Negotiating When There Is No Plan B

Idea in Brief The Problem When a company is dependent on one supplier, partner, or customer, negotiators often assume they have no leverage—and end up accepting unfavorable terms or getting boxed into “take it or leave it” ultimatums. The Solution Even when there’s no clear walk-away alternative, negotiators can regain power by thinking more broadly about their options. Partial substitutes, creative work-arounds, unilateral actions, and a deeper understanding of the other party’s dependency can all shift the negotiation dynamics. The Next Steps In addition to exploring partial alternatives, look for the hidden strengths in your own position. Seek out temporary solutions and get tacit approval for them, focus on the players and the process, reframe threats as noncoercive warnings, and appeal to fairness as a forcing mechanism when power dynamics don’t work. We’d been working for several years with one of the world’s largest utilities when we received an urgent call from a senior executive there. “You remember that new power plant we announced we were building so that we could meet promises we’d made to the market for new electricity generation?” he said. “Well, we’re already behind schedule, and the engineering and construction firm we’ve been negotiating with has demanded a huge up-front payment before they start work. We simply cannot afford to pay anything close to that amount. But we have no alternative; we selected them because they were the only company with the capability to build this plant in the time frame we need. We can’t agree to what they’re demanding, they’re refusing to negotiate, and we can’t just walk away. What can we do?” As negotiation consultants, we unfortunately get calls like this all the time. In a perfect world negotiators always have a plan B. In the negotiation literature this is called a BATNA (best alternative to a negotiated agreement), a term introduced by Roger Fisher and William Ury in their 1981 book, Getting to Yes. The concept has several key implications: You shouldn’t agree to any deal if there’s a better alternative; you shouldn’t expect the other party to agree to your deal if it has a better alternative; you should seek to improve your BATNA; and you should at least consider if and how to weaken the BATNA of your negotiation counterpart. In many of the most important and challenging business negotiations, however, there’s no obvious solution other than a deal with a specific party. Because of that, it feels as if there’s no plan B. But we’ve spent a good part of the past 30 years advising companies on hundreds of negotiations (ranging in value from millions to billions of dollars) and training thousands of people on negotiation tactics, and in our experience dealmakers are rarely as constrained as they may believe in such situations, especially if they expand the way they think about their “walk-away” alternatives and about negotiation power dynamics more broadly. Indeed, knowing what to do when there seems to be no plan B is one of the unique strengths of the most experienced and skilled dealmakers. In high-stakes negotiations there often are creative work-arounds, unilateral actions you can take to improve your leverage, and partial alternatives that can shift the balance of power. In this article we’ll take you through the right ways to approach this challenge. The Power of Partial Alternatives When negotiators map out their BATNA, they often search for a complete alternative that addresses every problem. But in many cases such a solution simply doesn’t exist. Instead, the breakthrough comes from identifying options that may not fully replace the deal on the table but can open up new possibilities. These partial solutions, even if limited, can change negotiation dynamics in meaningful ways. Consider a high-tech client of ours that had a long-standing relationship with a supplier of critical electronic components. Because of various considerations, including the required volume of the components, there was no other single supplier that could be a complete alternative to the incumbent. In recent years the supplier had continually raised prices and come up short on quality and performance. As our client said to us, “We can’t live without them, but it’s getting harder and harder to live with them.” After demanding yet another price increase, the supplier refused to engage in constructive negotiations. Our client seemingly was left with nothing but a “nuclear” alternative: live with no deal and with insufficient supplies of several key components, at least for a year or two while it developed and qualified a new supplier. During that time our client would no longer be able to produce certain products and would therefore do lasting damage to some customer relationships—in addition to losing tens of millions of dollars in revenue. That BATNA looked so bad that it seemed our client would be better off taking virtually any price increase from the incumbent supplier. That’s a situation no negotiator wants to be in. But when we encouraged the client to consider anything it could do to meet some of its needs, things started to look brighter. In fact, the tech company was able to identify two smaller suppliers that were qualified to meet design specs and quality standards. Even combined, they had the capacity to meet only 30% of our client’s total required volume, which was steadily increasing. But using them would reduce our client’s dependence on the incumbent supplier and create negotiation leverage. The tech company went back to the incumbent supplier and gave it two options: The company either would commit to 5% higher volume if the supplier agreed to better pricing or would make a materially smaller purchase from the supplier if it stuck to its pricing demands. One possible response from the supplier would have been an ultimatum demanding that our client purchase 100% of the components from it or it would not work with the client at all. The client waited nervously, but in the end the supplier accepted a new price in return for higher volumes. Our client had gained leverage by identifying realistic partial alternatives. During