RESEARCH & IDEAS

Negotiating in Three Dimensions

Q&A with: James Sebenius Published: October 2, 2006 Author: Martha Lagace

Executive Summary:
"Negotiation is increasingly a way of life for effective managers," say HBS professor James Sebenius and colleague David Lax. Their new book, 3-D Negotiation, describes how you can shape important deals through tactics, deal design, and set-up, and why three dimensions are more powerful than one. Here's a Q&A and book excerpt. Key concepts include: Three-D negotiation comprises tactics, deal design, and set-up. Their use depends on the nature of the barriers you face. A 3-D strategy is an aligned combination of set-up moves that occur away from the table, deal design moves, and tactics at the table, all designed to overcome the barriers you've identified. The best response to a barrier in one dimension may be moves within other dimensions.

Tactics, deal design, and set-up are three crucial components of the most effective negotiations. Yet many negotiators focus only on the tactical part, running the risk of undermining their own best interests. How can you negotiate more skillfully and confidently with clients, partners, and adversaries as well as with colleagues within your organization? In this Q&A, James Sebenius and David Lax, authors of 3-D Negotiation: Powerful Tools to Change the Game in Your Most Important Deals, discuss the common mistakes of negotiators, the power of a three-dimensional approach, why negotiating is an essential skill, and where the science of negotiation is headed. Negotiation is a core competence for life, "not merely an important skill to be wheeled out for special occasions," they argue. James K. Sebenius is the Gordon Donaldson Professor of Business Administration at Harvard Business School and a principal of Lax Sebenius LLC, a negotiation strategy firm. He also serves on the Executive Committee of the Program on Negotiation at Harvard Law School. David A. Lax, a former faculty member at Harvard Business School and investment banker, is now principal of Lax Sebenius LLC.

Martha Lagace: 3-D Negotiation presents a multi-dimensional approach for people who thought negotiation was only about what happens at the bargaining table. What common mistakes do you see and what typical assumptions about negotiation are you challenging? James Sebenius and David Lax: Even experienced negotiators make mistakes in all three dimensions. Let us start with the least familiar kind of mistake. Flaws in our third dimension, the set-up of a negotiation, can take many forms: wrong parties, wrong issues, wrong walkaways, wrong sequence, wrong basic process choices. Here's one common set-up error (among many): It is easy to make one kind of mistake in your choice of negotiating agents. You know the importance of using a skilled and knowledgeable negotiating agent as well as crafting a contract that aligns your agent's incentives with your own. Yet a well-structured contract with your agent may not be enough. For example, top executive pay attorney Joe Bachelder once took his client aside after the first negotiating session. The board had selected his client to be its next CEO and was working out his compensation package. Bachelder informed his client that he would end up with everything he wanted from the negotiation. Why was Bachelder so confident of total victory? Because, he explained, the board had put the firm's well-regarded general counsel in charge of the negotiations. Why was this a mistake? It was not an issue of effectiveness: The general counsel was undoubtedly a skilled negotiator. Yet, as Bachelder happily informed his client, "When this is over, you're going to be that guy's boss. He knows that. He can't fight you too hard on anything." In retrospect, the board made a simple set-up error; it got the parties wrong in this negotiation. For its representative in these critical talks, the board should have hired an outside specialist, with properly aligned interests and incentives. More generally, you should look hard at a potential agent's other interests and relationships to determine whether he or she is part of the right negotiating set-up.

