The End of the Mexican Road

Negotiations. We all think we’re good at them. Most people aren’t that good.

For many the idea of negotiations is “let’s split the difference 50/50.” In some situations this is the right answer. In many cases it’s not.
I learned many of my negotiation techniques through experience. But I did read a couple of books on the topic that were useful:
1. You Can Negotiation Anything (by Herb Cohen)
2. Getting to Yes
I enjoyed both. And negotiation technique is one of the few areas on my MBA that was truly new information to me by the time I had attended. I learned concepts such as BATNA (Best alternative to a negotiated agreement, which every MBA will remember). We like to short-hand it, as in, “What’s our BATNA?”
As a VC I’m required to negotiate constantly.

• submitting term sheets
• doing pre-emptive follow-on rounds
• agreeing whether or not to top up a founder’s equity
• agreeing annual compensation packages
• negotiating with other VCs over who gets to invest how much
• and so on

As a result I’ve really resisted writing about negotiations. I don’t want everybody with whom I’m currently negotiating thinking, “Ah, you’re just employing technique XYZ.” Each situation is different. Sometimes my, “this is my best & final offer” really is just that. Other times I say it more subtly and have some small negotiating room. Sometimes I even say, “I will change price / terms if I need to. I prefer not to. But I really want to work together so if it’s important to you, let’s discuss things.”
But negotiations are so important that I thought I ought to included a few posts on the topic. This is the first.
I’ll do my second, “Everybody Wants Their Pound of Flesh” soon after. If I forget to write, “Don’t Negotiation Piecemeal” after that then remind me.
The first post is for situations in which you are the BUYER.
The End of the Mexican Road
When I was in college I found myself in Mexico often enough. It was a unique experience for me at that age. No, I’m not talking about the times I was in Tiajuana too late at night. But the times where we took weekend trips further in Baja California or Spring Break week-long trips to Mazatlan.
This was my first real experience with haggling. You walk up to a guy selling you a Mexican blanket (or other trinket you don’t really need) and he says:

Vendor: My friend. You buy my blanket. Only $20
Me: $20? That’s a case of beer! And I’d still have change left! (it was the late 80′s after all) You gotta be kidding!
Vendor: OK, my friend. For you. Today only. $18.
Me: No, thanks.
Vendor: OK. How much you pay? This a high quality blanket, amigo.
Me: (egged on by my friends): 2 dollars. I’ll buy a blanket for $2.
Vendor: Ay. Come on. This is high quality, my friend. I give it to you for $16.
Me: $10. That’s my final offer.
Vendor: No, my friend. It costs me more than that.

And so I started walking away. I didn’t really want or need the blanket. We were in a bazaar – somehow you get frenzied into buying shit.
As I walked down the road the vendor chased me. He had a look of desperation on his face, “My friend, my friend. Please. Ok. You can buy this blanket for $12. I make no money. But for you? 12 dollars.”
I take out my wallet. We’re both happy. I think I got a good deal. He knows he did.
And so I learned an important negotiation lesson in college. Sellers will always chase you down the road if they think you’re walking away from a deal that they want to do.
Your job is to offer a price (or terms) and walk. See if they follow you. If you get to the end of the road and turn right and they’re not following you then you know you offered a price that was too low.
But here’s the thing. As long as you negotiated in good faith and weren’t a jerk, if you turn right and don’t get followed you still have another chance. If you come back around the corner you can always start the negotiation off again. It’s not like they would say, “No, I’m sorry, sir. My offer is no longer valid.”
Imagine in my previous case if I had offered $10 and he hadn’t followed me. In that case my price was too low even for him. I could have easily come back and said, “Ok, how about $14?” or even, “Fine. I’ll buy it for $16.”
In this case I would have learned a bit about his floor. $10 was too low.
I know this all sounds obvious but trust me – in my many years of leading team members through their negotiations I know that people often struggle with finding the true floor or even seeing whether a negotiation is possible. I always busted out my metaphor, “Offer X. Walk to the end of the road. Turn right. If he doesn’t follow you we need to rethink our offer.
Another great example of where I saw this “floor testing” used was in the book, “Swim with the Sharks without Being Eaten Alive.” I read it more than 20 years ago so I can’t say for sure whether it is still relevant or not.  But it had a big impact on me in the late 80′s. The author, Harvey Mackay, talked about his strategy. He would often send other people not related to him in to negotiate a price on a certain product and do much of the haggling in advance of him. They were floor testing. That way when Harvey STARTED his process he came in a lot better informed about price & term sensitivity.
Some real world examples:
1. Executive Recruiters
I have a high degree of respect for high-quality executive recruiters. For the right jobs in your company (usually senior) and for certain types of roles they can be vital.
But their pricing strategy has always driven me bonkers. In booming markets the best firms operate on a 33% basis. They want a third of the total comp package of a senior recruit. Then many ask for 33% of this fee to be paid up front, 33% after one month and 33% after two months. I have never signed a contract on these terms.
Also, they often want to charge you 33% of total comp. So if you hire a senior sales rep with 100% bonus on top of their $150,000 base salary they want to get paid $100,000 (33% of $300,000). WTF. Why should I pay 2x the price to hire a VP of sales as I would pay to hire a VP of Market, Technology or Finance? The work is the exact same amount. And which startup would pay that kind of money anyways???
I don’t want to make this a post about negotiating with executive recruiters, but the leverage points of negotiation are:

• percentage fees (will they go to 25%? 20%? 17%?)
• fixed fees (will they agree a number so that your interests are aligned? After all, you don’t want them talking up comp because they get paid more)
• payment terms (can you make it performance based? 1/3 of fee on short-list of candidates, 1/3 on acceptance by a candidate, 1/3 first month after employee joins)
• replacement search (if candidate leaves or is fired in first X months, what happens? replacement search? part refund? what?)
• non poach (will they sign an agreement not to hire anybody from your company for 3 years? 2 years? 1 year? 5 years?)
• etc

Obviously you can do some homework by asking other entrepreneurs what terms they negotiation with recruiters. Sometimes you have to walk to the end of the Mexican road.

2. Software Packages
The number of times I’ve seen software license agreements where I’ve been told by my colleague trying to purchase it that, “the fee is the fee. My rep told me.” or something similar. The fee is seldom just the fee. Especially near the end of a quarter.

• Can we get a trial period first?
• Can we pay the same amount but extra licenses at the same cost?
• Can we get a “most favored nation” contract? (where if another customer is offered a lower price, they’re legally obliged to offer it to me)
• Can we prepay a year and get a discount?
• You say only prepay a year. We want to buy monthly
• And so on

Negotiating Style
Understanding what terms or price you should pay does not mean you need to take on a power-trip mentality when you’re the buyer. For starters, you should respect the people who are going to provide you with products and services. They’re just doing their job and often their product / service is integral to what you’re trying to achieve.
Also, just because you want to get a sense of what is possible in a purchasing negotiation doesn’t mean that you need to take every last penny of profit out of the deal. For example, if you’re in a down market so you can put the squeeze on a recruiter to do a search uber cheap, you might end up being penny wise, pound foolish. If that person has three gigs on at that time and your is significantly below market and below the others you shouldn’t be surprised if you get a little less time, attention and resources than the others.
In fact, your goal in a negotiation is not always to get the lowest possible terms. Your goal is to understand the needs of your partner and create win/win outcomes where both sides are incentivized to continue to want to work hard together – now and into the future. Sometimes that means you want the absolute best deal you can get. Other times it doesn’t.
Either way, remember that you can make offers with a smile on your face that might seem absurd. And if you’re not insulting in how you offer and if you walk down the road and turn right – you might learn a little bit more about the art of what is possible.

http://www.bothsidesofthetable.com/2012/02/11/the-end-of-the-mexican-road/

Stop Bargaining and Start Negotiating

A good negotiator knows how to get the bargainer off his or her script.

For me, the term “bargaining” conjures up a chaotic, aromatic scene in one of Taiwan’s night markets, where haggling over the price of pineapples, slippers, or just about anything else is a national sport.

When I first arrived in Taiwan, I couldn’t really participate, much to the disappointment of the vendors. Once I learned my numbers and a few other key words, though, the vendors really lit up. As an American, it felt awkward, but I slowly got used to it.

More recently, I attended a seminar on negotiation led by management consultant Jack Kaine. He wasn’t talking about pineapples, of course. He focused on negotiation for entrepreneurs, making a big distinction between bargaining and negotiation. I was caught off guard and drawn in at the same time. Aren’t bargaining and negotiation the same thing?

Not at all. And not just because I’m selling product development services rather than chicken feet.
Something about this distinction really sank in for me, and I found myself using it almost immediately without realizing it.

The distinction goes like this:

Bargaining is about focusing on who is right. It is competitive and win-lose.
Negotiation is about focusing on what is right. It is cooperative and win-win.

To truly engage in a negotiation, you must have trust and openness between the parties. Otherwise, it is impossible to find the common win-win.

When I found myself in a conversation with a bargainer who was trying to nickel-and-dime some services that had been requested by his more win-win-minded colleagues, I went off-script and asked what he really needed. I agreed with him that I was asking for a lot of money, and asked him what he wanted me to eliminate from the scope of work. After all, scope and pricing are judgment calls, and I was merely trying to provide him with a good outcome.

That stopped the bargaining in its tracks. Who wants to be the person in their organization responsible for a sub-par outcome?

Negotiation often requires creativity to ask the right clarifying questions and figure out what is truly of value to the other party. It may not be what you think until you ask.

To stay on a negotiation script and get off the narrow-minded bargainer’s script, focus on these three things:

Education. Questions, questions, questions. Learn what is truly important to the other person. Creatively push on the boundaries to explore what may not be obvious at first. This will enable you to address value in the deal and get away from focusing solely on numbers.

Expand the pie. Instead of subtracting things, figure out what you can add to get to a win-win. If you ask enough questions, you’ll know how to add extras that may not even cost you much, but may be of huge value to the other person. Perhaps they are totally off the main topic of the deal, but who cares if it gets you to a place where everybody wins?

