A quick review of value-creation in negotiation
Negotiation doesn’t need to be a win-lose contest where more for you means less for me.
Roger Fisher and William Ury made a compelling case for that proposition in their 1981 book Getting to Yes.1 Creative trades stemming from the parties’ differing interests and priorities can often expand the pie of value for all concerned. That was a big break-through in how people thought about and conducted negotiations. Now it’s widely understood
But five years later, David Lax and Jim Sebenius’s The Manager as Negotiator, raised a caution flag. The authors were fully on board about potentially expanding the value-pie but put a spotlight on the problem of dividing it. Specifically, they spoke of the "tension between creating and claiming value,” as they put it.
Yes, if I share my priorities when negotiating with you and you reciprocate, we can maximize joint value. But I might lie and claim I have a great offer from someone else, to give the impression that this deal isn’t worth very to me. I’d still be able to discern the real size and shape of our pie, and thus be able to grab the larger share of it. But if you likewise lie, neither of us will be able to see how much value we really can create. Then we’ll be back in win-lose land.
Over the years, other authors have written about the divide-the-pie dilemma, but few, if any, have made it the central element of their work. Now Yale economist Barry Nalebuff has done so superbly in his just published, Split the Pie: A Radical New Way to Negotiate.
I highly recommend the book. It offers a fresh perspective on the negotiation process, along with lots of sound advice. It’s often funny, to boot. I don’t buy his entire argument, but it is so well reasoned and expressed, thinking hard about where and why I disagreed was good mental exercise. (That could be true for you, as well.)
BATNAs and bargaining power
Nalebuff challenges common myths about negotiation. At the top of his list is, “The better your BATNA, the greater your power.”2 He says that statement is flat-out wrong. I completely agree.
Relative bargaining power is influenced by many factors. Perhaps the greatest one is the potential value that you can provide to your counterpart. That depends, of course, on their needs and their options.
Yes, having a good walk-away yourself always helps. Say you’re negotiating with a prospective employer after already getting an outstanding offer from another firm. That takes the pressure off for you, naturally. And it may give you the courage to ask for an even better deal. If they say no, you’re still in great shape.
But you may have a lousy BATNA and still get a great deal. Nalebuff cites an example that I described in a post here last year, “Teddy Roosevelt: The Secret of Bargaining Power.”
With the 1912 presidential election looming, TR’s campaign was in a desperate position. It had printed and was ready to distribute 3,000,000 copies of a pamphlet featuring a copyrighted picture of TR, but nobody had secured permission to use the photo. Nevertheless, the campaign was able to strike deal in which rather than paying the studio, the studio paid them!
BATNAs and dividing the pie
Here’s where I’m intrigued by Nalebuff’s argument, but not convinced. (I’m looking forward to your comments on this.) In a nutshell, he maintains that the size of the pie is bounded by the respective BATNAs of the parties. He draws two conclusions from that:
The better an agreement is for each of them individually, the more joint benefit will generated. True. No doubt about it.
Since each party’s assent is essential for agreement, Nalebuff concludes that “each has equal power. For this reason, you should split the pie evenly.” Umm . . . not necessarily so.
There are times when a 50/50 split is fair. But not always. What people contribute to a venture, in dollars, time, and effort are legitimate considerations, as well. Here’s a simple example.
Let’s say that the Smith’s must have their entire yard mowed today. It’s huge, so this is a six-hour job. The owners are prepared to pay local teenagers $15 an hour. Alice is ultra-capable but only has five hours free at the most. Brian, who is equally good, is even more time-pressed and can only do one hour. Neither of them has any other paying opportunities today, so both their BATNAs are zero, (dollar-wise, at least).
Using Nalebuff’s scale, Alice and Brian should split the $90 payment equally, $45 each, since neither party could have done the deal without the other.
But that hardly strikes me as fair. That would mean that Alice would get $9 an hour for her time and effort, while Brian would be paid at a $45 hourly rate. I’m not saying that Nalebuff is wrong and I am right. Rather it is that we both agree on the principle of equal treatment, but we disagree about how that’s calculated.
There’s another issue with Nalebuff’s 50/50 split rule. On the surface, it has the virtue of simplicity, at least in theory. But application is another thing. BATNAs are hard to calculate in practice. In the real world our nonagreement options are often fluid. In the course of negotiating, they may improve (if someone gives us a better offer) or they may deteriorate (if our fallback deteriorates).
Moreover, there’s the problem of monetizing subjective factors. I may be more eager to do a deal with you, whom I’ve worked with productively, than with a stranger with whom I have no experience. That familiarity expands the pie from my point of view, but it’s not easy to put a price on it.3
Nalebuff’s split-the-pie principle is at the heart of his analysis. I’ve just stated a couple of big caveats. So, why am I so enthusiastic about his book? It’s because he’s illuminated an all-too-long ignored aspect of negotiation—both in theory and in practice.
Nalebuff advises discussing ground-rules upfront in negotiation, including the principles for distributing the potential pie, be large or small. His even-split formula could be as good a starting point as any. You and your counterpart might sign on to his principle. Or you might propose a different standard.
Whichever path you follow, the ground-rules exercise will keep the fairness factor front and center, just as it should be, as the negotiation unfolds.
P.S. For more on Split the Pie, see an interview with Professor Nalebuff here:
(You can fast-forward for five minutes to get past content about the organization hosting the video.)
Housekeeping
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Be well! Mike
Bruce Patton joined was co-author for the second and all subsequent editions.
In negotiation-speak, your BATNA is your walk-away option, what you’ll do if you don’t come to agreement. BATNA stands for Best Alternative To a Negotiated Agreement.
An economist might say that the premium I’d pay to continue working with you reveals the incremental value of our positive relationship. I suspect that the weight I’d attach to it could depend on my mood on a given day.
Regarding the yard example, indeed Alice needs Brian as much as Brian needs Alice. So from a rational perspective they should go ahead with the 50% split since it's better than nothing. Then comes in the emotional issue of fairness that game theory is a bit weak on: Alice will deem that this is not fair, Brian may submit and go for a ratio approach which means that they settle in a new type of arrangement based say on time percentage split. Or Brian will play hard to get, Alice feeling cheated will scrap the whole deal, and a third player Tony will come in and usurp the business from both Alice and Brian. Great post,/tx