struckthat is not very attractive to one orboth parties, chances are that theywill invest less time and effort inworking together, they will becomemore wary in communicating witheach other, and their relationshipwill grow strained or unravel; as a result, they will be less able to takechances that would create morevalue. (See the exhibit “The Deal-Relationship Cycle.”)

To build strong working relation-ships and negotiate good deals, com-panies need to break the pattern oftrading off one for the other and beginto pay attention to each separately.They need to get their negotiators tosee that a problem with a relation-ship cannot be resolved through con-cessions and that a problem with adeal should not be considered a testof the relationship. By drawing a clearline between the immediate deal andthe longer-term relationship, twocompanies can start to create a virtu-ous cycle. Building a strong relation-ship will help them through therough spots in a particular deal, andthe value created by closing the dealwill further enhance and broadentheir relationship.1

When Eastman Kodak transferredits data center operations to IBM, thetwo companies struggled to balancethe deal and the relationship. A lotof money was at stake, and both sideswanted the terms of the deal to be intheir best interest. Kodak wanted toreduce its costs; IBM wanted to in-crease its revenues. But the compa-nies also knew that the ultimate suc-

8 harvard business review May–June 1999

negotiation as a corporate capabil ityI D E A S AT W O R K

The Deal-Relationship Cycle

Confirm

suspicions and

perceptions

Restrict

information

flow

Create

low-value

deal

Reduce

risk taking

and creativity

Improve

mutual

understanding

Share

information

about interests

Improve

trust and

communication

Create

valuable

options

Expand

scope of

discussions

Many negotiators make the mistake of confusing the deal with thebroader relationship. To improve a strained relationship, for example,they may offer a concession on price. Or to gain a price concession, theymay threaten to terminate the relationship. But such an approach al-most always backfires. It creates an adversarial dynamic: Negotiatorswithhold information to protect their bargaining positions. That leadsto greater suspicion and less creativity, which in turn undermines boththe immediate deal and the long-term relationship.

The Usual Way

A better approach is to separate the deal from the relationship. Whennegotiators don’t feel as though they need to trade the quality of the relationship for the terms of each individual deal, they exchange in-formation more freely and become more creative and collaborative in their discussions. That leads both to more valuable deals and tostronger, more trusting relationships.

A Better Approach

Underinvest in

relationship

cess of the outsourcing arrangementwould hinge on the health and open-ness of their long-term relationship.

Rather than treat the deal and therelationship as intertwined, the com-panies separated the two explicitly.Key managers from each side satdown and first laid out what particu-lar benefits they hoped to achievethrough the terms of the immediateagreement. They then articulated asprecisely as possible what wouldconstitute a successful relationshipover the long haul. On the basis ofthose discussions, they developedtwo discrete lists of issues, one relat-ing to the terms of the deal and onerelating to the nature of the relation-ship. (See the exhibit “Kodak andIBM: A Good Deal and a Strong Rela-tionship.”) They agreed that anyproblem arising from the issues onone list could not be resolved by ex-acting concessions on issues fromthe other list. Trouble with a lack oftrust or poor communication – rela-tionship issues –could not, for exam-ple, be solved through changes inpricing, software-licensing terms, orother deal-related issues. This cleardistinction between the deal and therelationship guided Kodak and IBMthrough the initial negotiation andhas continued to define their inter-actions. It’s no coincidence that theirrelationship has come to be viewedas a model of effective partnering inbusiness.

Negotiation strategies that maketrade-offs between the value you canobtain in a deal and the quality ofyour relationship with the other party are flawed from the start. Man-agers who accept explanations like“To maintain the relationship, I gavein on price” from their negotiatorsare condoning both poor deals andweak relationships.

Learning to Walk Away from a DealNegotiators, like salespeople, believethat their success hinges on theirability to close deals. If a negotiationfalls apart, they see it as a failure –forthemselves and for their companies.Their reasoning is easy to under-stand. By the time most negotiatorssit down at the bargaining table,their organizations have already

invested a lot of time and money inpreparation. They’ve analyzed theirown needs, evaluated potential sup-pliers or partners, created and re-viewed a shortlist, selected a final-ist, and charted out a bargainingstrategy. As the negotiators see it,failing to conclude the deal wouldwaste all that effort, not to mentiondisrupt what has likely become awell-established schedule. Once a ne-gotiation has begun, going back tothe drawing board no longer seems a viable option.