an after-action review of the negotiation, a key insight emerged: Earlier efforts to develop secondary and backup suppliers had foundered because the company underestimated the benefits of sources that could deliver only a very small percentage of its requirements. Looking for a single best alternative had been limiting. Indeed, the more complex the negotiation and the more dependent you are on the other party, the more important it is to seek out partial alternatives. Don’t Negotiate from a Place of Fear Though engaging with alternative suppliers may appear to be a form of brinkmanship, we find that it’s exceedingly rare for a deal to blow up when a company makes reasonable but firm demands. In fact, we have encountered that response only once in the past 25 years, and the circumstances were highly idiosyncratic. When you feel as if you have no alternative, it’s natural to focus on your own vulnerability and overlook the chinks in the other side’s armor. Even experienced negotiators can fall into this trap, fixating on who “needs the deal more” and missing opportunities to gain leverage. But when you broaden your perspective—analyzing not just your own BATNA but also the other party’s alternatives—you often discover hidden strengths in your position. In that light, let’s revisit the concern that the supplier would walk away if the tech company didn’t accept all its terms. The reason this almost never happens is that negotiation counterparties’ dependence on one another is usually more balanced than it might seem. If you rely heavily on a supplier, chances are, it also depends on your business for revenue. The higher the switching costs for a customer, the more painful it usually is for the supplier to lose that customer. Even if one side has more leverage, few negotiators are willing to risk substantial losses just to win a slightly better deal. If you do encounter a counterpart willing to play chicken in this way, it’s best to walk away—or at least start planning your exit. The long-term cost of staying in such a relationship will almost always outweigh the short-term pain of leaving. Drawing on the children’s game rock-paper-scissors, João Santos’s photographs capture play in suspension, leaving the outcome to the viewer’s imagination. Consider a global company we worked with that was highly dependent on a single-source supplier for critical coating materials—meaning no other supplier could provide what this one did. During contract renewal the supplier demanded a 10% price increase while our client was pushing for a 5% reduction. Without a deal, our client faced losing more than $100 million in annual revenue, laying off hundreds of employees, and irrevocably damaging many key customer relationships. Accepting the increase, on the other hand, would hurt margins, EBITDA, and the stock price—and set a precedent for future hikes. The deal represented “only” 10% of the supplier’s revenue—but as we pointed out, losing our client would hurt the supplier more than the raw numbers suggested. It was a manufacturer with high fixed costs, and the product was one of its most profitable offerings. Because this product line was highly specialized, replacing the lost revenue from our client would take time and money because the supplier would need to retool its manufacturing lines to produce coatings it could sell to other customers—which would significantly strain its free cash flow. The takeaway: Even if your alternatives look bleak, it may still be rational for the other side to make concessions. Dependence in negotiations is rarely one-sided, and feeling vulnerable doesn’t mean you lack leverage. Seek Temporary Alternatives and Tacit Consent In situations where the search for a plan B continues to come up empty, expanding your analysis to consider what you can do, even just temporarily, without the agreement of the other side is often the key. When a powerful counterpart says, “Take it or leave it,” even highly experienced negotiators often feel pressured to agree to an unfavorable deal or to walk away and face the equally unattractive consequences of no agreement. But there’s virtually always a third alternative, at least for a while, to decline to agree but not outright reject the other side’s demands. Even when the other party views a refusal to immediately agree as equivalent to permanently walking away, you can usually reframe your response as simply declining to agree right now. Of course, aggressive negotiators will often couple a demand with a deadline. In our experience it’s almost always possible to extend such deadlines, especially with a reasonable justification, often some variation of “We need more time to evaluate and consider.” It can also be useful to explore ways to move forward without explicit agreement. Ultimately, you can’t have a deal unless the other side agrees. But there are different kinds of consent, and in practice we’ve found that distinguishing between active and tacit consent is very useful. Not every action in a negotiation requires the other party’s formal approval. In many cases you can act as long as your counterpart doesn’t object. Understanding when you can rely on tacit acceptance rather than waiting for a clear “yes” gives you more room to maneuver. Take a global microprocessor company we worked with for many years. During a review of its supplier contracts, we found that a top supplier was charging it radically different prices when the same components were shipped to different sites in different countries. In some cases unit prices for one manufacturing site were more than double those for others, independent of shipping costs, which of course legitimately varied by delivery location. The company’s top executives were understandably irate and wanted to immediately contact the supplier and demand consistent pricing—plus a refund for what they deemed overcharges for the past year. Before they did so, we analyzed how the supplier might respond. It turns out it was the only qualified source of the components (a classic “no alternatives” scenario), and in the best case it would take more than a year to qualify a new supplier. While it was possible the supplier would