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					 Psychological Techniques of Negotiation




SCHELLING, SEBENIUS AND
 PERSONAL NEGOTIATION




                    1568

     MANCHESTER BUSINESS SCHOOL
           EXECUTIVE MBA
   20 September 2004 (extended to 27/09/04)
SCHELLING, SEBENIUS AND PERSONAL NEGOTIATION                                    Psychological Techniques of Negotiation



                                             TABLE OF CONTENTS


EXECUTIVE SUMMARY ................................................................................................. ii
1 Brief review of Thomas C. Schelling’s Work ............................................................. 1
  1.1    Thomas C. Schelling ......................................................................................... 1
  1.2    Schelling’s Work on Strategy and Conflict ......................................................... 1
  1.3    Worth to a Modern Negotiator ........................................................................... 1
2 BRIEF REVIEW OF Lax and Sebenius’S WORK ..................................................... 2
  2.1    David A. Lax and James K. Sebenius ............................................................... 2
  2.2    Lax and Sebenius’ Work on Getting the Best Deal ............................................ 2
3 comparisons of terminalogy...................................................................................... 3
  3.1    Focal Points ...................................................................................................... 3
  3.2    Commitment...................................................................................................... 3
  3.3    Threat ............................................................................................................... 3
4 PERSONAL NEGOTIATION .................................................................................... 4
  4.1    Negotiating of an Employment Contract and Equity Participation Scheme ........ 4
  4.2    Step 1: Deal Diagram ........................................................................................ 4
    4.2.1    Negotiating Parties ..................................................................................... 5
    4.2.2    Deal Blockers ............................................................................................. 5
  4.3    Step 2: Assess Interests.................................................................................... 5
  4.4    Step 3: Assess Best Alternatives To Negotiated Agreements (BATNAs) ........... 6
    4.4.1    Key Decisions ............................................................................................ 6
    4.4.2    Response ................................................................................................... 6
    4.4.3    BATNAs ..................................................................................................... 6
  4.5    Step 4: Solve Joint Problem .............................................................................. 6
5 Commons Sense Negotiations Techniques .............................................................. 8
6 REFERENCES......................................................................................................... 9




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                                           EXECUTIVE SUMMARY

The report has been written as a key part of the assessment for Psychological
Techniques of Negotiation elective undertaken as part of the Executive MBA Programme
at Manchester Business School.

It is written as a result of review of two textbooks on negotiation, these being ‘The
Strategy of Conflict’ by Thomas C. Schelling, and ‘The Manager as Negotiator’ written by
David A. Lax and James K. Sebenius.

Section 1 of the report briefly introduces Schelling and comments on his work on
strategy and conflict. Section 1 is completed with a brief comment on worth of
Schelling’s work to a modern negotiator.

Section 2 introduces Lax and Sebenius and comment on their work on getting the best
deal, which gives a four-step methodology for undertaking any negotiation. Point to note
is that the work of Lax and Sebenius is written with many applications and examples,
greatly assisting the understanding of negotiation techniques.

Section 3 reviews differences in terminology used by Schelling and Lax and Sebenius.
Specifically, meanings of ‘focal point’, ‘threat’ and ‘commitment’ are reviewed.

Section 4 presents a current negotiation undertaken by the author. The discussion
follows the four-step introduced by Lax and Sebenius.

Section 5 presents some of the common sense negotiation techniques.




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1      BRIEF REVIEW OF THOMAS C. SCHELLING’S WORK

1.1      Thomas C. Schelling

Prior to reviewing the works of Thomas C. Schelling, it is worth quickly introducing the
author behind the “Strategy of Conflict”.

Schelling is a distinguished university professor from the Harvard University, and has
spent time both in Europe and the US, working on the Marshall Plan and the associated
works in late 1940s and early 1950s before joining Yale, Harvard and Maryland
Universities in later years.

His research interests include many areas of conflict including military strategy and arms
control, energy and environmental policy, nuclear proliferation, and foreign aid and
international trade. His publications include: The Strategy of Conflict (1960), Arms and
Influence (1966), Micro-motives and Macro-behaviour (1978) and Choice and
Consequence (1984).

1.2      Schelling’s Work on Strategy and Conflict

Schelling has brought his experience of governmental policy making on strategy and
conflict in to classroom environment by assisting students to address non-transparent
issues in a different yet rewarding way, by first, bringing a sense of curiosity and,
second, an ability to keep moral and social preferences under tight discipline while
analysing the implications of alternative policies.