While understandable, that kindof thinking often puts a company’snegotiators in a box. They becomestuck in a cycle of concessions, al-lowing the other side to dictate the

details of the deal. At one respectedSouth American metropolitan news-paper, for example, the advertisingsales force has developed a deeply in-grained never-lose-a-client culture.The salespeople routinely offer steepdiscounts from their standard adrates just to keep advertisers fromwalking away. Their average dis-count rate, across a $300 million ad-vertising space, is 45%. Asked to jus-tify the discounts, they point to thesmall marginal cost of producing anextra page of print. As long as the adrevenue exceeds the marginal cost,they argue, the paper is coming outahead. What they don’t consider,though, is how their behavior has ledadvertisers to expect ever greater

Kodak and IBM: A Good Deal

and a Strong Relationship

sourcing agreement for the operation of Kodak’s datacenters, they carefully distinguished between theterms of the deal and the nature of the long-term re-lationship they hoped to engender. They developedtwo lists of issues –one relating to the deal, the otherto the relationship – and agreed to keep the two setsof issues separate at all times. Following are illustra-tive excerpts from the two lists.

Deal Issues

Retirement and replacement

of hardware

Use of third-party software

Service levels

Ease of communication

Record storage, mainte-

nance, and security

Pricing

Terms of employee transfers

Termination and return of

data center operations to

Kodak or transfer to another

party

Relationship Issues

Reliability

Giving each other the benefit

of the doubt

Absence of coercion

Understanding each other’s

objectives

Timeliness of consultations

Mutual respect

negotiation as a corporate capabil ity I D E A S AT W O R K

harvard business review May–June 1999 9

When Eastman Kodak and IBM negotiated an out-

Making Negotiation an

Institutional Capability

10 harvard business review May–June 1999

negotiation as a corporate capabil ityI D E A S AT W O R K

To move from a situational view of negotiation to one thatrecognizes negotiation as an institutional process does not re-quire radical organizational change. It does require putting inplace new tools and procedures that will enable executives tobetter manage and support negotiators.

Steps in the

Negotiation

Process

Situational View Institutional View Examples of Tools and

Procedures

Determining

objectives

Preparing for the

negotiation

Conducting the

negotiation

Reviewing the

negotiation

Goals are set on a

case-by-case basis;

negotiators seek to

maximize personal

compensation.

Preparations proceed

in an ad hoc manner;

often there’s no time

for any preparation.

• deal and relationship

scorecards

• negotiation

instructions template

Preparations are well

structured; negotiators

draw on prior corporate

experience.

Negotiators act as

lone wolves with little

supervision; success

or failure is seen to

depend on personal

ability.

Reviews are done

sporadically; focus is

on cost reductions and

percentage of deals

closed.

Reviews are performed

systematically to cap-

ture information so it

can be applied to future

negotiations; focus is

not only on the results

of each negotiation but

on the way it was con-

ducted; reviews extract

lessons rather than ap-

portion blame or praise.

Objectives for each

negotiation are tied to

larger corporate goals;

separate goals are

established for the deal

and the relationship.

• database of past

negotiations

• worksheet for under-

standing counterpart’s

choice

• manager’s checklist for

BATNA review

Managers play an

active coaching role;

colleagues share a nego-

tiation approach and

vocabulary.

• negotiation playbook

that links strategies

to categories of

negotiations

• training programs for

negotiators and their

managers

• “Yellow Pages” that en-

able efficient consulta-

tion with experienced

colleagues

• structured review

questions that focus

not only on outcomes

but also on process

• debriefing forms

that feed into best-

practices database

• Training in construc-

tive debriefing

discounts. The advertisers, knowingthe paper will do anything to keepthem, have all the leverage. Eachheavily discounted ad may indeed bemarginally profitable, but in combi-nation they reduce the paper’s over-all revenue and profits dramatically.

To get out of this box, managersneed to make sure negotiators un-derstand that they always have alter-natives to closing a deal. Nearly 20years ago, Roger Fisher and WilliamUry introduced into the negotiationlexicon the term “BATNA,” an acro-nym for “Best Alternative to Negoti-ated Agreement.” They showed thatnegotiation results can be greatlyimproved by identifying the best al-ternative to completing the deal andthen carefully evaluating the nego-tiated agreement against that alter-native. If the negotiated agreementis better, close the deal. If the alter-native is better, walk away.2

The BATNA approach changes the ground rules of negotiation. Ne-gotiators no longer see their role as producing agreements but rather as making good choices. And if theydon’t reach an agreement, they don’tsee that as a failure. If they reject adeal because it falls short of theircompany’s BATNA, they have suc-ceeded, not failed.

Negotiators should always thinkthrough their alternatives beforethey even start to negotiate. By iden-tifying a BATNA at the outset, theyestablish an objective hurdle thatany negotiated agreement has toclear. They don’t have to rely on sub-jective judgments that an offer seemstoo low or unreasonable. As the ne-gotiation proceeds, they should con-stantly think about ways to improvetheir BATNA – by doing further re-search, by considering alternativeinvestments, or by identifying otherpotential allies. And they shouldnever accept an agreement that isnot at least as good as their BATNA.

