Getting What You Want: Negotiating 27 January, 2011

Getting what you want is an important skill. However, it is shadowed by the skill of conceding only what you must while keeping relationships in tact. Winning really means satisfying interest. Much of what follows is based on the work of Roger Fisher and William Ury, although I have tuned much of it to be what I feel is relevant. Lets begin by defining negotiation.

  • Dealing with differences and needs
  • Getting more
  • Satisfying a need you cannot get on your own
  • Building relationships that benefit all parties (debatable by some)

There are two main schools of thought when it comes to negotiating. The first, and most common, is bargaining. Academically, it is referred to as positional negotiating. In this kind of negotiation, parties believe that there is a fixed amount of value that can be claimed. Each party tries to get as much value as possible. The second kind of negotiation is sometimes referred to as integrative. In this second kind of negotiation, parties believe that it is possible to create new value in addition to what is up for negotiation and then have parties claim the parts that are important to them.

A classic example of the difference in these two negotiation styles is two children that both want an orange. In distributive negotiation it would be fair to cut the orange in half. Integrative negotiation however, would look to the interests of the two children to discover that one child wanted to make orange juice from the fruit, and the other child wanted to use the rind to make a cake. Here on child would get the entire peel and the other child would get the entire fruit, with both children being better off than the standard bargaining and fairness models.

There are hybrid models of course, where one party bargains and the other tries to create value. Most research suggests that when one party sticks to value creating negotiation, the other party can be convinced to do the same. Some authors like Jim Camp, argue that trying to attain a win-win situation brings in too much emotion and allows you to be taken advantage of. If the parties remove irrational emotion from the equation and really focus on what is going on.

Differences in belief, or even different interpretations of a fact make deals possible (eg: buying and selling stocks). To understand these differences pre-negotiation preparation and during-negotiation preparation is a key. Lack of preparation is the biggest problem in negotiating. Having said this, keep in mind that the amount of prep required should be proportional to what is at stake.

Planning Steps
  • Know the other group's culture and beliefs
  • Determine interests and good outcomes for each party
  • Identify differences and opportunities for trade
  • Identify each party's best alternative to the negotiation
  • improve your best alternative before and during the negotiation
  • Negotiate with those who can make the decision
  • Be patient
  • Acquire external standards for top and alternate possibilities

The Negotiation
  • Distinguish personalities from the problem
  • Focus on interests
  • Explain your interests as they explain theirs
  • Generate more options
  • Listen carefully, expressing empathy when needed
  • If your best alternative is weak, don't divulge it

  • Recognize malicious tactics and call them out
  • Present interests first, then the proposal
  • Praise for something still under way makes a person want to keep doing it
  • If you think the other party can improve their alternatives, put an expiration on the offer

If Things are not Progressing
Ask "How might the other side be criticized if they made the negotiation?".

If Your Ability to Trust is Questioned
Try something like "I don't think it is a question of trust, I think it is a question of making sure we are on the same page".
Also, "It is not about trust, it's about everyone feeling like there is a fair deal".

Making it Easy to Say Yes Without Sounding Like a Threat
Attribute the statement to standards or established facts. Be careful of the phrasing and bring up the importance of the relationship between the two parties.

You Need More Information
Silence can be powerful and act as a smooth rejection of what was just said. It can also make the other party feel like they need to back up what was just said with more information. Talking specifically to people who have less authority to make decisions and are not as worried about keeping quiet on certain topics can bring you more information.

The Negotiation's Initial Direction is a Problem
Statistically, the first offer correlates with the final agreement. Putting the first offer on the table can help drive the whole discussion but you must be able to back it up. If another party makes a proposal first, bring in standards that are in your favor, bring up interests, and then put your offer on the table.

Things to Keep in Mind
Along with general negotiating practices and tactics, there are several ideas whose diversity keeps them from being categorized. Even though they may be smaller, individual ideas, they should not be underestimated. For exanple: Don't attack or defend. The more you can remove irrational emotion from the negotiation, the better chance you will have of being able to concentrate on satisfying both parties.

Make yourself open to correction. Remember that those with whom you are negotiating are people and have the same basic human needs that you do. People do not like to be threatened, told they are wrong, or insulted. Also, don't assume that your worst nightmare is the other party's top priority. Thinking in this way only allows value to be claimed, not created.

