10% of Negotiators Destroy Value For Both Parties

August 2015

Zopaf recently completed a negotiation study that yielded many interesting insights. One of them is that some negotiators not only strike bad deals, but actually strike deals that destroy value for both the buyer and the seller. The Negotiation Map in figure 1 summarizes the final accepted offers in our negotiation study.

Figure 1

The Negotiation Map above has 5 main features:

  • ZOPA (Zone Of Potential Agreement): The ZOPA is represented by the green area. This summarizes all th potential offers that are good for both the buyer and seller.
  • The upper ZOPA Frontier: Not all offers within the Zone Of Potential Agreement are created equally. Some offers are better than others and a small subset are the best possible offers. These best possible offers make up the upper red line.
  • The lower ZOPA Frontier. The lower edge represents the set of of worst possible offers. Offers closer to this edge destroy value for both the buyer and seller.
  • The black diagonal line represents the route taken when operating within a purely competitive negotiation. Offers above this line move away from purely competitive negotiations to collaborative negotiations. Trades are made between the negotiables to find offers that are better for both parties. Offers below this line move away from purely collaborative negotiations, but the trades made among the negotiables are poor. These poor trades result in value destruction for both parties.
  • The points on the Negotiation Map represent the value of an offer.

The competitive force represented by the black diagonal is a powerful force. It pulls us away from the set of best possible offers (the upper red edge). Fortunately, it tends to pull us away from the worst possible offers (the bottom edge). Unfortunately, however, this force will not guarantee that value destroying offers are not struck.

Figure 2 summarizes the entire offer / counter offer progression of one of the teams. The seller starts off with a very good value creating offer. The buyer starts off with a very bad value destroying offer. As the offer / counter offer process progresses, we see that the black diagonal pulls on both the value creating and value destroying deals. The end result is that offers tend to hover around the black diagonal. As seen in Figure 1, however, sometimes the pull from the black diagonal is not enough to prevent a bad deal from being struck.

Figure 2

Negotiators aim to create and claim value. The results achievable from purely competitive negotiations are generally seen as the lower bound on what can be achieved. This is because there is no focus on expanding the negotiation pie in a purely competitive scenario. Our study shows that you can actually do worse that what is achievable through purely competitive negotiations. We are emotional and irrational beings often negotiating in the dark, we can actually do worse than purely competitive negotiations and destroy value. Fortunately, tools like Negotiation Maps help give us the perspective to stay out out of value destroying territory.

Zopaf - Negotiation Tools

Ramon Andino

CEO - Founder

zopaf - by Andinian Inc.

www.zopaf.com

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Price Negotiations - The Zopaf Way

July 2015

Many people feel stuck and helpless when thinking about Price Negotiations. They feel there is no wiggle room and that the cards are stacked against them. Fortunately, there is always more wiggle room than what you see at first glance. I’m here to tell you how to find it and how to benefit from it.

First off, let me make a distinction between haggling and negotiating. When you haggle you only care about one thing: Price. You go back and forth with another person until you strike a price that you can both live with. Negotiations, on the other hand, involve multiple issues. The best negotiators leverage the entire negotiation package to close the best deals. It follows, therefore, that price negotiations are never just about price and you should use this to your advantage.

Many have written about the benefits of negotiating an entire package instead of negotiating one issue at a time. This concept is more popularly known as logrolling. The Program On Negotiation at Harvard Law School defines logrolling as follows:

The act of trading across issues in a negotiation. Logrolling requires that a negotiator knows his or her own priorities, but also the priorities of the other side. If one side values something more than the other, they should be given it in exchange for reciprocity on issues that are a higher priority to their opponent. (Deepak Malhotra and Max Bazerman, Negotiation Genius [Bantam, 2007], 61).

Simply put: By focusing on the entire package instead of just price you can make trades among all the issues to design an offer that works best for you. This is a powerful concept but it is easier said than done. That is why many people succumb to splitting the difference on each issue in a negotiation package. If two negotiators have different priority profiles, how do you make trades on each issue simultaneously to fully leverage logrolling? Among all the different tradeoffs that can be made, is there a best tradeoff scenario? The answer is yes on both accounts. The key to painless logrolling is to use linear optimization.

Let’s drive this point home using zopaf. Let’s say you are negotiating the deal outlined in Table 1. You’ve identified the issues, the range of typical values, the importance each party places on each issue and you both are converging on an offer that splits the difference on each issue.

Table 1

If we plot that offer on a Negotiation Map (Figure 1), we see that the offer lands right in the middle of the green zone (ZOPA). This offer is far from the ZOPA Frontier, the upper red line. The distance between this offer and the red line represents the value that is being left on the table during this negotiation.