Negotiators sometimes can discover hidden sources of value and then craft agreements to unlock that value and overcome barriers created by poor deal design.
Now let's move to some errors in our most familiar first dimension, face-to-face tactics "at the table." Negotiators listen and communicate poorly, make cross-cultural gaffes, fail to respond effectively to hardball styles, and so on. One of the most common tactical errors arises when people become fixated on their bargaining "positions" rather than probing for the full set of underlying "interests," or what each side really cares about. Failure to uncover interests often leads to mistakes in our second dimension, deal design, such as treating potentially more cooperative agreements as pure price deals in which the interests of the parties are strictly opposed. Consider an example of both kinds of mistakes from the U.S. Midwest. In this case, environmentalists and farmers opposed a power company's plans to build a dam. On the surface, the parties appeared to have deep, irreconcilable positions, which had resulted in a long stalemate. Yet a superior deal could be designed if the parties looked past their stubborn bargaining positions to their underlying interests. By stepping back and mapping the parties' real interests, it emerged that the farmers were worried about reduced water flow below the dam, the environmentalists were focused on the downstream habitat of the endangered whooping crane, and the power company urgently needed new generating capacity and a greener image. After a costly legal impasse that threatened to last for years, the three groups designed a better deal that included a smaller dam built on a fast track, water-flow guarantees, downstream habitat protection, and a trust fund

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to enhance whooping crane habitats elsewhere. Working solo or jointly at the drawing board, negotiators sometimes can discover hidden sources of value and then craft agreements to unlock that value and overcome barriers created by poor deal design. Here are some questions to ask the next time your talks seem stalled for deal-related reasons: Is price truly the only issue? Can we unbundle different aspects of what looks like a single issue and give each side what it values mostat low cost to the other side? Are there other high-benefit, low-cost trades? Should we add value-creating contingencies and risk-sharing provisions to the contract? Can the contract cope not only with economic issues but also with the egos involved? These are but a few of the many common negotiating errors we see in practice. Q: Your 3-D alternative draws on three dimensions: tactics, deal design, and set-up. In a nutshell, what do these elements mean individually and together? Should a negotiator weigh them equally, especially under time pressure? A: Whether your focus should be on one or a combination of tactics at the table, deal design, or set-up moves away from the table depends directly on the nature of the barriers that you face. When you have a potential deal in mind, we have developed a set of tools to quickly perform what we call a "3-D barriers audit" to determine what barriers stand between you and your desired agreement. While there are many specifics, the broad diagnostic questions follow our three-dimensional scheme. First, you should ask whether it is a tactical or people-related barrier like communication, trust, misperceptions, or the like. Second, you should ask whether the problem is deal-related: Does the proposed agreement offer sufficient value to the parties to be more attractive than no deal? Does it accomplish their objectives? Third, are there set-up problems such as wrong parties, interests, no-deal options, sequence, or basic process choices? When talks stall, it's tempting to jump to conclusions: "It's purely a price gap." "They're being unreasonable." "We're not communicating well." "We're in a weak position." Instead of focusing on the first explanation that leaps to mind, you should critically diagnose the key barriers to the kind of agreement you have in mind; this will then allow you to devise the most promising approach to overcoming them. Without an accurate barriers assessment, the strategy and tactics you craft may address the wrong problems. Imagine that a supplier is negotiating with an important but difficult client who adamantly refuses to budge on certain contract terms. Assuming that they face an interpersonal or

tactical barrier, suppliers often seek training on the principles of persuasion, joint brainstorming, how to make advantageous initial offers, body language, and so on. Yet apparent tactical or interpersonal barriers may actually be another type of problem. More broadly, the best response to a barrier in one dimension may be moves within other dimensions. As the purchasing agent calms down a bit, for example, he mentions that cash is very tight, "especially this quarter." Is this a deal-design barrier? Perhaps a delayed payment schedule would do the trick, with the bulk of the payment due when procurement budgets are replenished. The frustrated supplier also may be overlooking a fundamental set-up barrier. While top management from both firms might speak of the importance of "partnership" and "quality," the purchasing agent may be motivated by monthly targets and pennies ground out of suppliers. To succeed, the supplier may need to create a more promising set-up with more sympathetic parties involved in the negotiation.

