I was having an interesting conversation with a client recently.
The client, let’s call him Zack, was about to enter into a rather important business negotiation worth potentially tens of thousands of dollars.
The client asked what the best route would be to approach an upcoming contract negotiation.
My very first question to the client was, “What’s your BATNA?”
He responded with, “Huh?”
I took a course in negotiations in university, and during that time I read one of the best business books I’ve ever read, Getting to Yes, Negotiating Agreement Without Giving In by Roger Fisher and William Ury.
One of the principles they discussed in the book is the concept of understanding your BATNA. The concept has served me well for the last 30 years. In fact, so well that I never enter an agreement or negotiation without giving consideration to my BATNA.
I then asked Zack the BATNA question in another way.
“If you don’t strike an agreement with your current supplier, who else can provide you with the product and at what price?”
First, the definition: BATNA means the Best Alternative to a Negotiated Agreement.
What I explained to Zack was that the first thing he needed to do, and even before he started the negotiation, was to understand what the alternatives were in the event that he wasn’t able to negotiate a new agreement with his current supplier.
In other words, what was the best alternative if he couldn’t negotiate a new contract. It might include signing an agreement with an alternate supplier.
I suggested to Zack that he needed to understand all of his alternate options (BATNA). This includes price, of course, but also needs to include other important contract/supplier variables like quality of service, the inconvenience of switching suppliers, payment terms, and so on.
With this research in hand, he would now be equipped to begin the contract negotiations with his supplier.
Let me illustrate why the BATNA is so important.
Let’s suppose you’re buying widgets from your supplier for $1,000 a widget. You buy upwards of 500 widgets a year or the equivalent of $500,000 of product a year. You’re hoping to negotiate the amount per widget down from $1,000 per unit to $950 a unit, which would represent a savings of $25,000 a year.
You’re also not that pleased with some of the other terms outside of pricing. So that needs to be renegotiated, too. For example, you’re hoping to improve the delivery timeframe from 6 to 3 days and the payment terms from net 30 to net 60 days.
If Zack starts the negotiations without knowing who the alternate suppliers are, and at what price and terms he can buy the product for, then he will be at a disadvantage when he begins the negotiations.
On the other hand, if Zack knows that there’s a supplier who is willing to offer the product for $930 a unit with a 3 day delivery commitment and payment terms of net 60 days, then he’s in a very strong position before he begins the negotiation, and he’s now established a new bottom line.
Let’s say, on the other hand, that he’s found out that the best alternate supplier can provide him with the product at $1,050 per unit with a 10-day delivery, then he’s going to be in a very different position when he begins the negotiations.
Armed with enough research, Zack is now ready to enter the negotiations. He knows that he’s hoping to drive some major concessions from his supplier and understands the consequence of not coming to a new agreement with his supplier.
It’s very important that both parties in a negotiation feel good about the end position, or as Ury and Fisher suggest, they should “invent options for mutual gain.” Let’s say Zack knows that his supplier might eventually agree to provide the product for $930 a unit, but he believes that if he’s able to negotiate a new price of $930, his supplier might be bitter about the concession.
The concept of “inventing options for mutual gain” implies that there are interests and underlying constraints that both parties have that will likely not be identical. For example, Zack might be very fixated on the price and shipping terms, while the supplier is most concerned about the minimum order quantity of each delivery.
Let’s say it turns out that the supplier is fine with providing a price of $930 a unit, and would even be willing to negotiate down to $910 a unit, but he wants Zack to place order volumes at much larger quantities than what he has traditionally placed. Or maybe the supplier is a public company and needs the paperwork signed in the next 15 days to make their year-end.
Zack might not care about placing larger order volumes or even about signing in the next 15 days. These would be easy concessions for Zack to make. It’s through exploring the concept of “inventing options for mutual gain” that these were uncovered.
The above can be summarized by a Chris Voss quote on negotiations: “Never be so sure of what you want that you wouldn’t take something better.”
Check Your Ego at the Door
One other thing to note before you enter a negotiation is to try not to get too ego-invested in the negotiation or the outcome itself. I internalized something that Colin Powell said quite a few years ago. It resonated with me. “Never let your ego get so close to your position that when your position goes, your ego goes with it.”
Doing your homework in a negotiation needs to transcend the most obvious element of price and extend to many other variables like service, terms, quantities, and so on. Understanding these elements, and where each side stands in regards to these elements is part of the negotiation, but having this information—or as much of it as possible—before you begin is the first step to ensuring a successful, win-win negotiation that ideally leaves both sides pleased with the end result.
And then, before you enter into any negotiation, always remember to completely understand your BATNA.
On a somewhat related note, I wrote a blog post titled: Sell Me This Pen. I Tackle the Wolf of Wall Street Sales Riddle. Do You Know the Right Way to Sell the Pen? Would you know the right way to sell the pen (taken from the Wolf of Wall Street movie)? Read the post to find out.
Do you know the steps required to get your new business off the ground? Read this blog post: The 5 Steps You Need to Take to Get Your Startup From Paper to Launch and Then to Infinity and Beyond
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