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10/18/2019

Negotiation strategies: Saying the right thing at the right time

Whether Brexit, Brussels or an office - negotiations shape our everyday life. In business life, complex negotiation situations are the order of the day: they arise in purchasing, for example, when there is an urgent need to cut costs, in mergers and acquisitions, when no reasonable price is called for, as well as in negotiations with employee representatives, without whose approval no restructuring programme can be implemented.

Especially when it comes to large financial volumes, as is regularly the case in the automotive, mechanical and plant engineering, basic industries, chemicals, pharmaceuticals or logistics sectors, the further successful development, sometimes even the existence, depends on these negotiations. It does not matter whether negotiations are conducted with a counterpart who plays off his power as a monopolist, or whether several participants are engaged in fierce competition. The challenge is always the same: it must be decided in the best possible way, although one's own decision depends on others and their interests and strategies.  

This situation is described memorably with the so-called prisoner dilemma: prisoners who confess go out with little punishment, while those who are burdened by their confessions are punished particularly severely. The decision dilemma lies in the fact that a confession seems advantageous to any prisoner acting in isolation. Consequently, most prisoners will confess, although they could have completely escaped punishment by consistently denying it.  

Eliminating obstructive emotions

In order to prevent this dilemma from leading to wrong decisions or a standstill, e.g. in important award procedures or investment decisions, the methodology of game-theoretical negotiation is used, now enriched by findings from psychology and behavioural economics. If one considers that games are nothing more than mathematical models with which interactions between participants are calculated and predicted, then it quickly becomes clear that with this negotiation methodology obstructive emotions can be removed from negotiations. "Negotiations often fail because too many emotions are involved. This ranges from frustration to anger to euphoria. You can't negotiate successfully with that. This is only possible if you take out these emotions and develop a clear system," says René Schumann, Managing Director of Kerkhoff Negotiations (KN). The Düsseldorf-based company is part of the nationwide Kerkhoff Group and specializes in solving difficult negotiation situations for its clients with the best possible result.  

Keeping a cool head 

Negotiation therefore requires method and system, a good mathematical model and a well-coordinated team of negotiation experts who keep a cool head. In practice, it is a matter of developing a special negotiation design for each case, i.e. defining the rules of the game and process steps and generally communicating openly. This provides the framework within which the participants have to make their decisions, for example on an offer price. Negotiations are either parallel or sequential, often several times in several rounds. Known forms of negotiation are auctions that end with the highest price, or reverse auctions in which the lowest price is awarded. 

Negotiation design for difficult cases

Negotiation specialist Schumann reports on the case of a large machine manufacturer who had to procure a new robot welding system. As is not unusual for complex systems, the concept phase was much longer than planned. As a result, the decision had to be made quickly in order not to jeopardize production. "And speed always has its price, a difficult prerequisite if the budget is limited from the outset," says Schumann. The particular challenge in this case was that only one other supplier was known in addition to the previous supplier, and there was no time for detailed market research.  

After preparing the offer documents, KN initially developed a negotiation design that was especially promising for this case. And it looked like this: Both suppliers were initially given the opportunity to improve their offers. The supplier with the better bid received the pole position for the subsequent auction, in which higher and higher prices were announced in several steps - starting well below the actual budget. Each supplier now decided separately from the other which price level he wanted to accept. In principle, the following applies to such a ticker auction: the earlier a supplier knocks down, the cheaper the investment. If a supplier accepts a price, the auction ends immediately. 

"In fact, in this case the speed was not at the expense of the price," Schumann sums up. On the contrary, a price was achieved that was more than ten percent below the original offer. "The order for the robotic welding system, one of the customer's most important capital investments of recent years, was completed in a record time of just four weeks with more than satisfactory results. The usual time for negotiations of this kind is twice as long. 

Purchasing information

Negotiations with many providers can often be shortened with a simple but effective consideration. If you want to find out how the other bidders behaved, you can buy this information. The price for the information about the distance to the best bidder or about the entire ranking consists in a reduction of the offered price. This new information can then be used to submit a new bid. Anyone who does not want this must, of course, do without this knowledge of the competitors and guess how they will behave. "Not everything can be solved simply with experience or from the gut. You don't do important negotiations on the side," says negotiation expert Rene Schumann. 

Especially against the background of a weak economy, the expert observes that the negotiation climate is becoming rougher. "Those who now want to ensure that they can get through the next few years without damage with efficiency programs must exploit the potential of successful negotiations," says Schumann.

Author: Susanne Knorre, Knorre Consulting
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