Figure 1

In this discussion we will not worry ourselves with finding and closing the best deals, we will focus on leveraging the differences between two people to design the best deal at a particular point on the map. In other words, how can we use linear optimization to make me happier with respect to price? Using zopaf ’s linear optimization engine, we execute a long press and move the live offer to the 25,25 point (Figure 2). In Figure 2 we have two offers on top of each other. The one that splits the difference on each issue and the one that is found on that very point using linear optimization. That’s why you have two offers highlighted in blue in Figure 2.

Figure 2

Zopaf finds the best offer while paying close attention to the things that are most important to the buyer. By doing this, zopaf finds a better offer than that which was obtained by simply splitting the difference. Instead of blindly splitting the difference on each issue, it makes trades on the different issues taking both party’s priorities into account as well as incorporating the buyer’s perspective. It finds a better offer with a better price point. Instead of paying $110,000 you pay $100,000 for the package. You get less warranty coverage, have to pay more quickly and charge the supplier less for late deliveries, but you care less about these things anyway (Table 2).

Table 2

So the trick to price negotiation is not to focus on price, but to leverage the entire negotiation package. This does not mean that you give up your focus on price. It just means that you need to strategically trade on the rest of the package to get you closer to where you’d like to be on price. To get this done, you need new tools. You need zopaf.

Zopaf - Negotiation Tools

Ramon Andino

CEO - Founder

zopaf - by Andinian Inc.

www.zopaf.com

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Win-Win Negotiations, Zopaf style

June 2015

Much has been written about distributive and integrative negotiations. Distributive negotiations are negotiations where parties try to claim the biggest piece of a fixed negotiation pie. This competitive approach is sometimes referred to as win-lose negotiations. Integrative negotiations are negotiations where you try to build value in the negotiation and increase the size of the negotiation pie. This collaborative approach is more popularly known as win-win negotiations. Both approaches should be used in a negotiation. This article describes how to use both techniques through the lens of a Negotiation Map.

Zopaf’s spin on negotiations is that the only thing that really matters to any of us is the “win-“ part of win-win or win-lose. We really only care about our own interests. Choosing a “win” or “lose” approach to go along that “win-“ depends on the negotiation at hand. Moreover, winning means getting as big a piece of negotiation pie as possible. Sometimes it is better to get a smaller piece of a much larger pie than getting a larger piece of a much smaller pie.

If we accept the idea that we only care about the “win-“ half of the equation, then where do we go from there? Do we choose win-win or win-lose? Well, it all depends. Two main considerations are where the negotiation is in it’s life cycle and what the structure of the negotiation is. By a negotiation’s lifecycle, we are referring to the stage of the negotiation. Is it in its early stages or in its late stages. By the structure of the negotiation we are referring to the Negotiation Map. Is the Negotiation Map wide with a lot of wiggle room (Figure 3) or is the Negotiation Map narrow with no wiggle room (Figure1)? The width of the map depends on how differently each negotiator weighs each negotiable. The bigger the difference, the wider the map and vice versa. In negotiations, differences are great. If two parties have totally different priorities, they can trade off on those differences to find deals that make them both better off. If they weigh all negotiables equally, then they are forced to operate in a zero sum game scenario (Figure 1). The only viable negotiation strategy in a zero sum game scenario is a win-lose strategy. This scenario arises when negotiators negotiate only one issue or when they treat the negotiation as if both parties value things equally.

Figure 1

Figure 2

Figure 3

Regardless of the stage in the lifecycle or the structure of the negotiation map, In the early stages of the negotiation the negotiation is generally in a competitive mode. The negotiators are in a land grab, trying to establish their anchors and frame the negotiation. In the later stages, the negotiators are converging on a final offer and trying to squeeze as much as they can out of the deal. They can either try to take it from each other or try to expand the pie and create value for both parties. Whether they try to claim value from each other or create value depends on the Negotiation Map.

In the first graph, you would not spend any energy going NorthEast. An integrative negotiation approach would be the wrong choice. In the second graph, you could choose either approach. You have to ask yourself, do I think I can gain more by using a competitive approach and moving along the diagonal or will I gain more by moving NorthEast? You may also consider the relationship aspect at this point. If you will negotiate with this person again, it may be better to get more by moving Northeast.

