Contract negotiation

Three key criteria you are likely going to violate next time you negotiate a contract.

Whether a contract is about developing some new software or about designing a loft in Berlin, it all starts with a negotiation. If you are setting up a fixed-price contract you will be negotiating deadlines and price. If you’re working on a time & materials deal, you will be negotiating the fee, be it on a hourly, daily or weekly basis. Each side takes a position, argues for it, and makes concessions to reach a compromise. This is an example:

Customer: “I need some software to invoice my users”
Consultant: “It depends on requirements”
Customer makes requirements as explicit as she can/wants.
Customer: “I want features A, B, C and D. They are all important!”
Consultant: “I need 4 months and €16,000”
Customer: “What? No way. My maximum budget is €7,500!”
Consultant: “Well I could go to €14,000 if you pay €5,000 upfront”
Customer: “Mh, I might consider a serious offer, but…”
Consultant: “I can deliver A, B and C in 4 months for €12,000.”
Customer: “Features A, B, C in three months for €9,000”

And so on…

In software development this minuet is about how many features the team will be able to pack into a finite amount of time, the customer pushing for more features, the developer holding her position to get buffer enough to manage any sudden unplanned problem. The parties start from setting up an exploratory position and then gradually give up. It goes on until they reach an agreement – or not – and then they freeze the deal in a contract hoping the following reality check won’t spoil the party.

Usually it does. But that’s a topic for another post.

Three criteria to judge a contract negotiation

Any method to prepare a contract may be fairly judged by three criteria:

  1. it should lead to a valuable and sustainable agreement, if any is possible
  2. it should be efficient, with no waste of time or money
  3. it should not damage – if not improve – the relationship between the parties

The negotiation approach shown in the little dialogue above is known as positional bargaining and it is the most common way to reach a deal about a contract. It serves some useful purpose because it tells the other side what we want, it helps protecting our interest under pressure and it can sometimes eventually lead to a good deal. But still positional bargaining fails to comply with the basic requirements of producing a valuable agreement, efficiently and amicably.

Negotiating over positions leads to unwise contracts

When parties bargain over positions, they tend to lock themselves into those positions. This ignites a chain of events, because the more the parties make their position clear and defend it against attacks, the more committed they become to it. The more you try to convince the other side of how right your position is, the harder it gets for you to change it. Ego becomes the position and the true value of the agreement starts losing actual priority.

Any agreement reached this way usually reflects a point between starting positions and not a solution carefully crafted to meet the legitimate interests of both sides. The result usually is a contract less satisfactory to each side than it could have been.

Negotiating over positions is inefficient

Positional bargaining takes a lot of time. It creates incentives for a stall to establish. It’s a game based on starting with an extreme position, stubbornly holding it and making small concessions only to keep the negotiation going and so it is for both sides. Each of these factors interfere with finding an agreement quickly.

The more you drag your feet, the more you threaten to walk out of the negotiation, the more you make the other side tired the more likely you are going to win. But all these tactics are also going to increase the time needed to reach an agreement and the chance you don’t even reach it at all!

Negotiating over positions makes an ongoing relationship uncomfortable

In positional bargaining each side asserts what she will and won’t do. Since a party’s success is the measure of the other party’s defeat and viceversa, reaching a deal this way very soon becomes a contest of will. Since the people you are negotiating with try to reduce your reach, it becomes very hard to keep them apart from bitter feelings.

To make this sad scenario even worse, this all usually happens the very first time you meet a new business opportunity, represented by a new customer or a new consultant, conditioning the very moment in which your relationship is established.

What to do then?

Many people think being nice is enough to solve the problem. They hope that following a more gentle style of negotiation will make things easier. The other side is not an adversary, but a friend and they try to focus on reaching agreement instead of their goal, making offers, concessions and giving up as necessary to avoid confrontation.
Such a soft negotiation style leads to two possible outcomes:

  • In case two soft parties meet, the agreement will be highly likely reached and even very soon but it will usually be suboptimal. Both parties will have given up something too soon.
  • In case a soft negotiator faces an hard one, the game will be biased in favour of the hard player, no need to explain.

We play two games: a game and a meta-game.

The point is that every contract we are about to sign brings another negotiation in. It is a sort of meta-contract. The first contract is about the price and terms of the service you are going to buy or sell. The second one, on a higher level, helps structure the rules of the game you are playing and you are going to play in the future. This second invisible contract escapes notice because it is usually negotiated unconsciously. But you know it or not, every move you make trying reaching an agreement will forge the rules of the agreement itself.

Principled negotiation

Instead of accepting a positional negotiation, try changing the game next time you discuss a contract. Try adopting these four principles:

  1. Separate the people from the problem of reaching your goal. People are not computers but still every negotiation passes through people. Figuratively, if not literally, both sides should come to see themselves as working side-by-side, attacking the problem, not each other.
  2. Focus on value delivered, not positions held. Both parties’ constraints are legitimate. Business constraints and technical ones as well are legitimate. Just compromising between positions is not likely to produce an agreement which will effectively take care of the human needs that led people to adopt their positions.
  3. Generate many options before deciding what agreement to sign. Designing optimal solutions while under pressure is very hard. Deciding in the presence of an adversary narrows your vision. Having a lot at stake inhibits creativity. We should learn by lessons learned by designers and generate many options before going on with the selected one enhancing the chance to reconcile differing interests.
  4. Define some criteria to judge the quality of the agreement for both parties. Raw stubbornness may prove valuable while negotiating a contract. However you can counter such an approach by insisting that a single say-so is not enough and that the agreement must reflect some fair standard, independent of the naked will of either side.

To sum up, try negotiating your next contract on these four principles. It will result in a wise agreement, reached efficiently without all the costs of digging into each other positions and keeping people away from the problem, thus making an amicable agreement possible.

Have you ever experienced such a negotiation? What contract you ended up with that time? Tell me more about your past negotiation experience!

Photo by wiertz: https://www.flickr.com/photos/wiertz/4563720850

One thought on “Three key criteria you are likely going to violate next time you negotiate a contract.

  1. Pingback: La meta-negoziazione nei contratti b2b - Alberto Mucignat

Comments are closed.