Negotiating and Contracting
Negotiating and contracting tests negotiation preparation, styles and tactics, and the translation of a deal into enforceable contract terms. Expect questions on BATNA, ZOPA, concession planning, integrative versus distributive bargaining and the commercial terms that record the agreement.
Core rules and concepts
- BATNA is the best alternative to a negotiated agreement. It sets the walk-away point. A reservation price is the least acceptable outcome; a target is the desired outcome.
- The ZOPA is the zone of possible agreement between the buyer's maximum and the seller's minimum.
- Distributive bargaining assumes a fixed pie and focuses on price. Integrative bargaining expands the pie by trading issues such as payment terms, volume, lead time, warranty and service.
- Preparation covers objectives, issue priorities, tradeables, BATNA, team roles, agenda, location and authority limits.
- A common negotiation sequence is prepare, exchange information, propose, bargain, close and document.
- Concessions should be reciprocal, decreasing and conditional. Never concede without obtaining something in return.
- Contracting records the deal through terms on specification, price, payment, delivery, title and risk, warranties, indemnities, confidentiality, termination and dispute resolution.
Worked example
A buyer needs 1,000 units. Its reservation price is £12 per unit and target is £10.50. The seller's minimum is £9.50 and target is £11.80. The ZOPA is £9.50 to £12. If the buyer opens at £8, it is outside the ZOPA and may damage trust. A better plan is to open near £9.50 with justification, then trade towards £10.50 by offering earlier payment or a larger volume. The reasoning is that the opening should be ambitious but credible, and concessions should buy value elsewhere rather than simply move price.
Traps that cost marks
- Entering negotiation without a calculated BATNA.
- Revealing the reservation price or authority limit.
- Making unilateral concessions without a trade.
- Leaving key terms oral or failing to document the deal.