In Figure 3, there is a lot of room to maneuver as you go NorthEast. However, this does not mean that you go NorthEast right away. You need to balance the transition from competitive to collaborative very well. You need to be competitive enough in the beginning to put a stake in the ground in a position that favors you without jeopardizing the trust and rapport required to move NorthEast as the negotiation progresses. That may mean that you have to work twice as hard at being a good listener, being careful with your anchoring, paying close attention to the rapport component, etc. Once you start moving northeast you also want to strike a good balance between value creation and value claiming. I like to move East - North East. With this trajectory, I am giving but making sure I am claiming a little more.

The balance you strike between collaborative and competitive negotiations changes as you negotiate. It depends on the stage of the negotiation and the structure of the Negotiation Map. Use both techniques to your advantage.

Zopaf - Negotiation Tools

Ramon Andino

CEO - Founder

zopaf - by Andinian Inc.

www.zopaf.com

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Analytics helps us answer 2 classic negotiation questions

May 2015

One of the most common questions I hear from people in negotiation circles is: “How can I figure out what the other person cares about?” The cookie cutter answer to this question is: “Make several offers at a time and hold everything constant except for the variable you are trying to learn.” Although this is generally true, it is impractical advice. Imagine doing this for a deal with 15 negotiables. The flow of the negotiation would be hijacked by this lab experiment. The real way to figure out what the other person is thinking is to use machine learning. Machine learning and its pattern recognition algorithms has given us driverless cars and speech recognition among other things. Why not use techniques that are transforming other parts of our lives in negotiations? Now to be fair, machine learning alone could not help you figure out what the other person is thinking. You would also have to use modeling techniques and linear optimization to get it just right. Machine learning can only happen if the other two elements are implemented, so lets start there.

NEGOTIATION MODEL

Building a model of a negotiation allows us to summarize and make sense of a very complicated and multidimensional scenario. The simplest representation of this model is the Negotiation Map. Every possible offer is summarized as one point on the map. It’s main features are:

  • The Buyer’s Wall - Offers to the left of the Buyer’s Wall are only acceptable to the seller
  • The Seller’s Floor - Offers below the Seller’s floor are only acceptable to the buyer
  • ZOPA (Zone Of Potential Agreement) - Offers in this region are acceptable to both the buyer and seller
  • ZOPA Frontier - These are the set of optimal offers. If you are not on the ZOPA Frontier, you both could do better.
  • Points on the map - These are the graphical representation of an offer
With the Negotiation Map you can finally answer the other age old question: “Could I do better?” If you are not on the ZOPA Frontier, the answer is: “Yes, you can do better!” The Zopaf Frontier is the upper edge of the Negotiation Map. The Negotiation Map is a handy tool because it puts all the offers into perspective and gives you a compass. You should try to move Northeastwardly to capture as much value as you can from the negotiation. I’ll take an offramp here to mention that this does not mean that you take all the value for yourself. Often the only way you can move Northeastwardly is if you share some of that value with your counterpart. If your negotiation style is purely competitive, you will stifle the creativity and trust that is needed to move towards the Zopa Frontier. The Negotiation Map alone is a great tool to provide perspective and give us the Zopa Frontier as the main objective. With this tool you could evaluate an offer that you wanted to submit to see how good it was relative to all the other offers on the map. You could also evaluate offers submitted by your negotiation counterpart to see how good they were and if they could be improved upon. The first version of Zopaf really only provided the Negotiation Map. Through Monte Carlos Simulation zopaf calculated 80,000 permutations of the negotiation model to fill in the map. It provided great perspective when entering offers manually, but when you wanted to pick a particular point on the map you had to accept the point that was randomly generated using Monte Carlos Simulation. People never liked the point that was generated for them at random. I was repeatedly asked: “How can I design the best deal at that point?” The answer was linear optimization.

LINEAR OPTIMIZATION

To see why linear optimization is needed, lets look at the first figure. There is only one point on the negotiation Map. However, the four offers below the graph are all summarized by the same point on the map. The first column shows the best offer from the Buyer “perspective” and the other columns show offers that support machine learning. If you were to touch the point on the map, you would actually be given the option to switch to the seller “perspective”. This is a handy little feature that lets you take on the seller’s perspective without gaining or losing anything. It could help find a little wiggle room when at an impasse. Taking this a step further, the Negotiation Map represents an infinite number of points on the map and in turn each point on the map represents an infinite number of offers! Aren’t you glad that there is analytics that can handle this instead of you trying to do it in all in your head? Linear optimization is needed to find the best offer for a given point on the map. Without linear optimization you would drown in all the potential offers at that point alone. It seems like adding linear optimization makes a useful tool even more useful, but weren’t we talking about trying to learn what the other person cares about? Without giving too much away, we use linear optimization to structure a Design Of Experiment to tease out as much information from the rejected offers as possible, as quickly as possible. Now I know I was poking fun at the lab experiment earlier, but our DOE was incorporated specifically so that it does not feel like a lab experiment. It’s goal is to design the offers that will get the most data while being the least intrusive. That does not happen by accident. You need to use DOE so it doesn’t feel like a lab experiment.