yield to an argument that in fairness it should charge every site around the globe the same low price, we deemed it more likely, given a supply-constrained market, that its response would be that it had been undercharging our client in some cases and to reset all prices to match the highest existing one. The client’s increased exposure under that scenario ran into tens of millions of dollars a year. The microprocessor company decided not to engage the supplier in a formal negotiation over pricing. Instead, it started making payments on all the supplier’s invoices based on the lowest price the supplier was invoicing for its components. When the company paid less than the invoiced amount, it provided a simple note of explanation: “The total due appears to be in error, based on an inappropriate unit price of X. Please see an invoice from your company for the same components at a lower price. We have paid this invoice based on that price.” As we expected, orders continued to be fulfilled without interruption. After a few months our client began to receive letters about underpayment from the sites that were charging higher prices, but the onus for action was now on the supplier. Inertia is a powerful force. Instead of asking for the supplier’s agreement to lower prices to a consistent level, our client simply had begun paying the supplier according to that principle. Meanwhile, the company was saving a significant amount of money every month. In a sense the supplier had agreed to this arrangement—but only in a tacit and passive manner. It could have cut off shipments, but operationally and psychologically, such a move would have been a major escalation, and we rightly assessed that the supplier wouldn’t do so. It took nearly a year before the supplier’s executives formally escalated the issue to our client. They floated the possibility of cutting off shipments, but their tone wasn’t aggressive, and they expressed a desire to negotiate a mutually acceptable resolution. By now the market had cooled a bit, and demand and supply were more in balance; the supplier’s BATNA to our client’s business had weakened. And the client had not been idle; it was now in a position to move to a new supplier if it needed to, although such a move would have entailed risk and wasn’t the preferred outcome. Ultimately, our client and the supplier agreed to a new global contract with consistent pricing at a level close to the lowest price the client had been paying. Focus on the Players and the Process When there seems to be no plan B, negotiators should consider literally anything they can do unilaterally that will help yield a more favorable outcome. We call these procedural alternatives, as opposed to alternatives to an eventual agreement. To uncover them, you need to keep the principal-agent distinction top of mind—that is, distinguish between the company you’re negotiating with and the individual people you’re dealing with. In a recent negotiation we advised on, our client’s business represented only a few million dollars to its distributor—a global company with billions in annual revenue. The distributor’s team repeatedly emphasized that fact when concerns about pricing and one-sided contract terms were raised, implying that our client lacked meaningful leverage. Closer analysis told a different story. While our client’s business was small relative to the distributor’s business as a whole, it was critical to the specific unit at the table—which had only recently been created to focus on our client’s industry. Our client accounted for a substantial share of that unit’s revenue target, giving the client far more leverage than the distributor’s headline numbers suggested. Moreover, our client’s business made up a significant share of the lead negotiator’s personal revenue quota at the distributor. João Santos Our client’s position suddenly looked more promising. But the distributor’s lead negotiator remained inflexible. At one point, in a somewhat heated exchange, she retorted, “I already met my numbers for the year,” implying that she didn’t care whether the client renewed its contract. Was that true, or was she bluffing? Our client’s team worked the back channels and heard that the lead negotiator was out to make a name for herself by closing deals that were much more profitable than those made by her predecessor (who was fired for being too soft, and with whom, as it turned out, our client’s lead negotiator had a very warm and collegial relationship). Our client still had no plan B, and the terms the distributor offered were still not ones it could live with. But we did have some new insights about its alternatives—not to an eventual deal with the distributor but in the sense of possible unilateral actions our client could take to improve its negotiating position. For example, it identified a new competitor to the incumbent distribution partner, one that was much smaller and untested, but hungry. The client was able to quickly negotiate a deal of limited scope (with pricing and terms wrapped tightly under an NDA) with it in exchange for a press release designed to catch the eye of the primary partner. The client also reached out to one of its largest customers (which had a separate, and very large, business relationship with the primary distributor) and enlisted its SVP of sales to reach out to the distributor to advocate on the client’s behalf. Though small, our client was an important partner to his company. And his company and its business were much more important to the distributor than our client was. (It’s good to have powerful friends.) Along the way the client’s team considered escalating the situation to the boss of the lead negotiator at the distributor but ultimately decided that the risks of doing so outweighed the benefits. In the end our client was able to obtain a new agreement with better pricing and more-balanced terms. Its leverage came not from identifying a walk-away alternative but from taking unilateral actions during the negotiation process that put pressure on the other side to be more reasonable. Reframe Threats as Warnings Communicating walk-away alternatives during negotiations is a delicate