The Essence of Negotiation
Summary
To create sustainable business benefits, the nature of business relationships needs to change. This means negotiation is no longer about how much one party can gain from another – but more about "win-win" to create long-lasting partnerships.
Solution
It is no longer a cliché to state that we live in a "global economy". We do in fact live in a world where goods and services are traded right across the world. This creates a global economy of an estimated USD $74 trillion. By anyone's standards, this is a lot of money. It means big business for everyone, regardless if they directly or indirectly tap into the global economy. It means an increasing standard of living and opportunities to progress.
The state of business affects everyone in one way or another.
A healthy economy is one of the essentials of national economic management. This is created by active involvement with partners and suppliers and markets sometimes nearby, sometimes across the other side of the world. This means the individual components that make up any general healthy economy – the businesses – do the best possible job in ensuring sustainable business benefits.
This makes sense. Good business is often long-term business and good business is good for everyone.
This means there is a need to:
- understand the markets and people you are buying from or selling into
- negotiate the best possible deal
- live up to the promises
Out of these three points, negotiation is the least well understood and therefore, potentially, the single greatest point of failure.
Negotiation is important. Some people are wary of it. Some people are frightened of it. Some people thrive on it. And yet negotiation is what defines the commercial arrangements among different organizations/suppliers/partners. Therefore, by its nature, it also defines the level of commercial success of the parties involved. It defines the sustainability of the relationship and the profitable health of the business, and therefore of the wider general economy.
Negotiation is important. Successful negotiation, clever negotiation is of paramount importance.
As has been stated, the best business runs on sustainable arrangements. Short term wins usually equate to repetitive, avoidable and so unacceptable cost. Where possible, to ensure the sustainability of business benefits and to ensure the continuance of long-term strategic partnerships, corporate negotiation should be on the basis of "win-win" – but the best possible "win-win". with maximum profitability within the specific circumstances. This calls for a commercial focus based on relationship building, not just how much money can you make in the shortest time.
For example, if you want to buy good quality items from a seller and ensure the continuous supply of good quality items over a long period of time, one of the worst things to do is to drive the price down so low it effectively becomes not worth the cost to produce and sell at that quality. This means either the quality will fall or supply will not be continuous. This is bad practice and certainly bad business. Although there is the short term gain of agreeing to an initial low cost, if it is not sustainable for the seller to continuously provide, then the whole process will have to be gone through again – this is the unacceptable avoidable costs of inappropriate negotiation.
Likewise, if an organization fails to negotiate well enough in the buying or selling of goods or services, it certainly loses out. There are many examples of this in real life. In such instances, there is a direct effect on bottom-line profitability.
It has been estimated that within the global economy UK businesses lose approximately GBP £75 billion in revenue or extra cost due to poor negotiation. This jumps to a staggering estimate of approximately €400–500 billion Euros for the European zone as a whole. This means €400–500 billion Euros of extra profitable work just to make up for the gap.
This is a huge amount of money. It is bigger than the economies of many countries – and it's being lost due to poor negotiation. This means money is flooding out of the badly negotiated companies and national economies – away to somewhere else. Such a level of loss is hardly sustainable. What it is, is wasteful and unprofessional.
We all negotiate through life. We make deals and compromises all the time without realizing it. It's part of our nature. Yet to some people and within some cultures, the purposeful act of negotiation to create deal-making is not only a scary prospect but can be highly embarrassing. Is this why some parts of the world heavily lose out to other regions where there is a long-established culture of negotiation?
Yet negotiation is not simply about bargaining over money to reach a deal. It's about working out how to conduct the best business – and with whom. It's about research. It's about psychology and understanding behaviorisms. It's about picking up on those tiny signals of body language. It's about building a relationship so the next time around a deal is on the table with the same people, they are more likely to sign quickly on the dotted line without all that expensive run-up of time and extra resources during the initial sale/trade.
It's about the identification of opportunity.
The thing is, we've all sat in countless business meetings listening to a seemingly endless supply of facts and figures. Facts and figures and logic are all important in every walk of life; of course they are. However, if studying the history and dynamism of business, in fact of any human interaction, it soon becomes clear that the best business, that the best of any interaction, is by building relationships with people you trust … and who trust you.