Sometimes, there is no obvious al-

company needs to think about creat-ing a BATNA for itself; it shouldn’tjust sit back and negotiate from a

largest producer of electric power inChile. Much smaller than its two

biggest competitors, both of whichare vertically integrated, Colbún hasoften found itself at a substantialdisadvantage in terms of scale andnegotiating leverage. It had to bar-gain for transmission capacity, forexample, with the transmission armof the largest power company. If ithad gone into those negotiationswithout an alternative, it wouldhave been at the mercy of the otherside, and it would have ended uppaying dearly for the capacity. ButColbún had an express corporatepolicy requiring the establishmentof a BATNA in any negotiation. Be-

cause there were no other existingoptions for purchasing transmissioncapacity, Colbún had to create one –developing its own transmission line.

While negotiations with the domi-nant producer continued, Colbún de-veloped conceptual plans for its owntransmission line, conducted feasi-bility studies, and even put construc-tion contracts out to bid. As develop-ment of Colbún’s BATNA progressed,the other side steadily reduced itsprice quote – though Colbún ulti-mately decided it would be bestserved by going ahead and buildingits own line.

Colbún has used a similar BATNA-based strategy in many other impor-tant deals, including negotiating thepurchase of turbines for a new gas-fired power plant and the transpor-tation of natural gas to the plant. Asit did in the transmission-line deci-sion, it has in a number of instancesbroken off negotiations and pursuedits BATNA instead.

Adopting the BATNA approachinvolves overturning long-held as-sumptions. Senior executives can’t

Executives can’t just

proclaim that it’s

okay to walk away

from a deal; they

need to back their

rhetoric with action.

harvard business review May–June 1999 11

negotiation as a corporate capabil ity I D E A S AT W O R K

just proclaim that it’s now okay towalk away from a deal; they have to make sure that the message is re-inforced all the way down the chainof command. Consider what hap-pened to one company that decidedto pursue a new market strategy.From now on, the company’s seniorexecutives announced, the companywould concentrate on selling only tocustomers to whom it could deliverhigh-value-added services at pre-mium prices. Before closing a sale,salespeople should consider whetherthe prospective customer wouldmeet the new criterion; if not, theyshould reject the deal and devote thecompany’s resources elsewhere. Inthe field, however, managers contin-ued to encourage their negotiators todiscount heavily if necessary to winor maintain large accounts. The nego-tiators were still hearing the message“Don’t let any big deal get away,”and they did not change their behav-ior at the bargaining table. The newstrategy never got off the ground.

Executives need to back up theirrhetoric with actions that have animpact in the field. They need to seekout examples in which the com-pany’s negotiators decided the orga-nization would be better served bywalking away from the deal to pursuetheir BATNA – and then they have topraise those negotiators and use theirapproaches as models. If negotiatorsare not made aware that their col-leagues are turning away some dealsto pursue other opportunities, theywill not believe they truly have thatalternative. Companies should alsoconsider making a BATNA evalua-tion an explicit step in the negotia-tion process, requiring, for example,that negotiators discuss with theirmanagers how each proposed dealstacks up against a clearly definedBATNA. If negotiators are not re-quired to assess their deals with refer-ence to their BATNA, they may notbelieve the choice between the twois real.

Not only do executives have tosend the right messages internally,they need to be aware of how theirexternal communications may af-fect negotiators. In an interviewpublished in a widely read magazine,the CEO of a large computer com-

position of weakness. Consider the

ternative to a deal. In such cases, the

example of Colbún SA, the third

used to judge their performance allows them greater – not less – free-dom in crafting agreements. Estab-lishing categorization and prioriti-zation schemes can increase theirproductivity and free them to thinkmore creatively. (See the exhibit“Making Negotiation an Institu-tional Capability.”)

Some negotiators will not be ableto adapt to the new, more standard-ized and coordinated approaches –they’ll chafe under even the light-est managerial yoke. Most, though,will thrive in the new environment.They will come to find that theyhave actually gained more power,more prestige, and – not least – moresatisfaction. And their companieswill reap the benefits of closer, morecreative relationships with suppli-ers, customers, and other partners.

1. For further discussion on separating the dealfrom the relationship, see Roger Fisher and ScottBrown, Getting Together: Building a Relation-ship That Gets to Yes (Houghton Mifflin, 1988).

2. The concept of BATNA was introduced byRoger Fisher and William L. Ury in Getting toYes: Negotiating Agreement Without GivingIn (Houghton Mifflin, 1981). Its successful application has been extensively documented by the negotiation scholar Howard Raiffa,among others. See, for example, Raiffa’s classicThe Art and Science of Negotiation (BelknapPress, 1982).

