Project Management 4
Risk Management 4
Decision Making 4
During preparation and during negotiation, most focus on how to split the pie, i.e. value capture. This is natural, as the simplest negotiations are “fixed pie”, i.e. if I get more, you get less. Fixed pie negotiations are how children learn the art, and yet too many of us never proceed past the focus on value capture. Value capture is important, but it is not value-creating. Before deciding how things should be divided, give long and serious thought to how they might be multiplied.
Consider everything you have, know, and can do, relative to the topic of negotiation. Some of these things will be highly valued by you, and some will be highly valued by the party with whom you’re negotiating. Whenever you find disagreements re: value you have a chance to create value! This is not always intuitive, but it’s the most powerful concept in negotiation. It merits an example. Let’s imagine that doing a deal is worth $100 to you, and $100 to your counterparty. You are each incentivized (by the $100) to do the deal. Great. Now imagine you could run an analysis that made the deal worth $1,000 to your counterparty, and the analysis cost you $10 to run. Now the deal with the analysis is worth $90 to you, and $1,000 to your counterparty. The total deal value without the analysis is $200. The total with the analysis is $1,090. Clearly, there has been value created. Kudos! Don’t jump immediately to value capture, however – keep searching for more ways that you can either do things today that:
- have asymmetric value between the parties (as in the example above),
- have low or no cost but add value to one or both parties (e.g. writing a nice joint press release), or
- place bets on different assumptions of future outcomes (as in the example below).
The most common place that people disagree in a negotiation is about future outcomes. Typically, one party believes outcomes will be more likely and more valuable. If each party bets on what they believe to be the more likely outcome, value is created. Think about it – if I am certain the drug I’m out licensing will be approved, I may “place a bet” on this outcome by requesting a $100M milestone upon approval. If my counterparty thinks there is no chance of approval, they’ll be happy to accept the milestone (we leave the question of why they’d want to in-license the asset in this overly-simplistic example to the reader!). In their spreadsheet, their probability is zero, so adding the milestone has no impact on their costs. The deal value is not affected. From my perspective, the value of the deal just went up by $100M. The total deal value therefore went up by $100M. Not bad for a day’s work.
At the outset, ensure you’re both committed to creating as much value as you can, and to the concept that value created should be equitably shared, and you may be able to make your deal far more valuable overall… and to you.
During preparation, and during the negotiation itself. Word to the wise: once you’ve got a deal hammered out, congratulate the counterparty, write down the agreed-upon terms, and invite them to take 30 min to see if there are other ways to create value, together. If both parties like the idea, wonderful! Add it to the terms. If you don’t find anything new, wonderful! You’ve already begun working collaboratively with you new partner… before the contract has even been signed.
Value creation is the most basic, and most powerful function of a business. A negotiation is one time when that function is translated into something tangible. Don’t let the opportunity pass!
An appreciation for the centrality of value creation in all businesses, and some ideas for how to bring a value creation mindset to negotiation.