Make it personal.  Yes, you may be doing a deal with a behemoth, but you are negotiating with people who have their own issues, problems, and agendas within the behemoth. Don’t lose sight of the people! Find out what they need in the deal to make the most effective use of your time together. Build trust. Never back them into a corner.

Bargaining in the night market was good training. I remember all the antics my friends engaged in, like stomping out of the stall and having the vendor chase you down the alley lowering the price, only to return and continue the game. It was passive-aggressive drama at its best, but kind of fun if you didn’t take it too seriously. Of course, when the only thing at stake is a pineapple, it’s a little easier to play hardball than when you are desperate to get a new contract for your company.

Still, the best way to learn to negotiate well is to do it. And in the best negotiations, everyone walks away feeling like they got a good deal-;making them more likely to come back and do business another day.

http://www.inc.com/laura-smoliar/the-difference-between-bargaining-and-negotiating.html

Why 'Win-Win' Negotiating Is the Surest Way You'll Lose

When it comes to deal-making, you should master this simple three-step strategy of the self-made wealthy instead.


Everybody loves a win-win answer to a problem. It's great when a potentially-contentious situation ends up with everybody coming out ahead. And isn't that the way most business deals should go, too? Let's all sit down and find a way for everyone to win. What could be better?

But when I surveyed people for my new book, Business Brilliant, one group overwhelmingly disagreed with the the idea that "win-win solutions are best." That group was self-made multi-millionaires, people whose net worth exceeds $30 million.

What do these super-successful people know about win-win deal-making that nobody else does?

It turns out that if you look at the very best in negotiation thinking, the notion of "win-win" is widely regarded as a dangerous trap. Even the late Stephen Covey, author of Seven Habits of Highly Effective People and hardly an advocate of cut-throat business practices, was wary of win-win. He cautioned that the win-win ideal often tempts good-hearted people to buy into bad deals that they later come to regret, sometimes for years.

Here's why. Let's say, for example that you adopt a "win-win" attitude with someone who has an "I-must-win" outlook. Covey and others would say that your "win-win" perspective almost guarantees you'll be the only one offering concessions in order to reach agreement. Then you're not playing win-win at all. You're playing wimp-win. You're the wimp and the other guy wins.

So what should you do? Almost all guides to negotiating more or less recommend the same three-step alternative to win-win: First, write down your wished-for goals. Second, study what the opposition wants. Third, write down the number and conditions at which you will walk away. Negotiation guru Michael C. Donaldson calls these three steps "wish, want, walk."

Simple enough? Not really. Research shows that executing on each of these steps makes most people feel awful. For instance, setting high goals means you'll almost always miss those goals, but you'll achieve more than if you had set lower, more realistic goals. Most set low goals because of that enjoyable feeling you get when you succeed. People actually feel better when they ask for $50 and get $50 than when they ask for $100 and get $60, even though you're obviously better off with $60 than you are with $50.

Researching the other side's position and probing for weaknesses to exploit doesn't feel very good, either. The survey research I did showed that about 75 percent of middle-class people don't agree with exploiting weaknesses during negotiations. Among the multi-millionaires, though, 100 percent agreed! Exploiting weakness is the name of the game.

And as far as walking away from a deal? Just 22 percent of middle-class people say they have an easy time abandoning a business deal "if it's not just right." But for multi-millionaires, it's unanimous. Take a walk if you can't get what you want: 100 percent agreement.

Of course, negotiating is a psychological game, but to be successful at it, it's important to know the obstacles inside your own head that make each step of wish, want, walk so difficult to execute. If you're like most people, you'll avoid setting a very high goal at the start of a prospective deal because you feel better about yourself if you're reasonable and realistic. You're also likely to feel reluctant to investigate and exploit the other side’s vulnerabilities because that’s not something that a nice person does. And, walking away because you haven't gotten what you want? That makes the whole process feel like a waste of time. Who wants to go home empty-handed after all that work?

If you're dealing with an experienced negotiator, that negotiator is trying to use all these psychological biases and social norms against you. He'll thank you for being reasonable (hoping to cow you into abandoning your highest goals). He'll remind you of your own weaknesses, having thoroughly studied your position. And he'll dare you to be rude enough to walk away. He'll exploit what's known as "the norm of reciprocity," by telling you how smart and considerate you are--and then he'll make a ridiculous low-ball offer. His flattery creates inside you a natural psychological urge to reciprocate by accepting the offer, when the thing you really need to do is tell him that you're ready to walk away if that's the best he can offer.

Self-made multi-millionaires know this. It's how they got where they are. Now that you know it, too, will you make use of it? Stephen Covey used to say that negotiation is all a matter of courage. When you settle for a "win-win" deal that you really don't care for, Covey said you're basically choosing to sell yourself out. You're telling your negotiating opposite, Covey wrote: "I'll be so considerate of your convictions and desires that I won't have the courage to express and actualize my own."

http://www.inc.com/lewis-schiff/negotiating-successfully-strategy-win-win.html