Instead of treating ‘conflict’ as a pathological state and seek its causes and treatment,
Schelling takes ‘conflict’ for granted and study the rational conscious behaviour
associated with it.

Schelling is concerned with the exploitation of potential force with respect to ‘strategy’
instead of efficient application of force. He argues that particular outcomes are worse (or
better) for both parties than certain outcomes. The sum of the gains of the parties
involved is not fixed (i.e. more for one means less for the other). The common interest is
to reach an outcome that is advantages to both parties.

Schelling argues that most conflicts are essentially explicit or tacit ‘bargaining’ situations,
where ability of one party to gain is dependent on the choices and decisions the other
party must make, with the result that in most situations, a better bargain for one party
means less for the other party.

Schelling further argues that the credibility of a ‘threat’ depends on the costs and risks
associated with fulfilment for the party making the ‘threat’. ‘Deterrence’ on the other hand
is concerned with the exploitation of potential force by persuading the other party that it
is in his or her own best interest to avoid certain courses of activity.

1.3      Worth to a Modern Negotiator

Schelling’s lessons about tacit communication are much more important than the simple
scenarios. In any interactive situation, it is vitally important to look at matters from the
side of the other party. By understanding the other party’s perspective, one can improve
his or hers comprehension of the situation dramatically with the result of ending the
negotiation process better than expected1.
1
 Zechhauser, Richard. ‘Distinguished fellow: Reflections on Thomas Schelling’. Journal of Economic Perspectives, Vol. 3,
No. 2, Spring 1989, Pages 153 - 164

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2      BRIEF REVIEW OF LAX AND SEBENIUS’S WORK

2.1      David A. Lax and James K. Sebenius

David A. Lax and James K. Sebenius are principles of Lax Sebenius LLC, a firm of
negotiation strategy specialists. Sebenius is a Professor at Harvard Business School,
and Lax and Sebenius jointly found the Negotiation Roundtable at Harvard and have co-
authored many articles and books on negotiation including ‘The Manager as Negotiator’.

They are pupils of Schelling and have taken his teaching to develop their own
negotiation techniques, theories and frameworks.

2.2      Lax and Sebenius’ Work on Getting the Best Deal

Lax and Sebenius argue that an effective negotiator is one who could persuade the
other party to accept a proposal that meets all his real interests. This can only be
achieved if the deal meets other party’s interests better than the best no-deal option. The
negotiation therefore is to shape the perceived choice of other party’s deal vs. no-deal
so that what was chosen in their own interest is also what he wants (the art of letting
them have your way for their reasons).

Lax and Sebenius came up with four-step methodology to successfully manage a
negotiations, which includes mapping all involved parties on a deal diagram, assess real
interests of both parties, assess Best Alternative To Negotiated Agreement (BATNA),
and solve the joint problem of crafting a deal which is better than any of the no-deal
options. Personal experience based on this four-step methodology is discussed in
Section 4 of this report.




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3      COMPARISONS OF TERMINALOGY

3.1      Focal Points

Sebenius and Lax state that negotiations are often resolved at psychologically prominent
‘focal points’ simply because doing so may be less costly than trying otherwise to
resolve the indeterminate situation.

Schelling states that a focal point is more persuasive as an exact expected outcome
than as an approximation. A concession may be a sign of collapse and small
concessions are less likely to lead to settlement than larger ones. Inherently unstable
focal points serve not as an outcome but as a sign of where to look for the outcome.

3.2      Commitment
Sebenius and Lax state that the ability to make a commitment first credibly and
irreversibly to a preferred settlement can result in the party making the commitment
winning the bargaining. If the negotiators make incompatible commitments from which
they cannot back down, they will deadlock themselves in to a corner leading to
unsatisfactory settlement. Commitment can also change how the other party values the
possible outcomes. To avoid conceding, a negotiator may invoke his or her underlying
needs to maintain a firm reputation for future bargaining or even for later in the current
negotiation. Situations may warrant ignorance or pretending not to hear of the
commitments made by the other party by introducing new information, if the commitment
is not in the best interest of the party.

Schelling states that if a buyer can accept an irrevocable commitment in a way that is
unambiguously visible to the seller, he can squeeze the range of indeterminacy down to
the point most favourable to him.