When talks tempting to conclusions.

stall, jump

it's to

This can mean finding and nurturing an influential internal champion on the other side who would truly benefit from added quality and service. The supplier might induce such an advocate to persuade the agent on her behalf, directly or via links to senior management. Beyond a good proposal and the effective interpersonal skills needed in the initial two-party negotiation, a three- or four-party set-upinternal champion plus senior management in addition to the supplier and agentcan maximize the odds of the supplier's success at the ground level. The broader point is to do a 3-D barriers audit, then craft a 3-D strategy to overcome those specific barriers. A 3-D strategy is an aligned combination of set-up moves away from the table, deal design moves "on the drawing board," and tactics "at the table" all tailored to overcome the barriers you've identified. Q: One-on-one negotiations are often tough, but the complexity is magnified during multiparty negotiations, especially when some of the interested parties are not obvious. How do you advise flagging all key influencers? A: To get the set-up of a negotiation right, you need to get the parties right. You might think that the parties are simply you and the person on the other side of the table, but it is often much more complex, requiring an act of disciplined imagination rather than a mechanical list. In our new book, we

systematically work through ways to get the right "all-party map." In a nutshell, you need to take a disciplined look beyond the usual suspects to figure out who might really matter: potential and actual parties, internal and external players, principals and agents, decision makers and influencers, allies and blockers, and high- and low-value parties, as well as those who must approve and implement the deal. Map the relationships among those on your all-party map by assessing the informal as well as the formal decision and governance processes. For example, to improve the odds of your ultimate target saying "yes," we often use a process called "backward mapping." Start by trying to discern who influences the target player and to whom that player defers. For example, when we were advising a client who was eager to sell his company, we counseled him against his instincts to quickly open serious negotiations with a potential acquirer's CEO. Instead, we researched whom the CEO would turn to regarding acquisitions. Of course, his CFO would be pivotal. Continuing to map backwards from the CFO, we turned up an analyst in the finance department whom the CFO deeply respected and who would almost certainly do the valuation work on this somewhat unorthodox deal. After initial contact with the CEO, we spent a great deal of time ensuring that the key analyst bought into the deal. When intensive negotiations finally began with the CEO, the groundwork had been laid. The CEO turned to his CFO, who turned to his key analyst, who made our case from the inside. Q: You've asserted that negotiation should be a core skill for virtually all managers. Why? How can managers who are not directly involved with deal making assess and hone their own skills on a regular basis? A: Most important managerial problems involve people whose interests and perceptions are in some conflict. Effective management and leadership often depend on the capacity to envision and bring about sustainable agreements among these parties. This is true with respect to discrete transactions such as mergers, labor contracts, and out-of-court settlements. It is true when working out new supplier and customer relationships, dealing with large shareholders and creditors, as well as initiating and managing cross-border strategic alliances. It is true inside the firm where people from different functional areas and divisions need to reach and implement new cooperative arrangements in response to change. It is true with respect to conflicts arising from the interaction of businesses with governments as well as with environmental and other nongovernmental organizations. It is true as workforces become more diverse and business increasingly crosses borders and cultures. And it is endlessly true for entrepreneurs who must come to productive terms with investors, potential employees and board members,

