Negotiation Blog

Negotiating Demands for Unjustified Compensation

By Thomas Wood

As many issues typically arise during execution of an agreement as arise during contract negotiations. Some require contract modifications, while others require a change in performance expectations. I worked with a manufacturing client recently on its dispute with a valued customer. The challenge was how to resolve the compliance issues without damaging the relationship. 

PROBLEM:

My manufacturing client (Sandra) couldn’t get an important customer (Joe) to pay his bill. Joe insisted that a special order of a low volume, high cost part was delivered a week late. This caused Joe to miss his delivery deadline with his big customer. Joe is being slapped with a penalty fee from his customer and wants a 50% discount.

After probing Sandra, I learn that a delivery deadline was not in the contract. There was a verbal commitment to get the part there as soon as possible, but no promised date. Sandra wants to keep Joe happy, but since she didn’t violate the contract, she won’t discount the price.

Try this:

Before asking an irate customer to be reasonable, Sandra should invite him to problem-solve a win-win solution. A particularly effective way is to listen, draw him out, respond and summarize. For example:

  • Joe: "You were late, which made us late and now we are slapped with a penalty; it is your fault and I am not going to pay your bill."
  • Sandra: "You are getting flack from your customer and the reason is you were delayed because our product was delivered to you later than expected."

It is challenging to actively listen when you feel attacked, so practice before you make the call.

DON'T:

Be careful not to make counter-accusations. It is counter-productive. "It is not my fault; you ordered the product last minute and we delivered as soon as we could, which is what we told you when you placed the order."

NEXT STEPS:

Suggest that you do some research together on what went wrong, what the current obligations and understandings are, and whether they need to be revised. For example, Sandra might say: "I would be happy to consider compensation once we agree on the facts. Would you be willing to take out the contract, see what we agreed to and then decide what needs to be done? Let’s also review the order and communication process that occurred for this part and see if they need to be changed."

Once you have agreed on the facts and process improvements, choose an offer.

CHOICE ONE: Create good will with a concession other than a price discount. Sandra might say, "Given the facts we have uncovered, I’m not inclined to discount this particular order. But I am sorry and want to help. For example, I could eliminate the late payment penalty."

CHOICE TWO: Offer a trade in exchange for a concession. Sandra could say, "You are an important customer to me and I’d like to help you out, so what I could do is give you a 4% discount on this order, if you pay it within 3 days."

CHOICE THREE: Use legitimacy (facts, such as previous agreements, industry standards, competing offers, cost plus). Sandra could propose, "Let’s both see how we have handled this in the past. I will look into how we have dealt with similar situations with other important customers and you look at what you have agreed to with your customers in this sort of a situation. What do you offer your clients if you were not contractually late on delivery, but yet were later then they expected?"

KEY to negotiating a resolution

The key is to turn the conversation into a problem-solving negotiated agreement.

  • Make trades you are comfortable with, but get concessions in return.
  • Let the facts be the bad guy. It will keep your negotiation from turning into an argument.
  • Jointly determine deadlines, but probe arbitrary deadlines you are given
  • Come to an agreement on how to keep this from happening in the future.
  • Remain calm and sympathetic.

If you do this, your relationship with your customer will be stronger than ever. Remember…. Be firm but fair!

Negotiating Tip

When negotiating via email, establish rapport first: start with a telephone call or web conference. Even better, if possible, start with a face-to-face meeting.


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Negotiation Blog

Politicians' Negotiations -- What Can We Learn?

By Thomas Wood

Whatever the nature of our negotiations (commercial, legal, regulatory, internal, etc) we can learn from the ups and downs of some of the most prominent public negotiations. With the Euro in serious trouble and economies worldwide shaken, government negotiations over economic strategies are around the clock and very public. The US negotiations over federal budgets, taxes and spending are a prime example.

With several US significant tax and spending provisions set to kick in (or lapse) in December and January, official Washington will be furiously bargaining at year’s end. And the stakes couldn’t be higher: the fate of the US national economy, the credit rating of the U.S. government, and the confidence of the American people in their elected representatives’ ability to tackle big problems.

In last summer’s negotiations, President Obama and the Congress' House Speaker John Boehner came close to striking a “grand bargain” on long-term debt reduction. It combined restrictions on the growth of entitlement programs (which are trades dear to the Democrat party) with increased taxes on the wealthy (which is anathema to the Republican party). But at the last minute the deal fell apart. Examining elements of this failed negotiation through the prism of Best Negotiating Practices may well provide insight into what could happen at the end of this year, as well as provide guidance for our daily bargaining.

The 2011 budget talks were prompted by a deadline—namely, the need to raise the US government’s debt ceiling so it could borrow more money to pay its bills. Congressional Republicans used this deadline to try to force concessions: they refused to increase the government’s borrowing authority without obtaining agreement by the Administration to substantial budget cuts. While absolute deadlines can be helpful in focusing energy and avoiding unnecessary delay, skilled negotiators can also use arbitrary deadlines as tactic to gain advantage.

The Republicans took a position opposed to any tax increases.  The President’s position was that he would not accept the level of cuts in entitlement programs sought by the Republicans without an increase in taxes on the wealthy. For both sides, the interest was to achieve debt reduction while maintaining the support of each party’s political base. Negotiators sought a solution—as good negotiators should—that served the two parties’ interests, even if it seemed to violate their positions (raising taxes by closing loopholes rather than raising rates, for example).

