This article is written by Samridhi Jain who is pursuing an Introductory Course: Legal Writing For Blogging, Paid Internships, Knowledge Management, Research and Editing Jobs from LawSikho.
What is negotiation?
It’s the process of effective communication between parties to achieve desired goals. Here, both the parties look forward to winning the deal and earning profits as a result. I believe that creating a win-win situation during negotiation is the core of a good deal. Making the other person feel like they are winning is the hallmark of a good negotiator.
Learning negotiation is one thing, observing and practicing negotiation is another. Theoretically, negotiation can be taught forever but only when you negotiate will you understand the specifics and the role of human psychology.
People feel that negotiation is scary or it isn’t as important but negotiation is one of the most important and crucial factors in deciding how the deal turns out. You can never have a great deal without effective negotiation.
John F Kennedy has rightly said, “Let us never negotiate out of fear. But let us never fear to negotiate.”
Pre-requisites of a Negotiation
- Understand the business and the contract by evaluating the needs of the client
The most important and essential element to get started with negotiation is to understand the business of the person for whom you are making a contract. Unless there is a clear understanding of how the business works, there is a very little scope that the contract you draft would be successful for the person.
You can understand a business by asking the following questions:
- What are the types of deals the business engages in?
- What is the company’s goal in terms of profits, sales, etc.?
- What is their core requirement?
- Why is this contract important to them?
- What are their values and principles?
- What do they think about the competition?
- How do they deal with failure?
- What’s their core customer base or target audience?
- Why and how do they succeed or want to?
- What’s the core idea that drives their business?
For example, if it’s an energy sector business, it’s crucial to get an understanding of their customers- are they huge businesses or is it the government or are they the general public? All the segments will require a different approach. If it’s a huge business, you will need to understand their needs and goals to further yours. If it’s the government you will have to focus on acquiring great funding with quality service delivery and focus on bulk dispatch. If it’s a general consumer you will have to focus more on quality, affordable pricing and market segmentation using pricing strategies.
Pro tip: When you are drafting a contract for anyone make sure you are well equipped with the current affairs from that sector/ industry.
Once you have asked these questions and found answers for the same, it’s time to understand the terms of the contract. To understand the terms first we need to know the needs of the client.
Questions for the same:
- What does the business expect from the contract?
Remember: It’s not about giving them the draft, it’s about the result the draft will create.
- What are the things they want in the contract no matter what? Basically, what are the things they will not negotiate at any cost?
- What are the things they really want to have but can consider negotiating?
- What are the parts they don’t mind negotiating at all?
- What are the kind of risks the client is willing to take?
When you ask these 5 questions you will be crystal clear about the clients’ requirements and doing this will enable constructive communication throughout the process of negotiation.
For example, if the energy sector business has to deal with a larger business and requires a loan agreement to purchase solar panels for delivery then terms like guarantee need to be considered closely, a lender usually drafts it and sends it across to the borrower – so you will have to be clear on your requirements and all of it must be defined and discussed so as to avoid misunderstanding.
Using the above question list you can achieve effective communication.
Always be on the same page with your client.
- Understanding loopholes and proofreading the contract
This step is a deal-breaker. You need to have a clear understanding of where the contract can fall apart during the negotiation and how you will overcome that. Deciding this in advance will make the negotiation easier to flow.
If you ask the relevant questions to your client about their requirements then you can easily figure out the loopholes and build on them.
Before finalizing any contract it goes without saying that it must be proofread. But most of the people skip this step and end up losing the deal to the other party.
How can you proofread well?
- Check all typos and make sure the language used is professional and clear.
- Run the contract through a grammar check.
- Make sure all terms are correctly defined.
- Make sure none of the clauses are ambiguous.
- Make sure all referencing is done correctly.
- Make sure all risks and consequences have been provided for.
- Make sure all timelines are in place.
- Run the contract parallelly with the clients’ requirements and see if all the requirements are fulfilled.
- And finally, ask a senior or someone else to review it to make sure you didn’t miss anything but if that isn’t possible, just make sure it aligns with the clients’ requirements.
This would not be an exhaustive list but covers most of the important points to remember.
In 2017, a small proofreading mistake cost Amazon $150 million. There was an outage at the cloud provider Amazon Web Services which led major websites and mobile apps to go blank. It happened due to a typo. Though this is not a mistake in the contract, it’s important to note that proofreading can play a huge role.
- Specify or highlight the clauses to be negotiated with the other party
This leads to more clarity by establishing priorities and focus during negotiation.
Let’s take an example of a loan agreement,
- Make sure you have dealt with the definitions clause and defined all required terms.
- Check all the conditions established and their respective purposes like termination, renewal, time, etc.
- Go through the repayment clause with utmost focus.
- Read the interest clause and understand how it can be further negotiated.
- Representations and warranties must be checked and discussed thoroughly with the client.
- Check all the undertakings by the respective parties.
- Check all the areas of potential dispute and consequences of the clauses.
- Check all the payments, fees and expenses.
- Check the other requirements like notices, currency, payment methods, use of licenses, waivers, disclosure, modifications, third party rights, any laws involved, insurance, premature termination, etc.