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technology partners, distributors, and possible acquisitions as well as would-be acquirers. Yet beyond such formal deals, negotiation is increasingly a way of life for effective managers for at least three sets of reasons. First, formal authority, hierarchy, and command are less and less able by themselves to ensure productive cooperation and genuine commitment. This is the case internally where cross-functional and inter-unit coordination is crucial and where greater professionalization means that key employees and colleagues both have and value more autonomy. It is also true externally with an increasing number of influential stakeholders outside the traditional chain of command. Newer and flatter organizational formsstrategic alliances, joint ventures, tightly-knit supply chains across different firms, virtual corporations, network entities, as well as team-based processesgenerally require almost continuous negotiation to function effectively. Second, the sheer pace of change in markets, technologies, and competition puts a sharply increased premium on the capacity of organizations to flexibly respond by devising new arrangements and renegotiating the old ones. Salient examples requiring some truly complex negotiations include the convergence of computing, telecommunications, and information/entertainment sectors as well as a steady flow of restructurings, especially in heavily leveraged parts of the corporate, financial, and real estate sectors. Operationally, "flexibility" in the face of a faster pace of changecombined with an increasing number of influential stakeholdersmeans that yesterday's arrangements must be reworked into today's, and that today's will have to be altered to meet the needs of tomorrow. Persuading key stakeholders to abandon familiar practices and perceived entitlements can severely test a manager's negotiation skills. Third, increasing demographic diversity of the work force and genuine globalization of business raise the risks of unproductive cultural misunderstandings and costly conflict. These outcomes can often be prevented or mitigated by effective negotiation. In short, negotiation has always been a useful skill for managers to deal with disputes and to make deals. But with more influential stakeholders, with authority and hierarchy necessary but decreasingly sufficient, with looser organizational forms, with an increased pace of change, and with greater diversity and global reach, negotiation assumes greater importance. For effective managers, it is a way of life, a new core competence, not merely an important skill to be wheeled out for special occasions. To hone their negotiation skills, the first requirement is to recognize the prevalence of formal and informal negotiating situations. Then, naturally, we suggest becoming familiar with the framework of 3-D negotiation. Much like the job of a manager, 3-D negotiation is not

merely an interpersonal task, but also a substantive one (designing value-creating arrangements), and an architectural one (getting the set-up right to induce maximally productive cooperation). Q: Given geopolitical tensions today, what are the complexities of the challenges facing professional negotiators whose work is very high-stakes? If it's possible to generalize, how do you view the skills and practices of most negotiators working on high-stakes issues? Are there large or different "skill issues" compared to previous periods of time you've witnessed? A: There is a fruitful dialogue underway between people negotiating business, legal, and financial deals and their international counterparts faced with life-and-death negotiating challenges. Each group can learn important lessons from the other since there are remarkably many similarities. Here at Harvard, we have initiated and hosted an annual Great Negotiator Award series over the past six years, sponsored by an inter-university consortium of Harvard, MIT, and Tufts through the Program on Negotiation. Honorees have included such figures as George Mitchell, Charlene Barshefsky, Richard Holbrooke, Lakdhar Brahimi, Stuart Eizenstadt, and Sadako Ogata. We've written detailed cases on the most challenging negotiations faced by these remarkable men and womenwhether ending the war in Bosnia, creating an interim government in Afghanistan, crafting a U.S.-Chinese trade deal over intellectual property, or getting Protestants and Catholics in Northern Ireland to come to terms. By spending intensive time with these great negotiators, writing cases on their most challenging deals, and relentlessly probing their thought processes and approaches to some of the world's most difficult negotiations, we are able to add even more valuable source material to our intellectual and practical treasury. For example, when you asked above about how to get the right parties involved to set up the most promising negotiation, we might have drawn on the experience of one of our awardees, veteran U.N. diplomat Lakdhar Brahimi. Prior to his recent efforts negotiating interim governments in Afghanistan and Iraq, he took the lead in ending the bloody, seventeen-year civil war in Lebanon. Should the negotiating set-up simply include the leaders of the warring factions? No. As Brahimi recalls: we met in Jedda [Saudi Arabia] to discuss our plan. We needed the Americans with us. We needed the United Nations with us. We needed France with us because France was very close to the Christians and we needed the Vatican, which is a very important player there. So we went to Beirut, Damascus, Baghdad, Paris, Rome, Washington, New York, London, Moscow, and Beijing. That is the first step to make sure that all the people who carry some

