Few things have more impact on the long-term success of your business than your ability to negotiate successful deals with customers, suppliers, bankers and other key constituencies. Yet most CEOs leave too much money on the table during their most important business deals. Why? Because they usually take the wrong approach to the negotiating process.

Rather than approaching negotiations as a mutual problem-solving process, most CEOs see it as a kind of mental and verbal sparring session, where the side with the sharpest mind, toughest resolve and most aggressive tactics emerges as the victor. Such an approach invariably leads to win-lose or, worse, lose-lose outcomes, and their companies suffer in the long run.

Adopting a more productive negotiating mindset requires getting rid of some outdated notions about how to negotiate effectively. In particular, four common negotiating myths make it difficult, if not impossible, to create win-win deals.

  • Negotiating myth No. 1: Negotiating involves competition.
    Reality: Negotiations involve exchanging information and resources in order to satisfy the different and sometimes conflicting needs of two or more parties.
  • Negotiating myth No. 2: Negotiating involves bargaining.
    Reality: Bargaining is competitive; negotiating is co-operative. Bargaining focuses on who is right; negotiating focuses on what is right. Negotiating creates long-term deals and relationships. Bargaining agreements never last because the losing party always insists on the chance to come back and get even.
  • Negotiating myth No. 3: Negotiating always involves compromise.
    Reality: Nobody wins in compromise because both sides end up getting less than they want or need.
  • Negotiating myth No. 4: Effective negotiations involve the use of tactics, trickery and manipulation.
    Reality: Honest, ethical negotiators never try to manipulate or deceive the other side. Tactics should only be used in self-defence.

The bottom line is that negotiating business deals has nothing to do with bargaining, compromise and competition. To create win-win outcomes, both sides must:

  • strive to understand the other person's wants and needs
  • attempt to solve the other person's problems as well as their own
  • adopt a mindset of flexibility rather than rigidity
  • focus on "enlarging the pie" rather than dividing it up
  • always aim for win-win outcomes.

This approach may sound "soft" to those who enjoy going toe-to-toe with the other side during a negotiation. However, following these principles will dramatically increase your chances of creating deals that benefit both sides and lead to positive long-term relationships.

Six steps to a better deal

We offer a six-step road map for achieving win-win deals:

  1. Understand the other side.
  2. Plan your approach.
  3. Build the relationship.
  4. Solve their problem.
  5. Enlarge the pie.
  6. Make the numbers work.

1. Understand the other side

To solve the other person's problem you need to gather as much information as possible about their situation. Specifically, you need to know:

  • any existing time, industry and/or financial pressures
  • their corporate goals and objectives
  • their specific goals for the negotiation
  • their options if they don't make the deal with you
  • the personal goals of the negotiator
  • who makes the final decision on the deal.

Smart negotiators spend far more time on research and discovery than they do on the actual negotiations. The more information you have, the greater your ability to solve the other person's problem to your advantage.

Find out who you're negotiating with. One of the first things in any business negotiation is to establish the honesty and ethics of the person sitting across from you. A lot of people say they want a win-win outcome, but their negotiating style and strategy often prove otherwise.

2. Plan your approach

A planned approach starts with having a crystal-clear understanding of your own position. To clarify your position we recommend identifying three different deal scenarios:

  • best possible outcome
  • worst acceptable outcome
  • expected outcome.

These outcomes establish the ballpark you will play in. Without them, you have no realistic starting point. In addition, the best deal-makers always prepare two other key elements:

  • Walk-away point. This sets an absolute limit on the least favourable outcome you will accept. Anything less and you walk away from the deal.
  • BATNA. Your "best alternative to a negotiated agreement" identifies what you will do if you can't reach agreement on this deal.

As long as you have these two elements in place, you can't make a bad deal.

We also recommend the use of role play as an additional planning element. The more you know about how the other side might respond during the negotiation, the greater your chances of creating the outcome you want.

3. Build the relationship

If you want to make a good deal, take the time to build the relationship before getting into the specifics of the deal. Most CEOs focus on price terms and conditions because that's what they know best. Plus, those areas are easy to quantify. But the key to most negotiations is building communication, relationship and trust, because those elements most often determine the outcome.

How do you build communication, relationship and trust? By exchanging information, active listening, and acknowledging the other person's needs.