When comparing two options or one option to a standard, it is important to have some value associated with the differences. The benefit of having a defined point at which you will walk away is debatable. Some critics argue that it impedes new option generation, while the other side claims that you leave yourself open to an end result that is less desirable than if you had not negotiated. If you do subscribe to having a reservation price, it can be determined by looking at your best alternative and then adding the value of any extras.

There is a difference in knowing what consessions to make and when to make them. When getting ready to make a consession, make sure it is really worth it. if you are unsure about the concession and it is a big deal, you can always take a break to think. If the other side is making a concession, keep in mind that bigger concessions show that a party is more flexible while smaller concessions show that a party is less flexible.

Overcoming Cultural Differences
Geert Hofstede created five scales that help determine the attributes of a person. Although thoroughly understanding everything about someone's personality is probably not your objective, some important observations can be made (eg: is the person more fact oriented or relationship oriented).

The following is a list of the five scales and a brief description of each:
  • Power distance: Are all people equal in authority?
  • Individualism: The preference of individuals or groups
  • Uncertainty avoidance: The resistance to change
  • Masculinity: Assertiveness or dependence
  • Long term orientation: Long vs short term

Even though you can't give the other side a personality test to fill out, you can identify some of these elements based on geographical averages and organizational culture. By looking at jargon, dress code, rituals, ceremony, layout, and values (Hofstede helps here) you can tell what is important to that person. From this you can get a better picture about what they are willing to do and trade.

Negotiating is a useful art that takes practice to master. Understanding these elements will help guide that mastery as you run into opportunities to practice.

Time & Money: Best Friends or Worst Enemies 06 January, 2011

If the most powerful force in the world is compound interest as Albert Einstein once said, it should probably be a factor in investment decisions. Understanding the way in which time and rates of return affect money and projects will significantly help when determining whether or not to pursue a project or which project to choose.

Because this area of valuation is critical, it has been refined quite a bit. We need to start with some definitions in order to keep straight how everything interacts and how this valuation happens.
  • Annuity - A set of fixed payments that happen over a period of time (loan, lease, etc.)
  • Present Value (PV) - The present value of future cash
  • Future Value (FV) - The future value of present cash
  • Discount rate - a rate used to find the present value of future cash
  • Net Present Value (NPV) - the difference between what something costs, and what it provides when discounted to PV
  • Discounted Cash Flow (DCF) Analysis - calculating cashflows and determining if their NPV > 0

Why do we care about discounting money to present values? Because projects and investments do not instantaneously finish and mature; They do so over different periods of time. Because of this, we must adjust them for the time value of money.

Here are the most important formulas used when dealing with PV, FV, and annuities.

PV / FV Formula
Ordinary annuity formulas
r = the interest rate / 100 (6.5% = .065)
n = the number of periods (months, years, etc.)
c = total payment
Annuity PV/FV = total principal

In practice, people generally use something like Excel rather than the formulas to compute these values. Excel does have these built in and labels the functions pv, fv, and pmt.

The discount rate, used as the rate (r) parameter in the preceding formulas, can be arbitrarily set to some required rate. The most commonly used discount rate is the cost of capital, specifically the Weighted Average Cost of Capital (WACC). The WACC is made up of the weighted cost of debt and equity or in other words, what currently satisfies debtors and shareholders.

These formulas can be used to put money at different times on the same playing field and allows for true comparison. The annuity formulas are also useful for everyday calculations such as mortgage payments.

Tracking Sustainability 03 January, 2011

The end goal of finance and accounting is to keep records, and make sure activities are sustainable for some given period. This happens when costs are examined and budgets are created.

Some methods for cost analysis are the following:
  • Process Costing - Assigning unit costs to items created with a process that does not stop when part of a single unit is completed
  • Variable Costing - Segregating fixed costs and variable costs on a per unit basis
  • Activity Based Costing (ABC) - Another alternative method of tracking costs in order to see how profitable a product or customer is. All activities are assigned a cost. A percentage of each activity used to create a product or service can then be summed for an overall cost.
Budgets are used to regulate work done and money spent. Budgets are also where most assumptions that are made come into play. The two main goals of any budget are planning and control (goals and satisfying goals).

A general master budget can be broken up into many smaller budgets. This helps organize the task and ensure its correctness.

Example Master Budget System

Example Sales Budget

An additional step that is often used when creating a budget is that of flexible budgets. A flexible budget is a budget based on activity ranges. Instead of creating one possible sales figure, or production figure, a few range or checkpoint numbers are chosen and a budget line is created for each of these.