influence are really on board. You'll find the counterpart of Brahimi's thought process in many complex private-sector deals. And this is but one relatively straightforward example. Q: You have a chapter coming out in the new book Advances in Decision Analysis called "Negotiation Analysis: Between Decisions and Games." Please tell us more about the emerging field of negotiation analysis and what it could mean for managers. Where do you see this field going in the future? A: This fairly technical chapter, mainly written for scholars and specialists, is Jim's current take on the field increasingly referred to as "negotiation analysis" that was pioneered by HBS emeritus professor Howard Raiffa, to whom both of us owe a great deal. Raiffa's approach essentially joins two initially separated intellectual traditions, the descriptive and the prescriptive. For many years, cognitive and social scientists performed careful laboratory experiments to determine what subjects actually do in negotiating situations, typically where better performance is rewarded with good money. This work led to many insights, but was fundamentally descriptive in nature. Meanwhile, largely in parallel, decision and game theorists typically analyzed what ultra-rational people would (or should) optimally do when interacting with other similar beings in negotiations. Of course, real people do not typically act in the ultra-rational manner assumed by such "symmetrically prescriptive" models. Howard Raiffa's intellectual innovation, since furthered by others such as HBS professor Max Bazerman, was to make his highly rational prescriptive advice conditional on the most empirically accurate description of what people actually do, often as studied by behavioral scientists. In a nutshell, this is the intellectual approach of negotiation analysis: to generate the best possible advice to one side given the most faithful possible descriptions of likely behavior of the other side or sides. We have contributed to all aspects of this negotiation analytic quest, both theoretical and empirical, but especially by extensive fieldwork studying great negotiators and challenging negotiations. We've also spent years, as part of each of our nonacademic careersas investment bankers, entrepreneurs, and in government agencies such as the State Departmentboth doing deals directly and advising on them. This long-term engagement with deals and dealmakers has left us increasingly dissatisfied with the "one dimensional" model that dominates most current thinking about negotiation. This model is primarily focused on the face-to-face tactical interplay "at the table." Extensive field observation and analysis has led us to codify the 3-D approach in which moves away from the

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table set up the most promising situation. Of course we are hardly alone. Exceedingly popular negotiation courses for MBAs and executives abound at major business schools. Negotiation analysis, in all its three dimensionstactics, deal design, and set upis the province of a wide range of scholars. We're very bullish on the field. Excerpt from "Get the No-Deal Options Right," 3-D Negotiation: Powerful Tools to Change the Game in Your Most Important Deals, by David A. Lax and James Sebenius. Editor's Note: Often stuck in a tired "win-win vs. win-lose" debate, many negotiation books focus exclusively on face-to-face tactics at the table. Yet, hard or soft, table tactics are only the "first dimension" of David A. Lax and James K. Sebenius' new "3-D negotiation" approach, developed from their decades of doing deals and analyzing great dealmakers. Moves in their "second dimension"deal designsystematically unlock economic and noneconomic value by creatively structuring agreements for the long term. But what really sets the 3-D approach apart is its "third dimension": set up. Before even showing up at a bargaining session, 3-D negotiators ensure that the right parties have been approached, in the right sequence, to address the right interests, by the right process, and facing the right consequences of walking away if there is no deal. This new arsenal of moves away from the tableto set up or reset the situation most favorablyoften has the greatest impact on the negotiated outcome. Superior set-up moves plus insightful deal designs can enable you to reach remarkable agreements at the table, unattainable by standard tactics. Several elements of a negotiation comprise its set up: the actual and potential parties, the full set of their interests, each side's best no-deal option, the sequencing, and basic process choices. Great negotiators work hard to ensure that all these elements add up to the most favorable possible set up. In this excerpt from 3-D Negotiation, Lax and Sebenius introduce one critical set-up factor: each side's best no-deal option, or walkaway. The negotiating implications of what you (and your counterparts) would do in the event of no deal has a long history, but has been most memorably captured by Roger Fisher, Bill Ury, and Bruce Patton in Getting to Yes as the "BATNA," or Best Alternative to Negotiated Agreement. Lax and Sebenius take this idea several steps further in their introduction to the importance of each side's best no-deal option. Excerpt: Many inexperienced negotiators think that they must hang on at all costs until a deal is done. But they'd be wise to listen to the words of Robert Rubin, former U.S. Secretary of the Treasury and cochairman of Goldman Sachs:

"When others sense your willingness to walk away, your hand is strengthened Sometimes you are better off not getting to yes."1 Both the perception and reality of no-deal options play a key role in most negotiations. Let's get really basic for a moment: Contrast two distinct situations in which you might negotiate with a new car salesperson. Situation 1: The salesperson has the strong impression that you have firmly decided on the car of your dreamscall it car Aand it is right there on his lot. You are obviously a serious buyer. As you settle into the chairs in front of the salesperson's desk, your spouse tells you firmly, "Honey, we've looked for a long time and we've seen absolutely nothing. Our old clunker may not even make it off this lot. This car is perfect!" Now you sit down to talk price. Situation 2: The salesperson sees you debating with yourself whether you really prefer car A (same as previous) that's right there on his lot, or a car (car B) that's at a different dealership. This time your spouse exudes ambivalence: "Honey, I think I prefer car B." Yes, you like car A a lot, but car B has a few features that you clearly prefer, and it is also priced below car A. In this scenario, you are negotiating the price of car A in order to help you decide whether to choose it over that other nice car, which you also like a lot, but, conveniently, is elsewhere, but not too far away. Now you sit down to talk price. It won't surprise you to read that you are likely to strike a far better price in Situation 2in which you appear to have an excellent no-deal option and the willingness to choose itcompared with the price you work out in Situation 1, in which you appear to have no good alternative to car A. Much more broadly than this simple situation, getting the set-up right means getting each side's no-deal options right. And getting no-deal options right is fundamental to each side's choice of "yes" or "no." Should you ultimately say "yes" to a proposed deal? The answer to that question depends on more than simply the value of that deal. It also depends on a comparison of your options in which you determine whether, to you, the value of saying yes exceeds the value of saying no. Sometimes, going back to Rubin's words, you are better off not getting to yes. And the same logic, of course, holds true for your counterparts across the table. The particulars of a proposed deal define the value of "yes." But how is the value of "no" determined? It depends on how well your interests are served by choosing your best "no-deal" optionthe most promising course of action you would take if you decided to say no to the proposed deal. Along with getting all the parties right and mapping their interests accurately, understandingand often

shapingeverybody's best no-deal option is the third fundamental element of a negotiation's set-up.2 Your best no-deal option may involve simply walking away and doing without any agreement. (What will the consequences of that course of action be?) It may involve going to another dealer, supplier, or buyer, making something in-house rather than procuring it externally, going to court rather than settling, forming a different coalition or alliance, or taking a strike. In the case of multinational peace talks, one nation's best no-deal option may involve anything ranging from the imposition of economic sanctions all the way up to the unilateral use of forceblockading, bombing, or invading. And, in the course of negotiating, your best no-deal option may be to continue the process, perhaps in the hope of a better offer. In all cases, assessing your no-deal option helps establish the critical relevant threshold: as compared to what? Meanwhile, of course, the other side is (at least informally) making its own assessment of its best no-deal option. When we work with our clients, we frequently talk in terms of the "deal/no-deal balance." Picture an old-fashioned scale with two pans. On one of the pans you stack up the value of your best no-deal option, and on the other pan, you stack up the value of saying yes to the proposed deal. As the negotiations proceed, you regularly "check the scale," metaphorically speaking, to see how your deal/no-deal balance looks. Although the negotiations often focus on the "yes pan," your actions as well as outside-world factors may be affecting the "no pan," as well. Plus, the other side may have its finger on the scale too: busily improving its no-deal optionsand, perhaps, trying to worsen yours. Whatever is going on in the negotiation, your best no-deal option sets the hurdlein terms of the full set of your intereststhat any agreement must clear to be acceptable. Ditto for them. All too often, negotiators get caught up in intense tactical interplay at the table. It feels like that's where the action is, and where your attention should be focused. Many negotiators, even experienced ones, pay insufficient attention to (1) their best no-deal option, and (2) the deal/no-deal balance. In too many cases, they treat their no-deal options mainly as afterthoughts, rather than as primary elements of the set-up. This can be a fatal mistake. Like parties and interestsno-deal options are foundational to favorably shaping the set-up: defining necessary conditions for any deal, strongly influencing outcomes, and often suggesting actions away from the table to set up more promising situations. In the balance of this chapter, we'll present five prescriptions for using the power of no-deal options to drive great deals. 1. Use your best no-deal option, and

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2.