art. If a negotiator says something like “We’re considering deals with other partners,” it usually leads to a downward spiral of arguments over who has a better BATNA and then devolves to “take it or leave it” threats. So people working on high-stakes deals face a tension between signaling that they’re able and willing to walk away and trying to draw the other side into a collaborative negotiation process. The solution to this quandary is to frame the possibility of alternatives as warnings, not as threats. The latter are coercive (“If you don’t agree, we will immediately cut off all shipments to you”) and invariably trigger defensiveness and counterthreats. Warnings, in contrast, are focused on self-protection, not harming the other side, and thus are far less likely to evoke an adversarial reaction. (“We can’t afford to pay the price you’re demanding. Unless we can negotiate something more reasonable, we’ll be forced to find someone else.”) The distinction is simple, but its application is nuanced. A few years ago we were advising a client on the renewal of a data-licensing agreement worth more than $100 million in annual revenue. The company that owned the data demanded a massive increase in fees that would have significantly undermined the profitability of several new products that relied on that data. Feeling cornered, our client’s executives considered a hardball approach. Their thinking was, If we push back, maybe they’ll back down. If we just accept, we’ll look weak and set ourselves up for more demands in the future. They need our business too—maybe we should make that clear to the market and our customers. Their read of the situation was correct, but their instinct to threaten was risky. When we used simulations to anticipate how the other side might respond to hardball tactics, we discovered that the most likely outcome was a protracted game of chicken, with lost revenue and damage to both sides for many months and a significant probability of no deal at all in the end. We have seen threats work in certain negotiations, but they are rare exceptions. Most people and organizations react badly to coercion and respond with counterthreats. No matter how much money is at stake, egos and emotions play a significant role in negotiations, and once the process becomes a battle of who can exact the most damage, both sides inevitably lose. Ultimately, our client decided to pursue a strategy that openly acknowledged and discussed both parties’ alternatives—but in a nonthreatening way. “We’re not going to pay the new license fee you’re demanding, and if you won’t negotiate something more reasonable, we’re prepared to walk away entirely,” our client said. “Doing so will be very costly for us, as of course you have modeled and estimated. We’ve already begun to draft communications to our customers explaining the situation and offering to help them look for partial competitor replacements. But painful as this would be, it’s a cost we’re willing to pay to show the market (and you) that we won’t be extorted. We have simulated various outcomes, and under most of them, the near-term revenue losses for us are indeed greater than they are for you, but they’re plenty bad for both of us. Over the long term, there’s significant risk for us both and a great deal of uncertainty. We’re happy to share our analysis with you and happy to review whatever analysis you’ve done. But what we’d much rather do is spend time and energy together looking at how to grow the market for your data and our risk and decision-analysis products and negotiate new revenue-sharing models that work for both of us. You decide.” As things turned out, both sides did spend a few weeks exchanging analyses of potential lost revenue and reputational damage, with some attendant posturing. At each juncture the client refused to take the bait of responding to anything that felt like a threat. Instead, it responded with warnings about the consequences that no agreement would have for both sides while expressing a desire to continue and even expand a partnership built on trust and a commitment to mutual benefits. Before long, negotiations were refocused on options for joint market growth, and a new agreement was signed six months later that delivered substantial gains to both parties. When All Else Fails, Try Fairness Negotiations are often framed as a zero-sum game: “Whoever cares least about the deal has the power.” But when the stakes are high, that mindset is limiting. If you don’t care, why negotiate at all? The real challenge isn’t caring less—it’s finding ways to make the other side care more. One effective approach is to shift the conversation from power to fairness, which is a surprisingly compelling human motivator. While it has been proven in experiments that dealmakers often will walk away from agreements that make economic sense if they perceive them to be unfair, our experience shows the flip side holds true, too: People will sometimes make concessions when forced to acknowledge that they’re treating the other party unfairly. Let’s go back to the utility that was facing the unreasonable payment demand from its construction and engineering company. We advised it to neither accept nor reject an ultimatum but to ask why the company was making the demand (and also warn that the number was nowhere close to affordable). That simple move reframed the negotiation from “take it or leave it” to “what’s reasonable?” The people on the other side conceded—not because they lost power but because they couldn’t justify their position. . . . Ideally, you’d be able to identify a viable plan B for all your deals. But when there really isn’t one, adopting an expanded view of power and alternatives can make all the difference. Even if you absolutely must end up with a deal with a specific counterpart, you still have options, and there are often ways to reduce (albeit not eliminate) your dependence on the other side. The best negotiators are those who look beyond the obvious and find creative sources of leverage to influence the negotiation process and their counterparts.

Negotiating When There Is No Plan B

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