Product no. 5394To place an order, call 1-800-988-0886.

pany once stated that back when hewas a sales representative, he neverlost a customer. He was trying tocounter criticism that the companyhad gotten so big that it had lostsight of the customer. But imaginehow the statement was interpretedby the company’s sales force. TheCEO was in effect telling the salesreps that they could never say no –and signaling customers that theyheld all the leverage. The negotia-tors’ BATNAs were instantly ren-dered inconsequential with one sim-ple public statement.

Companies routinely review pub-lic statements for their effect onstock valuation or regulatory com-pliance. And while I know of nocompany that has put in place a for-mal mechanism to review publicstatements for their effect on negoti-ations, it may not be such a bad idea.At the very least, those with respon-sibility for negotiations should alertsenior executives and public rela-tions departments to the fact thateven the best-intentioned state-ments can subtly undermine negoti-ating strategies.

Little Steps to Big Changes Shifting from a situational to an in-stitutional view of negotiation mayrepresent a radical change for manycompanies. It certainly represents a

radical change for many negotiators.But it doesn’t require radical actions.It requires carefully planned, oftensubtle, changes in practice, in em-phasis, and in communication. Infact, trying to ram the new way ofworking down negotiators’ throats,without adequate explanation orsupport, will just backfire, leavingnegotiators confused and alienated.If, for example, management sud-denly announces that all negotiatorsmust follow a set of rigid proceduresor fill out a set of forms after everymeeting, negotiators will simplycomplain that the bureaucracy iskeeping them from doing real work.They may fulfill the new require-ments in a perfunctory manner, butthey won’t change their perspectiveor their behavior.

The key to success is putting thenegotiation infrastructure in placethat makes the lives of negotiatorseasier and makes their jobs more re-warding. Supplying negotiators withpractical information makes it sim-pler for them to prepare for negotia-tions while also exposing them to alarger set of proven strategies so theycan do more than merely trade con-cessions. Showing them how theBATNA approach can be used inreal-world situations gives them anew source of leverage in their nego-tiations. Broadening the measures

12 harvard business review May–June 1999

negotiation as a corporate capabil ityI D E A S AT W O R K

ARTICLE

“E-Hubs: The New B2B Marketplaces” bySteven Kaplan and Mohanbir Sawhney (Har-vard Business Review, May–June 1999, Prod-uct no. 469X)“Turning Negotiation into a CorporateCapability” contains a wealth of examples ofthe kinds of negotiations that businesses have to perform every day. In “E-Hubs: The NewB2B Marketplaces,” Kaplan and Sawhney put negotiation in a whole new context: theadvent of business-to-business (B2B) dealingson the Web. This article makes clear that theInternet is changing the face of B2B negotia-tion. Web-based markets widen the numberand kinds of choices available to buyers, givesellers access to many more potential cus-tomers, and slash transaction costs for allplayers. Market makers stand to earn vastrevenues by negotiating hefty fees for everyB2B market transaction. And companies that control these on-line markets are exerting enormous influence over the waytransactions are carried out, relationshipsformed, and profits flow. Understanding how these electronic hubs work is crucial for everyone—including professional nego-tiators—who wants to craft a successful e-business strategy.

VIDEO

Getting To Yes: Video Workshop on Negotia-tion by Roger Fisher, William Ury, and BrucePatton (Harvard Business School Publishing,1999, Product no. 1070A)Danny Ertel is the coauthor, with Roger Fish-er, of Getting Ready to Negotiate: The Gettingto Yes Workbook.

Whereas Ertel’s suggestions in the “Negotia-tion” article focus on professional negotiators,Fisher et al. argue in this video workshop thatin today’s complex world of business every-one’s a negotiator. Why? Because we all haveto work with others to make decisions andagree on action plans—and often we’re work-ing from opposite positions and interests. Thetrick to skillful negotiation lies in knowinghow to turn opposing positions into mutualprofit. This video workshop features threeexperts from the Harvard Negotiation Project.The presenters echo Ertel’s point about theimportance of systematizing negotiation inyour company. Their pragmatic approachemphasizes what they call interest-basednegotiation, by which you pursue your owninterests while simultaneously building long-term relationships. Fisher et al.’s method letsyou unleash creativity, generate new insights,and consistently produce optimal outcomes.More than a dozen vignettes graphically showyou how to turn an adversarial or confronta-tional episode into a collaborative, problem-solving session. Based on actual negotiations,the vignettes feature top executives, corpo-rate lawyers, and professional negotiators, aswell as running commentary and suggestionsfrom Fisher, Ury, and Patton.

Turning Negotiation into a Corporate CapabilityE X P L O R I N G F U R T H E R . . .

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