3.

4.

5.

those of the other negotiating parties, to determine whether and, if so, where a zone of possible agreement exists. Make sure the other side sees you as ultimately able and willing to walk away. When your counterpart(s) perceives a credible increase in your willingness to walk awayespecially in the direction of an attractive no-deal optionyour at-the-table outcomes often improve. Therefore, take steps to improve your best no-deal option and consider actions to worsen that of your counterpart. Take care to protectand do not inadvertently weakenyour no-deal options. Consider worsening your own no-deal option in certain very carefully selected circumstances. When diagnosing a potential negotiation, use your understanding of no-deal options to distinguish between those situations in which negotiation can play a major role and those in which it must play a lesser role.

Determine if a zone of possible agreement exists

One simplified way to view negotiations is to see them as a sort of tug of wara battle that takes place along an adversarial line segment (the "rope"), with the seller tugging toward "high" and the buyer tugging toward "low." The buyer's closely-guarded true maximum determines the one end of the line segment (i.e., the maximum acceptable price if there is to be a deal), and the seller's equally well-guarded true minimum bounds the other end (i.e., the minimum acceptable price if there is to be a deal). It doesn't much matter whether the tug of war concerns the price of a car or a house, an insurance settlement, or the sale price of a company. In all cases, you should keep the mental image of the "price line segment" in mind; it has a very tight relationship to each side's best no-deal option. Your best no-deal option, again, is the most attractive course of action you could take in the event of no agreement in the current negotiation. The value you place on your best no-deal option sets the barin terms of the full set of your intereststhat any agreement must exceed to be acceptable; this is also true for the other side. As such, no-deal options imply the existence or absence of a Zone of Possible Agreement (ZOPA), a bit of jargon we find useful. The ZOPA simply means the set of possible agreements that is better for each side, given its interests, than its best no-deal option. Suppose that the seller's true minimum falls

below the buyer's true maximum, as depicted in Figure 6-1. In this case, a potentially profitable ZOPA exists; that is, agreement can be better for each side than the value of its best no-deal option. To be more concrete, let's say that Joe is selling his condo and has an acceptable offer (to him) for $450,000. Betty, meanwhile, would pay up to $500,000 for Joe's condo, rather than (a) buying another condo or (b) doing without a condo. The Joe-Betty ZOPA, therefore, obviously exists and is the set of prices between $450,000 and $500,000. Of course, it's easy to imagine a scenario with no ZOPA. For example: If Joe already had a $500,000 offer while Betty could buy exactly what she wanted elsewhere for $450,000, there'd be no ZOPA for Joe and Betty. Each side typically knows its own limits, which it must continually assess and reassess as new information unfolds. The problem is that many negotiators have only a hazy sense of their own no-deal options, or how to value themespecially when it comes to more complex no-deal options than the simple buy-sell price deal we've been using to illustrate our points so far. If Joe and Betty were involved in trying to settle a major class-action lawsuit, rather than selling and buying a condo, the no-deal options would be considerably more difficult to calculate. Let's see how accurately assessing the true ZOPAtrivial in theory, but tricky in practicecan be immensely profitable when done well. Sometimes the most important attributes of the other side's no-deal options can be invisibleunless you actively look for them. We once advised an American firm during a lengthy negotiation with a major Japanese company. The stated goal of the talks was to create a large-scale joint venture under Japanese control. In fact, creating this joint venture would represent a sale of about two-thirds of the U.S. firm, permitting it to concentrate on what it felt to be another business line with higher potential. During an excruciatingly detailed, two-year process, the negotiations were suspended several times, due to what the Japanese negotiators described as a "breakdown of its internal consensus process." Each time, however, the Japanese managed to resume negotiations, after painstaking internal efforts to rebuild and strengthen consensus within their company on the central role of the deal to their long-term global strategy. When a European firm unexpectedly made a tender offer for the entire American business, the Japanese firm suddenly had to fish or cut bait. When the Japanese signaled their intention to intensify the negotiationsin part to head off the Europeansnegotiators for the U.S. firm reassessed the ZOPA on price: that is, the least that the U.S. firm would accept and the most the Japanese company would pay for majority control of the part of the U.S. business to be