People have a pressure and a need to tell you what they want. If you don't hear them out, you won't get past their perception that your company can't meet their needs. If they don't feel that your company can meet their needs, they'll give the business to someone who will.

People make decisions for their reasons, not yours or anybody else's. Unless you address their reasons and needs, you're wasting your time and theirs. You discover those needs by asking questions and building trust so that they feel comfortable disclosing information to you.

4. Solve their problem

To create a true win-win deal, solve the other person's problem as well as your own. To do this you need to learn three things during the discovery phase: what the other side values, what they are looking for in the deal, and their "never-agains".

In order to solve the other person's problem, identify their items of value by asking open-ended questions. To determine their desired outcome, ask: "What exactly are you looking for in this deal?"

"Never-agains" are negative situations that have happened to the other person in the past and guide all their future negotiations. For example:

  • Never again will we pay cash up front.
  • Never again will we have partners in the deal.
  • Never again will we reveal confidential information.

It pays to get these out in the open early on because some people base their entire decision on them.

5. Enlarge the pie

There are two kinds of negotiation: "fixed-resource" and "expanded-resource". Fixed-resource negotiations (e.g. buying a car or a house) involve win-lose propositions because one side gets more and the other gets less. Expanded-resource negotiations involve finding ways to exchange things of varying value so that each side walks away with a positive outcome.

Bargainers and compromisers ask: "How do we divide up the pie fairly and equitably?" Skilled deal-makers ask: "How do we create a bigger pie so that we both get what we need?" Fixed-resource negotiations create win-lose outcomes, which lead to short-term relationships. Expanded-resource negotiations create win-win outcomes, which lead to long-term relationships.

To enlarge the pie:

  • Gather as much information as possible about both sides before starting the negotiations.
  • Identify items of value for both sides and list them in order of priority.
  • During the negotiations, avoid giving in to the temptation to bargain and compromise. Instead, get creative about ways to introduce and exchange items of value so that both sides get their needs met.
  • Stay focused on the desired outcome for the deal.

6. Make the numbers work

Most CEOs love to quantify things and reduce them to numbers because they are easy to work with. They also love to have precise formulas for the numbers. But the rationale behind the numbers always counts more than the actual numbers. The more you know about the method the other side uses to reach its conclusions, the better your chances of reaching a win-win deal.

When trying to arrive at the final numbers:

  • Clarify the rules for how the deal will be structured.
  • Strive for as much communication as possible.
  • Question all assumptions.
  • Show how you are different.
  • Focus on the risks as well as the benefits of doing business with you.

If you do the first five steps properly, working out the numbers becomes almost a formality. The key to any successful negotiation is to enlarge the pie by changing a fixed-resource negotiation into an expanded-resource negotiation. When you gather information, identify items of value for each side and look for creative ways to exchange them, you will make deals that work for both sides.

Playing the negotiating game

When negotiating deals with your customers and vendors, it helps to know how the game is played. The negotiating playing field consists of four key elements: time, information, power and passion. The party that holds the advantage in these areas will usually prevail.

The person who controls the tone, tempo and format of the negotiations has a decided advantage. We recommend five principles for tipping the control factor in your favour:

  1. The person who speaks first sets the tone for the negotiation.
  2. The person who asks the most questions determines the content and direction of a negotiation.
  3. Never argue with the other side.
  4. People do things for their reasons, not yours.
  5. The party who listens the most will have the greatest effect on the outcome of the negotiations.

A good outcome for both sides

Ultimately, reaching an agreement that works for both sides comes down to making sure the other person feels as though they got what they needed from the deal. To increase the odds of reaching this outcome, we recommend the following:

  • Identify common issues.
  • Go hard on the terms and easy on the people.
  • Translate the value of the deal to the other side.
  • Make it easy for them to win.

The secret to great deals is to let the other person walk away with a win. Don't make it so obvious that they feel as though you gave in. But letting them win is essential for keeping the deal in place.

