How to Negotiate Better Business Deals

The Theory and Practice of Negotiation from Harvard Law School’s Program on Negotiation

You’ve heard it many times: to get the most out of an agreement and a new business relationship, you have to collaborate to find new sources of value in addition to claiming value for yourself. Yet coming up with original, value-creating ideas can be easier said than done.

As Daniel Kahneman explains in his book Thinking, Fast and Slow (Farrar, Straus and Giroux, 2011), the vigilant, analytic thinking that we strive to adopt in negotiation is actually less conducive to creativity than the superficial, intuitive thinking we often try to avoid. In the midst of formulating arguments and crunching numbers, how can we open our minds to novel ideas? Here we present three basic techniques that you can use to get your creative juices flowing the next time you want to squeeze more value out of a negotiation.

1. Break the problem into smaller parts.

Perhaps the most helpful step you can take to promote creativity as a negotiator is to break problems into smaller components, writes Leigh Thompson in The Mind and Heart of the Negotiator (Pearson Prentice Hall, 2011). By doing so, you can build a multi-issue negotiation out of what might appear to be a single-issue deal.\

Negotiators often think they are haggling over a single issue, but that is rarely the case. In 2003, a university and its food and commercial workers’ union avoided a strike despite a $300,000 deficit by breaking a single issue—the union’s desire for wage increases—into multiple issues, including job security, parking fees, access to facilities, and overtime costs, writes Thompson. Identifying multiple issues positions you to make valuable tradeoffs based on your differing preferences.

How can you foster this type of creative mind-set in a counterpart who seems fixated on a single issue? Ask lots of questions and listen carefully to the answers. Then consider using the information the other party shares to open up a conversation about your respective preferences regarding the varying issues.

If your counterpart is reluctant to engage in such a discussion, put together several different packages for his review. When you put forth several proposals at the same time, you are likely to impress the other side with your flexibility and encourage him to reciprocate with his own innovative ideas. Even if he doesn’t like any of your initial proposals, his reactions will steer you in new directions for discussion.

2. Consider novel deal terms.

An array of issues may be on the table, but price can remain a sticking point, especially in the current economy. Unconventional deal-structuring arrangements can offer a way to bridge the gap between what a seller wants and what a buyer can afford.

When one side doesn’t have the funds needed to push through a deal, consider whether you can barter your way to the finish line. Thompson tells the story of a Formula 1 motor-racing team that wanted to launch a new website but didn’t have the budget to pay a London-based design studio to do the work. Instead of haggling over price, the team offered to pay for the website with tickets to upcoming Formula 1 races. The design studio readily agreed, seeing the opportunity to use the tickets to reward staff members for their performance and to woo new clients and pamper existing ones.

In addition, as we’ve discussed in past articles, a contingent contract offers a way to overcome differences in beliefs about future events and outcomes. Instead of arguing about how the future will play out, negotiators can place a bet on it. The same design studio described in the previous paragraph took this route when negotiating a deal to build an e-commerce website for the U.K. Football Association, writes Thompson. The association was working with a limited budget and wasn’t sure the website would pay off. So the studio proposed receiving a percentage of sales from the new site instead of a flat fee for its work. Such contingencies serve as a safety net that limits each side’s losses if the agreement goes awry, according to Thompson. Finally, negotiators often overlook opportunities to create more value by adding conditions to their deals, says Harvard Law School and Harvard Business School professor Guhan Subramanian. A condition is a deal-structuring technique that can be expressed in an “if ” statement, such as “I’ll do X if you’ll do Y.”

According to Subramanian, a condition might have been a game-changer for NBC in 2001, when the television network was negotiating with Paramount Studios to renew the eight-year-old hit TV show Frasier for another three years. NBC wanted a “cutback right” to cancel the show if ratings fell before the contract ended. Under pressure from the show’s star, Kelsey Grammer, Paramount refused; NBC backed down and agreed to pay approximately $5.4 million per episode for Frasier with no cutback right.

Subramanian argued that if NBC had given Paramount a choice between $5.2 million per episode without a cutback right or $5.5 million with a cutback right, this condition might have motivated the studio to put pressure on its star to accept the cutback right. As this example shows, creative negotiators not only find innovative ways to collaborate but also use their creativity to get what they want.

3. Try some mind games.

We’re all at least vaguely familiar with the concept of brainstorming—the popular technique used to unleash creativity in groups (and reduce the negative impact of “groupthink”). In a brainstorming session, individuals are encouraged to share whatever idea comes to mind, no matter how outlandish. Avoiding the urge to evaluate and criticize, the group gathers as many ideas as possible. At the end of the idea-generation stage, members may realize that they have adopted a more creative mind-set, and they may even find some good ideas on the list they’ve drawn up. Though research has found mixed results for the overall effectiveness of brainstorming in generating useful outcomes, negotiators who want to break out of an analytical mind-set might give it a try.

In her chapter “Creativity and Problem-Solving” in The Negotiator’s Fieldbook (American Bar Association, 2006), Jennifer Gerarda Brown suggests several other exercises that negotiators might use to stimulate their creativity.

In “mind mapping,” a form of word association, negotiators write down the problem they are facing and then add whatever related words come to mind on the same piece of paper. After covering the paper with words, negotiators can draw lines to connect those that seem related. This technique is designed to draw potentially useful links between various aspects of a problem and thus trigger creative solutions to difficult problems.

Another technique, known as “flipping,” involves considering the opposite of a given situation or idea. Mediator Christopher Honeyman has found that this can help parties find novel solutions to their conflicts. When encouraged to share their “bad ideas,” disputants may feel freed to offer ideas they partially or secretly support. As in brainstorming, Brown writes, being given permission to disclaim ownership of our ideas may inspire more creative thinking.