contributed to the joint venture. Obviously, the price ZOPA depended on financial valuations, including the strategic benefits and costs to each side of completing the transaction. Yet, at the very last moment before the U.S. board was about to authorize its negotiators to proceed in the final deal process, we pressed our client to think once again about the reality of the Japanese no-deal option. We quickly reviewed the other strategic options open to the Japanese firm and confirmed their undesirability. This last-minute, deeper look at the Japanese situation, moreover, began to focus our collective attention on the internal consequences of no deal to our Japanese counterparts. Having worked through a grueling consensus process, virtually everyone at the Japanese companyfrom the major owners, to the board to senior managers, to all those subunits that had required that massive persuasion effortwas deeply committed to doing this deal. The company was cash-rich, so minimizing the price of the deal was important, but not central. Armed with this understanding, the U.S. negotiators were able to leverage the Japanese company's nearly irresistible organizational momentumthe firm had spent over two years mentally integrating the U.S. operations into its long-term strategy. Now, rather than face the extreme internal organizational costs of "losing," the Japanese firm agreed to pay an extraordinarily high amount for the U.S. firm, far more than would have been the case absent the frustratingly lengthy consensus process. (In fact, it was almost triple its share price at the outset of the process.) One American negotiator described how, in effect, the Japanese entity had "fallen in love" over time with its targetand paid the price. This exceedingly profitable outcome (from the American point of view) probably would not have been possible had the U.S. negotiators thought of the transaction in conventional valuation terms and focused on external no-deal options. Instead, the other side's consensus processwhen recognized by the U.S. side as affecting the Japanese no-deal optionwas used to recognize that the true ZOPA extended well beyond what would otherwise have been justifiable. Excerpted by permission of Harvard Business School Press from 3-D Negotiation: Powerful Tools to Change the Game in Your Most Important Deals. Copyright 2006 David A. Lax and James K. Sebenius; all rights reserved. To order, please call (800) 988-0886 or purchase online: http://harvardbusinessonline.hbsp.harvard.edu/. 1. For these quotes and many other descriptions of Rubin's approach to negotiations, see R. E. Rubin and J. Weisberg, Uncertain World: Tough Choices from Wall Street to Washington (New York: Random

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House, 2003), 118, 168. 2. Negotiation experts Roger Fisher, Bill Ury, and Bruce Patton coined a useful acronym to capture this concept: BATNA, short for best alternative to a negotiated agreement. See R. Fisher, W. Ury, and B. Patton, Getting to Yes: Negotiating Agreement Without Giving In (New York: Penguin, 1991). We like the term, but have used "best no-deal option" instead simply to avoid jargon. The importance of no-deal options has quite a long intellectual history and many implications for bargaining, which we first detailed in our article "The Power of Alternatives or the Limits to Negotiation" (Negotiation Journal 1, no. 2 [1985]: 163-179).

About the authors

Martha Lagace is Senior Editor of HBS Working Knowledge. David A. Lax is a former faculty member at Harvard Business School and an investment banker. He is now a principal of Lax Sebenius LLC, a negotiation strategy firm. James K. Sebenius is a principal of Lax Sebenius LLC. He is the Gordon Donaldson Professor of Business Administration at Harvard Business School and serves on the Executive Committee of the Program on Negotiation at Harvard Law School.

Figure 6-1 The ZOPA (Zone of Possible Agreement) as a Battle Line Seller's Buyer's minimum maximum

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