- Further, also check the resolution process – courts or tribunals or arbitration.
Doing this will save so much of your time.
For example, in a loan agreement while dealing with the Guarantee clause you need know that if your client is unable to repay the loan at the stipulated time then their property like their house could be taken away as collateral, if you don’t discuss this aspect with them it can lead to a lot of problem in the future.
If the client doesn’t want the house to be taken away then you need to keep that in mind when negotiating. If they don’t mind that aspect then you need to deal with it more lightly. If there are any specifications then you need to remember those as well while negotiating.
If the person is adamant but the clause requires they be flexible then you need to discuss and communicate the issue. If they agree, well that’s great. If that does not happen, you can explain the pitfalls of that decision to them, but you cannot do much when the client is hell-bent on a certain aspect. Make sure the client knows what they are signing up for.
The Process of Negotiation
Where negotiation failed: The case of PointCast
In 1977, the “push technology” that a company called PointCast was a pioneer of was making headlines. This led them to be approached by Rupert Murdoch’s News Corporation-one of the world’s largest communication companies and they made an offer of $450 million. Negotiations took place which was intense and lasted for weeks.
In the hunger for negotiating the deal at a higher price and because of all the media attention to increase the value of the company drastically they wanted more and more. When the company lowered the deal to $400 million with incentive clauses which could have proved extremely beneficial to the company, but it was rejected. The news corporation closed the deal and led to major losses for PointCast during their IPO. Although PointCast was acquired by Idealab, the failed negotiations cost them $443 million.
Steve Lippin writes in the Wall Street Journal, “Merger professionals point to these euphemistically called ‘social issues’—ego and corporate pride, that is—as among the most difficult aspects of negotiating multibillion-dollar mergers these days. Although financial issues can be vexing too, these social issues can be deal-breakers.”
You can also read about the recent failed deals of Yahoo! CEO Jerry Yang with Microsoft and Google.
So, you see how these small negotiation mistakes can cost so much? Let’s look at the various ways to negotiate effectively:
- Communication and psychology of the client
Communication is the basic skill needed to take the negotiation further. Communication is usually not about what you say, but what the other party receives.
The biggest factor that contributes to any deal is the psychological aspect of negotiation. The background, culture, geography, and mindset can play a huge role in determining how the negotiations would proceed. It’s advisable to understand the party before continuing.
For example, you can try to establish if they are socially fluent or less interactive by asking questions, or you can praise them about their previous deals to check their ego factor. What you need to do here is to examine the style you need to adopt in dealing with them by understanding their personality.
You can try connecting on similar topics, and discuss ideas so that the comfort factor comes in. You can also try mirroring their words. That means including words or phrases they used while communicating with you and including those when you begin speaking. This can establish that you were listening and you care about the person. When you know all of that, you can play the deal psychologically as well!
- Establishing alternatives
Always remember that the negotiation will not go the exact way you want it to. There are many psychological factors involved as we have already discussed.
Making the negotiation a win-win situation is in your hands and you must make sure that happens during negotiation.
Use BATNA- Best Alternative To a Negotiation Settlement – keep this point in mind and you can come up with great alternatives.
Make sure that both parties are at ease. Even when you don’t have an alternative to what you’re looking for make sure the other party knows you have one.
- Finding solutions to problems
In the end, you’d want to win- see how you can get 51% from the agreement by making the other person feel extra achievement!
Remember that by making the other party feel like they have lost will not seal the deal but instead make them feel like they have 51% of the deal when in reality you have that 51%
You need to always have a clear idea of what you will do when x happens or when y happens or when z happens. All alternatives must be formulated with a clear path of action. You should be able to find solutions to the problems that have been created due to alternatives or any further developments due to the other parties’ decisions.
For example, if you give a threat of leaving the deal then have the capacity to leave. Don’t ever give out loose threats. You can allow the party to accept your threat and negotiate that further, but have the power to get up and leave if that does not happen. That will establish that you don’t want an alternative. Always be clear.
- Bargaining implementation in the draft
In this step, you need to put out a final bargain or a final deal you would like to offer and move on with discussing how the entire contract can be executed. Problems at this stage can be solved by effective communication and reminding each other of the benefits.
The last and final step where the parties have agreed on all terms and negotiated all possible clauses, it’s time to close the deal by signatures and required documentation. All the administrative work or filing or stamping has to be done and final execution with the results would be awaited.
Negotiation is a crucial aspect of any business and requires the right approach. By using the following negotiation checklist you can be sure of not missing anything. This will bring in a win-win situation while also making the other party feel that they have won.
Use this to become a pro-negotiator and always secure your client a great deal!
Effective Negotiation Checklist
- Understanding the business of the client.
- Understanding the needs/ requirements of the client.
- Providing for loopholes and proofreading.
- Specifying all negotiation related clauses.
- Remembering to take decisions with a calm mind.
- Analysing the consequences of each clause.
- Establishing alternatives.
- Finding solutions to problems.
- Implementing the draft.
- Moving to closure.
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