Far from the objectivity of facts and figures, trust is highly subjective. This reaches to the core of every one of us, regardless of who we are – people like to think of themselves as logical and rational creatures, when in fact beneath the thin veneer of civilization we are all emotional and irrational creatures. We like to think we make decisions based on logic and facts and figures and yet are heavily, heavily influenced by that emotional subconscious part of ourselves. This is the complexity of human behavior. Objectivity plays its part. Subjectivity controls how we view the world and therefore also the relevance of any objectivity.
This leads directly into the subjective concept of trust. And this in turn leads directly into the nature of negotiation and of sustainable business benefits. It leads to confidence, reputation, and brand value in an age of increasing scrutiny.
In the, at times, the cutthroat world of business it may seem strange to talk about the importance of trust as a basis for sustainable profitability. But have you ever attempted to engage in far-reaching business with people you don't trust? It is possible, but with a range of inbuilt handicaps that reduce the potential business benefits … and reduce the longevity of the interaction.
Trust. If you trust someone you are more likely to believe what they say. If you distrust someone you are less likely to believe what they say and spend more time and other finite resources looking for a way out of the relationship.
If you think someone is out to rob you, you won't believe a word they say.
In short, psychologically, trust equates to friendship or at least a state of being able to work together to create mutual benefit. Distrust equates to potential enmity and threat.
Business is often characterized by competition. However, co-operation and collaboration arguably play a greater role in the sustainability of business as a major driving force. Strategic partnerships, long term contracts, belief. The age-old business philosophy of "maximizing profit at any cost", where suppliers and partners and clients and even the consumer is drained of every available penny, is no longer appropriate for a world of finite resources, of increasing consumer power and increasing supplier importance.
Negotiation is important. Trust is the essence of negotiation.
This concept of trust is reinforced by clever negotiation. At the heart of clever negotiation is the drive for sustainability. Sustainability is not about negotiating hard to gain as much as possible, with the result being a total loss to the other party involved. This is an unsustainable business. No. Clever negotiation is about negotiating hard to gain that all-important "win-win" situation for both parties, creating a business relationship based on trust, mutual respect, a clear partnership and mutual benefit. This is a sustainable business.
This is where business clearly benefits from co-operation.
This is extremely relevant in today's business world with a range of client/supplier/partner relationships that SHOULD be based on quality, but through poor business practices can mainly be based on cost. Reduced cost often has a negative impact on quality – which has been quite striking in the short history of outsourcing, for example.
FACT: SME's and suppliers need to know more about the art of negotiation – and not be bullied.
FACT: large organizations need to understand the sustainability of business benefits.
So … what are the main steps for successful business negotiation that will help in returning and retaining some of that vast amount of money lost due to poor business practice?
- Understand what you want; know what you need.
- Understand who you are dealing with – and what they want/need.
- Create a scale of activity that will show the range of your potential outcomes matched against the range of the other people's potential outcomes. If there is an overlap, you're in business. If there isn't overlap, then one or both will need to compromise if there is to be a successful and sustainable outcome.
- Don't be afraid to walk away.
- Create a relationship through communication.
- Take your time. Limit your time and you will be forced to compromise and therefore needlessly give up areas you need or want. This will sour any relationship.
- Negotiating hard does not mean grinding the other party into the dust. Understand their strengths and weaknesses – and use these to create sustainability. Negotiating hard means a recognition of the win-win situation … and it is good practice to be open about the other's strengths and weaknesses and how you want to use these for mutual benefit. This creates the necessary trust.
- Contracts do not mean volume after volume of lawyer induced paperwork. Contractual negotiations conducted by lawyers can often lead to extended time and other resource use that spiral costs upwards and go some way to undermine confidence and trust. Contracts should be as brief – but as relevant – as possible.
- Contracts should include ALL relevant details. If it's not in the contract, it won't be in the work.
- Continuous improvement with regard to the relationship (and the contractual obligations) should be a common thread running through all the interactions.
The point is … why waste those finite resources in fighting with everyone. Why waste those finite resources running to stand still. The point is … work smarter, not harder. This is good business.
Source: James Stuart, https://www.managementexchange.com/hack/essence-negotiation
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