3.3      Threat

Schelling argues that a threat is no more than a communication of one’s own incentives,
designed to impress the other the automatic consequences of his actions. The distinctive
feature of this threat is that the threatner has no incentive to carry it out, but he has an
incentive to bind himself to the fulfilment of the threat, if he thinks the threat may be
successful because threat and not its fulfilment gains the end. Fulfilment is not required
if the threat succeeds.

Lax and Sebenius argue that a threat is a conditional commitment to do an undesirable
act if the threatened party does not comply. A threat is more effective; the more the
underlying commitment to carry it out is binding, credible, visible and irreversible.




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SCHELLING, SEBENIUS AND PERSONAL NEGOTIATION                                                                                                 Psychological Techniques of Negotiation




4      PERSONAL NEGOTIATION

4.1      Negotiating of an Employment Contract and Equity Participation Scheme

The author is in the process of negotiating an employment contract and equity
participation scheme agreement with a technology start-up company that was
incorporated in February 2004.

The author will be responsible for building up the business in the North West Region in
addition to covering the Utilities Sector nationally. The solutions offered by the company
are applicable to both larger multi-nationals as well as the sole trader, i.e. every
business on planet is a potential client.

4.2      Step 1: Deal Diagram
The deal diagram showing key stages of the negotiation stage is shown in Figure 1, both
in terms of past events (in blue) and future expected events (in red)


      120.0%




      100.0%
                                                                                                                                    Contract signed and investment made (planned)
                                                                                                                                First day of employment (planned)

       80.0%

                              Position accepted not withstanding the outcome of the outstanding queries


       60.0%


                                                        Telecon: Agreement in principle accepted

       40.0%



                                                                                                                Presentation given (to Chairman) followed by Interview
       20.0%



                                         On-line application completed
        0.0%                  Job Vacancy advertised on Daily Telegraph
               20/06/2004


                              27/06/2004


                                           04/07/2004


                                                           11/07/2004


                                                                        18/07/2004


                                                                                     25/07/2004


                                                                                                   01/08/2004


                                                                                                                   08/08/2004


                                                                                                                                15/08/2004


                                                                                                                                             22/08/2004


                                                                                                                                                          29/08/2004


                                                                                                                                                                       05/09/2004


                                                                                                                                                                                    12/09/2004


                                                                                                                                                                                                 19/09/2004


                                                                                                                                                                                                              26/09/2004


                                                                                                                                                                                                                           03/10/2004




                            Figure 1 – Deal diagram for negotiating an employment contract

As can be seen from Figure 1, the process started with responding to a job vacancy
advertised on Sunday Telegraph on 20 June 2004, and expected start date of
employment is 27 September 2004 leading to expected completion of contract signing
on 30 September 2004.




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4.2.1      Negotiating Parties
The author is supported by his wife in key decision-making and by a friend, who is a
corporate lawyer in reviewing both the terms of employment and equity participation
scheme. In addition, two banks have lent the necessary equity through personal loan
agreements. Author is expected to re-mortgage his property in order to pay off the two
loans, which attracts a significantly higher interest rate than mortgage rates. There are
no other significant players involved in the negotiation from the author’s (employee and
equity owner) side.

From the employer’s side, the key negotiator up to now has been the Chairman.
Recently, the Chief Executive Office (CEO) and Senior Managing Director (SMD) to
whom the author will report, have entered the negotiations. The key decision makers are
the Chairman and CEO. However, from recent discussions, it is becoming evident that
the role of key negotiator is being transferred to CEO.
4.2.2      Deal Blockers

SMD was appointed whilst the negotiations were taking place. There are a number of
other candidates of similar rank awaiting to be joined, and SMD has requested delaying
of their negotiations to allow him time to familiarise with his own responsibilities.

It is understood that SMD has made a similar request on author’s negotiations, but the
Chairman, due to a number of strategic reasons, turned down his request.

From the author’s side, there are no deal blockers with any significant authority to be
considered.

4.3      Step 2: Assess Interests

The author’s key requirements are two fold, these being:

a) Secure employment under the best possible terms including mitigating the risk on
   possible deferment of salary, bonus and reimbursement of expenses.
b) Ensure best terms for equity investment, both in terms of shareholding (avoid all
   possible future dilutions) and security (company will not be wounded up).