MACHINE LEARNING

As was stated earlier, machine learning is enabled by the negotiation model and linear optimization. Another element it leverages is making multiple offers. This is a technique many seasoned negotiators use and one of the first features I was asked to add. The woman that asked for this capability did not have machine learning in mind, but it was a technique she and many others use to keep negotiations flexible, spur creativity and help negotiators learn from their counterparts. In the machine learning context, we would submit offers in sets of three then rank each issue in terms of our counterpart’s preference. We could ask them to rank each offer or we could rank it ourselves by gaging their reaction to the offers. If we couple the rejection response, the negotiation model and the DOE we can then use machine learning to figure out what the other person cares about. People have been negotiating since the dawn of time. Now with analytical techniques that are transforming other aspects of our lives, we could finally answer the age old questions: “Could I do better?” and “What does my negotiation counterpart care about?”

Zopaf - Negotiation Tools

Ramon Andino

CEO - Founder

zopaf - by Andinian Inc.

www.zopaf.com

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Creating a negotiation map to win your next negotiation

April 2015

In my previous blog I stated that going forward you can’t negotiate the way you’ve negotiated in the past. I argued that the secret to winning your negotiations is analytics and a new set of tools is needed to help you win. In this short blog, I will talk about the first powerful tool: building a negotiation map by creating a negotiation model. The best way to understand something is to model it. Creating a negotiation model allows you to prepare better and allows you to understand the negotiation better. This alone would give you a competitive advantage in the negotiation. However, creating a negotiation model has the added benefit of allowing you to create an abstraction that will help keep you get grounded and serve as your compass through the fog of negotiation. This abstraction is the Negotiation Map and is shown below.

The graph above has several landmarks and features to allow you to design an offer or evaluate an offer submitted by your counterpart. The graph above places each offer in the negotiation map and allows you to evaluate that offer relative to:

  • The buyer’s wall
  • The seller’s floor
  • The zone of potential agreement (ZOPA)
  • The zone of potential agreement frontier (ZOPAF)

The graph above is made up of millions of yellow, blue, green and red points. Each point represents the overall value of an offer to the buyer and seller. In turn, each point or overall value can be the result of thousands of offers. For example, the point in the graph above summarizes the four offers zopaf is storing in the table below it. For every point you place on the map, there are an infinite number of offers that can be summarized by that same point. Some are only acceptable to the supplier (yellow), some only to the buyer (blue), some are acceptable to both (green) and some are optimal (red). Without a map and a tool to help you plot each offer relative to other offers, you will end up far from the zopa frontier and thus leaving money on the table.

Zopaf - Negotiation Tools

Ramon Andino

CEO - Founder

zopaf - by Andinian Inc.

www.zopaf.com

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How To Win Your Next Negotiation

March 2015

Let me start by saying that winning in negotiations often means that you have to help the other person win as well. That said, most people care about their own interests first. So let’s focus on what you really care about the most: getting as big a piece of negotiation pie as possible. A lot has been written on the subject of negotiation. I won’t waste your time or mine by rehashing old concepts and talking about stuff you’ve already heard. Zopaf is all about bringing something new to the world to help people capture the money they are currently leaving on the table. It does this by bringing hard tools to an arena that is flooded with solutions that amount to guidance on soft skills. Negotiating is both art and science. For far too long, people have been inundated with solutions focusing on the art element, but have starved for the tools / science element.

The secret to winning your next negotiation is the same force that is disrupting every other facet of your life: Analytics. In the blogs that follow, I will show you how powerful analytics tools can help you get more from your negotiations. These tools include:

  1. Mapping your negotiation via a negotiation model,
  2. Using linear optimization to find the best deals
  3. Using machine learning techniques to learn more about yourself and your negotiation counterpart

I’ll end today’s blog by giving you a sample of why you must do things differently going forward and the only way to do this is with a different set of tools. Every time an offer is rejected, a piece of information is shared. That information can be used to learn the other person’s interests and help you get more from your negotiations. In a world that expects higher margins every year, leaving money on the table is no longer acceptable.

Zopaf - Negotiation Tools

Ramon Andino

CEO - Founder

zopaf - by Andinian Inc.

www.zopaf.com

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