When the deal collapsed, Democrats charged that Boehner had lacked sufficient authority to bargain, and had been overruled by his Republican colleagues in the House. Negotiators should always have sufficient authority to strike a deal, but not absolute authority: carrying limited authority allows them to postpone or deflect unwelcome proposals. In the end, both sides decided that no deal was better than what they viewed as a bad one. They could both revert to the same, ready-made Best Alternative to a Negotiated Agreement (BATNA): elections, in which each side might achieve at the polling place what it couldn’t at the bargaining table.

While political negotiators in each country and all governments have special advantages and restrictions, everyone involved in negotiation can benefit from studying their successes and failures. It will be interesting to see if the US federal budget negotiators busy later this year are among those who have learned anything.

Negotiating Tip

Decide early as you prepare for an important negotiation, does the situation call for you to compete, collaborate, compromise, avoid or accommodate. All strategies have a time & place.


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Negotiation Blog

Like the Energizer Bunny, Washington’s debt ceiling negotiations keep on giving

By Thomas Wood

We tried to restrain ourselves from commenting in our negotiation workshops these last two months on the drama going on near our Washington, DC offices as the US President and Congress negotiated the US debt ceiling, with the President’s signature healthcare legislation – Obamacare – as the bargaining chip. Careful to stay neutral, but always alert to the strategy angles, we now have a few things to say, and they are all seeped in the fundamentals of negotiating. This Energizer Bunny just keeps on giving!

Negotiations to reopen the shuttered federal government and raise the nation’s debt ceiling were notable for one side’s insistence that it wasn’t negotiating at all. But despite the claims of President Obama and other Democratic leaders that they wouldn’t bargain over what they described as the basic functions of government, in the end they worked out a deal with their Republican adversaries. Most of us just don’t mean it when we say we won’t negotiate.

What other negotiating lessons can we learn from Washington’s latest fiscal crisis? At least five fundamentals.

1. The first is that preparation takes time. Although the partial shutdown of the federal government caught many Americans by surprise, defunding the government as a strategy for derailing health care reform was a plan in the making by an important faction of the Republican Party. President Obama, for his part, apparently decided in 2011—in the midst of another debt-ceiling confrontation—that he would never again negotiate over whether Washington should have enough borrowing authority to pay its bills.  As it generally does, this early planning affected the outcome of the negotiations.

2. Another prominent feature is the power of deadlines. Deadlines often figure in negotiation—sometimes proposed to spur action in a cooperative way, sometimes wielded as a weapon by one side to intimidate the other.

Government funding was due to expire October 1 and the Treasury’s borrowing limit (the “debt ceiling”) would be reached on October 17. There was a difference between the two, however: the first was acknowledged by both parties to be justified and absolute, since it was the statutory end of the government’s fiscal year. The second was a less concrete estimate by the Treasury. Some Republicans probed this second deadline, suspecting it was arbitrary and changeable. Though the GOP was criticized for questioning the precision of the debt ceiling deadline because the consequences of default were so severe—regardless of exactly when it was triggered—in less drastic situations such probing of deadlines is entirely appropriate.

3. Third, our approaches can evolve as the negotiations evolve. Like most political confrontations, the strategy when this negotiation began was competitive. Each side felt it had right on its side and demanded the other yield.  The Republicans, however, almost immediately shifted to what they presented as a compromise strategy, inviting the President and other Democrats to talk out their differences. But Democrats felt secure enough in their position—and viewed the GOP proposals as so unreasonable—that they didn’t feel pressured to go along.  This is not usually a practical strategy for ongoing relationships such as the President and Congress must maintain, but such is the degree of political polarization in Washington today.  Eventually, to break the weeks long deadlock, Democrats joined in the compromise strategy, which seeks to give something to each side.

4. Fourth, positions are merely one way to satisfy interests. That’s why positions move in negotiations. The general wisdom is that the Republicans got much less than the President out of this compromise settlement, but some commentators think that viewpoint is confusing positions with interests. In fact, Republican positions changed over the course of the negotiation: beginning with a demand to defund or delay the implementation of the Affordable Care Act (Obamacare), then moving to other tax and spending issues, and eventually to policies disconnected from the budget.

But Republican interests remained the same throughout: a smaller, less intrusive federal government funded by lower taxes.  Viewed that way, even though health care reform was only slightly modified, a central GPO intereses was served by maintaining existing spending restraints in the temporary budget adopted as part of the deal.

5. And last, without a strong Plan B or BATNA, there is little likelihood of a big win. One reason President Obama could at least in the beginning maintain that he was not negotiating, and in the end get more of what he wanted, is that the other side began the process without apparently developing a strategic Negotiation Envelope. This is a planning tool that maps out wants (Most Desired Outcome), reasonable expectations (Goals), fallbacks (Least Acceptable Agreements) and “Plan B” (Best Alternative To a Negotiated Agreement—BATNA). The most aggressive GOP leaders of the confrontation seemed to have identified a lot of Most Desired Outcomes, but not one Least Acceptable Agreement. And there was no viable BATNA, since the public would not put up indefinitely with a closed government or with the economic chaos caused by a national default.

Perhaps that’s the principle negotiating lesson of the federal fiscal crisis of 2013: set a reasonable goal and chart a path to get there.  Whatever the merits of the Republicans’ politics and policies, their negotiating strategy may need a recalculation.

Negotiating Tip

A weak partner is a dangerous partner. At minimum, find ways for all parties at the negotiating table to save face. 


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