Employer’s key interests can be summarised as follows:

a) Ensure the author is the best available candidate for the position
b) Ensure timely signing of contracts
c) Ensure timely issuance of the money for equity investment (on Day 1 of employment)

Failure to complete the negotiations successfully will lead to the followings:

a) Author having to re-enter the job market, having withdrawn from job searches three
   months ago (to concentrate on completing the MBA, which he will achieve when this
   report is submitted). Withdrawal will result in at least taking two to six months to
   secure suitable employment.
b) For employer, this will mean revisiting some of the candidates rejected, and
   spending a significant amount of very senior management time in recruitment. The
   author’s expected joining will significantly boost the company’s ability to reach
   potential clients in the North West and Utilities Sector nation wide.



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So, failure to successfully negotiate is not in the best interest of either party.

4.4      Step 3: Assess Best Alternatives To Negotiated Agreements (BATNAs)

4.4.1      Key Decisions

As mentioned in Section 4.2.1, the CEO recently entered the negotiations through issue
of a ‘Side Letter’ to the terms of employment and equity participation scheme, which
highlighted the following risks:

a) Right to defer salary payments
b) Right to defer expenses payments
c) Right to dilute shareholdings

4.4.2      Response

Whilst the author’s requirements are to remove all above key points and the associated
‘Side Letter’ in its totality from the negotiations, author intends to propose the following
as his response to the ‘Side Letter’:

a) Guaranteed salary payments for the first two months (to allow author’s negotiate
   better rates for his borrowings).
b) Agree time period for deferment of expenses (otherwise business targets will be
   compromised due to self-initiated controls on expenses, i.e. number of client visits
   will be reduced significantly resulting in low number of contract signing and resultant
   revenue generation)
c) Higher proportion of shareholding to account for additional risk stipulated in ‘Side
   Letter’ (same percentage as of those who joined in earlier this year, holding the
   same rank within the company).

4.4.3      BATNAs
Given above, the Best Alternatives To Negotiated Agreement (BATNA) can be identified
as follows:

a) Option 1: Walk away if ‘Side Letter’ is not withdrawn.
b) Option 2: Walk away if all of the requirements stipulated in Section 4.4.2 are not
   agreed.
c) Option 3: Walk away if author’s requirements for guaranteed salary for two months
   and time for deferment of expenses cannot be agreed. Agree to currently proposed
   shareholding.
d) Option 4: Walk away if salary cannot be guaranteed for the first two months. Accept
   all other rights stipulated in Section 4.4.2
e) Option 5: Accept all rights stipulated in Section 4.4.2

4.5      Step 4: Solve Joint Problem

It is not in the interest of either party to pull out from current negotiations. The employer
needs the author to implement their corporate strategy and secure contracts with
potential clients in the North West. At the same time, employer needs the skills and
experience brought by the author in establishing the Utilities Sector.



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The author needs employment to recover from loss income since leaving his last
employment in December 2003 to expedite the completion of the MBA, and to support
his family. So he is highly unlikely to walk away from the negotiation, given the risk of not
finding suitable employment before end of the year. However, on the same taken, the
investment he will be making on the company will be available to him to cover his and
his families living expenses. But the author treats this potential employment as a one in
lifetime opportunity.

So, given above the most likely BATNA would be option 3.




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5      COMMONS SENSE NEGOTIATIONS TECHNIQUES

Common sense negotiation is sometimes treated as an art, and not a science.
Experienced negotiators enter a negotiation knowing clearly what they want out of the
negotiation. They tend to look for win-win situations and tend to be creative, patient and
seek common ground. Time, information, options and approach are distinct forces that
act on negotiations.

The person who has the most time wins. People with tight deadlines usually loose. It is
also widely accepted that 80% of the concessions are made in the last 20% of the time.

Information is money. The more knowledgeable you are the better deal you will get.

Keeping an open mind with a fallback position also gives an advantage in a negotiation.




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6      REFERENCES

Lax, David A. and James K. Sebenius (1986). ‘The manager as negotiator: Bargaining
     for cooperation and competitive gain’. The Free Press
Schelling, Thomas C. (1997). ‘The strategy of conflict’. Harvard University
Zechhauser, Richard. ‘Distinguished fellow: Reflections on Thomas Schelling’. Journal of
     Economic Perspectives, Vol. 3, No. 2, Spring 1989, Pages 153 - 164.




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