The art of making concessions

Great deal-makers have a knack for making the right concession at just the right time. To improve your ability to make concessions we recommend the following:

  • Do the research. Make a list of "items of value" and use them when the other side asks for concessions. Also make a list of things you want in return.
  • Never respond immediately to a request for a concession. Instead, use time to add uncertainty, thereby adding value to the concession when you make it.
  • Never make a concession without asking for one in return. If you give without getting anything back, you reinforce the behaviour of asking for the concession.
  • Don't make huge concessions, especially on the first go-round. Making a large initial concession undermines your credibility and sends the message that you still have plenty of room to come down.
  • Make concessions in decreasing increments. This establishes more credibility for your opening position and signals that you have little room left in which to move.
  • Beware of "insignificant" concessions. Great negotiators can take you to the cleaners by constantly asking for small concessions. Always wait until you have the whole story before agreeing to a small concession.
  • Be prepared to justify every concession. Never make a concession unless you can demonstrate how the acquisition of new information has allowed you to change your position.
  • Never try to exploit a concession. When you try to take advantage of a concession, you lose credibility.
  • Know your bottom line. Never give something away if it doesn't make sense for your business.

In terms of concessions, the biggest mistake people make is going right to their final number, thinking they're getting a compromise. However, great negotiators don't get deals by compromising or focusing on concessions. They create great deals by exchanging items of equal or greater value so that both sides win.

Avoiding the deal-killers

One key to successful business deals is avoiding the major deal-killers while minimising the minor gaffes that don't necessarily prevent an agreement but lead to less than ideal outcomes. These include:

  • going too fast
  • failure to establish your walk-away position
  • assuming the other side looks at the deal the same way you do
  • taking a short-term view
  • proving the other person wrong
  • failure to conduct your internal negotiations
  • negotiating against yourself
  • improper use of concessions
  • not knowing when to stop.

Dealing with hardball negotiators

From time to time you will run across negotiators who like to play by their own rules. These people, whom we refer to as "hardball negotiators", tend to have rigid thinking patterns, be unwilling to compromise and have an overwhelming need to be right. Worse, they tend to pursue win-lose outcomes. Negotiating with these people requires a careful assessment of the situation and a slower, more deliberate approach to the deal.

When faced with a hardball negotiator we recommend the following:

  • Take a hard look at all the implications of the deal and what you stand to gain from it.
  • Hold fast to your walk-away point.
  • Don't get caught up in an auction mentality.
  • Watch out for individuals who just want to win.

Successfully negotiating with hardballers requires a three-pronged approach:

  1. Step aside. Never go head-to-head with a hardball negotiator because you will always lose. Instead, strive to defuse the conflict they're looking for by acknowledging their concerns and focusing on building communication and trust.
  2. Attract their interest. Give the hardballer plenty of air time to talk about what they value, what they are looking for, and any "hot" items the company has to have. To keep them talking about their interests, ask plenty of open-ended questions.
  3. Close the deal. Find a way to make the hardballer look good to their boss so that they will champion your position within their company. In order to cut a deal, they have to feel as though they got a better outcome than they would have received from your competitors.

If these steps don't work, you may have to walk away from the deal. However, in today's environment the business that you don't take will affect your bottom line more than any business that you do take. Knowing when to say "no" so that you can maintain margins is the sign of a good negotiator.

Improving your negotiating skills

To advance your skills as a negotiator we offer the following techniques:

  • Conduct a negotiation plus/delta. Make it a habit to critique your performance after every business deal, identifying areas that went well and those that could stand improvement.
  • Role play before every negotiation. Especially include reverse role play, where you try to determine how the other side will approach the negotiation.
  • Understand the real meaning of "win-win". "Win-win" does not mean equal win. One party may gain more than the other, but as long as you both gain more by negotiating, you come away with a win-win deal.
  • Avoid using tactics. Never introduce anything into the negotiating process that smacks of underhandedness, manipulation or deceit. Tactics should only be used to defend yourself from unscrupulous negotiators.
  • Focus on turning fixed-resource negotiations into expanded-resource negotiations. Great negotiators focus on bringing more into the deal and adding more value to each side.
  • Listen twice as much as you speak. To remember this important rule of thumb, simply look at the person across the table. They have two ears and one mouth.
  • Practise, practise, practise. Provide training and practice to your staff, especially your sales team. In addition, practise your own negotiating skills.
  • Never want anything so badly that you won't accept something else. Never go into a negotiation feeling as though you have to make the deal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.