If you are stuck coping with a faulty contract, try renegotiation.

Many viewed the deal to be a terrible one from the start. In December 2008, Richard M. Daley, then Chicago’s mayor, announced that his administration had agreed to lease the city’s parking meters for 75 years to a private company for nearly $1.2 billion in an attempt to tackle a budget shortfall of about $500 million. The deal was rushed through the city council despite members’ confusion about what, exactly, they were signing.

After Chicago Parking Meters (CPM), an investment group led by Morgan Stanley, took control of the city’s meters, Chicago drivers quickly found themselves paying the highest parking rates in the country. And in 2010, the news broke that, as had been widely suspected, the city had sacrificed billions of dollars in revenue in the negotiation. Daley spent $1.15 billion of the money paid to the city in the parking deal during what proved to be his final term in office, leaving just $125 million unspent.

As we described in the article “Help Your Agreement Go the Distance” in our June 2011 issue, CPM revealed in a private note sale that it expected to receive $11.6 billion in parking revenues over the course of its lease.

When Rahm Emanuel took office as Chicago’s new mayor in 2011, he vowed to try to get taxpayers a better parking-meter deal, despite the fact that the 75-year contract had only just gotten under way. We look at his administration’s renegotiation tactics with an eye toward identifying how you can avoid Chicago’s mistakes—both in your initial negotiations and in your renegotiations.

Attention-getting moves.

If you find yourself struggling to cope with a lopsided deal, your first step should be to call the inequities to the other party’s attention and ask for a renegotiation. Because most people have an innate desire to be fair, the other party may be willing to reopen a discussion before the end of your contract period, especially if you back up your request with convincing evidence.

What if they aren’t? Some would say it’s time to threaten a lawsuit, if you believe you can make a strong case. But doing so could escalate a situation that might be resolved more efficiently, cheaply, and peacefully.

There may be other ways to get your counterpart’s attention. When CPM submitted a bill for $12 million in lost revenue due to street closings in 2011, Emanuel refused to pay it. He also refused to reimburse the company for the $35.5 million it claimed it was owed as a result of cars with disabled-parking placards and license plates parking for free. He publicly challenged the company’s right to reimbursement, saying, “There’s a new sheriff in town.”

Emanuel then put together a team of heavy hitters, including the city’s chief financial officer and a prominent hedge fund managing partner, Michael Sacks, to fight the bills. These attention-getting moves worked: CPM agreed to sit down at the table.

In August 2012, the mayor announced an agreement that the city, and not CPM, was entitled to determine how much the company was owed due to street closings. The city then hired a technology consulting firm to develop software to recalculate the city’s bill. Meanwhile, the city’s dispute with the meter company over reimbursements for free parking by those with disability designations entered arbitration.

“A little lemonade”

The negotiations between CPM and the city’s team continued for months. In addition to filing legal actions and revoking prime parking spots from CPM’s control, city representatives sought to resolve a dispute over tens of millions in unpaid fees.

In April 2013, Emanuel announced the terms of the revised deal, which he claimed would save the city a projected $1 billion over the course of the 75-year contract, specifically by reducing fees billed by CPM for out-of-service meters and other lost revenue. The city agreed to pay $8.9 million of the disputed $49 million that CPM had claimed it was owed. The new contract also provides for free parking in many neighborhoods on Sunday, a city tradition that vanished when CPM took control in 2008.

Yet an analysis by the Chicago Tribune suggested that the renegotiation may not have resulted in a better overall deal for city taxpayers and drivers. CPM negotiated to extend the hours of paid parking on most nights other than Sunday. And the company could net millions in service fees from a pay-by-cell-phone system that could be added to the contract.

The city largely lost in the arbitration over disabled-parking permits. Yet Emanuel has lobbied the Illinois governor to block CPM from seeking further reimbursements for free parking for those using disabled signs and plates.

Burned by CPM’s initial contract, Chicago reluctantly voted in June to approve the renegotiated deal. Emanuel has tried to deflect criticism that the new terms don’t go far enough to improve Chicago’s side of the deal. “I’m trying to make a little lemonade out of a big lemon,” he said. “We can’t make this bad deal go away, or make it a good one.”

Toward more successful renegotiation

The limited success that the City of Chicago had renegotiating its botched parking-meter deal attests to the difficulty of persuading a counterpart to revise existing contract terms. Perhaps the ultimate lesson from the dispute may be the value of getting the deal right the first time. Here are a few tips to follow:

1. Create breaks. Mayor Daley consented to a truly epic 75-year deal with CPM. Given the difficulty of foreseeing how economic and other conditions will change, try instead to do short-term deals that will allow natural breaks for renegotiation. A much shorter contract would have allowed the City of Chicago to examine how the parking deal was working, negotiate adjustments as necessary, and seek out other bidders in the event of nonagreement.

2. Prepare for disputes. Even with short-term contracts, disputes and differences of opinion inevitably arise. Add a clause to your contract that requires renegotiation, mediation, or arbitration in the event that parties end up disagreeing about the terms of the contract or how the partnership should unfold.

3. Avoid quick fixes. Daley addressed a short-term crisis—a pressing budget shortfall—with what appeared to be a simple solution: a cash windfall from a parking-meter deal. In the midst of an emergency, it’s not unusual for negotiators to seize on seemingly quick fixes. Unfortunately, short-term thinking can lead to long-term problems. To avoid this common error, include disinterested parties in the decision-making process and encourage them to question your judgment.

This article reprinted with permission from the Harvard Law School’s Program on Negotiation’s monthly newsletter, Negotiation Briefings . (For more information see, www.pon.harvard.com.)