Elements to BATNA analysis

1. Snapshot of the P&L and other basic business metrics. 
   Notice the words “metric” as in ‘to measure’.   The first job of BATNA analysis is to have a very clear idea of where you really are now. Everyone thinks they are doing this implicitly, but that’s simply not good enough.  You have to sit down and articulate in very explicit terms just what your financial and operational status will be if this negotiation doesn’t yield an agreement.   
    
2.  Deal Structure. 
   The BATNA and Goal analysis work together to tell you what you should be negotiating for.  Put another way, the BATNA sets the M in your LIM analysis. The goal analysis tells you where you want to be. The BATNA analysis tells you where you are.  Now you understand the gap – and hopefully have numbers on it.  The BATNA forms the floor of your negotiating strategy.  You can now build your walk-away position as one that puts you marginally better off than your BATNA.  From there, putting your ‘most likely’ and ‘best case’ scenarios on the map are pretty easy.
    
3. Vector. 
   BATNAs fall and rise.  This is particularly important if your environment is in flux (i.e.: now, everyone) or if your competitive position is shifting. You should know if your own BATNA is rising and falling in the near term.  Is your steady-state business remaining stable, or are you in a deteriorating position in a failing industry?  This is more of an environmental analysis than an inward looking audit.  I referred to ‘rising or falling BATNA’ in my class when the recession shifted the negotiating balance of power from suppliers to purchasers – and now my class thinks that this is the main purpose of the BATNA analysis.  Determining if your BATNA is rising or falling is an interesting issue to analyze – after you already have a solid understanding of your operational and financial status in the event of no deal.  BATNA’s shouldn’t be referred to as ‘rising’ or ‘falling’ until you’ve already stated what yours is.
    
4.  Short Term Tactics. 
   The BATNA analysis can act as your own personal ‘devil’s advocate’.  If performed seriously, it will let you know your own weaknesses and friction-points.  Your job is now to address your immediate shortcomings with good bargaining while simultaneously hiding or disguising your shortcomings from counter-parties.  In other words, the BATNA tells you what to look for and what to lie about.
    
5. Long Term Strategy. 
   In the short term, you can just react to deficiencies and weaknesses revealed by the BATNA.  In the long term, it’s your job as a manager to steadily improve your company’s strategic position — or to increase your company’s BATNA.  You can think of BATNA as a key metric for understanding a company’s strategic position — and every deal you do now should contribute to raising your company’s BATNA in the future.

One of my main points was this:

 “Don’t continue negotiating with someone if you know it won’t end up in a transaction.  If there is a “deal-breaker” on the table, then that should be the first thing you deal with”. 

 The example we discussed was credit terms.   If your company has a policy of only giving a maximum of 45-day credit terms, but the customer insists on 90 days, I say that you should try to reach an agreement on that point first.  If not, it will ultimately kill your deal and waste everyone’s time.

A participant of the seminar disagreed.  His logic was that if you agreed to all the other points first and saved your major SPECIFIC point of disagreement until last, you improved your chances of reaching a final agreement.  He felt that if you reached a compromise on all the other points first, it would put a great deal of pressure on both sides to find a solution to the last disagreement.

 We went back and forth for a while, and I understand his point of view.   BUT…I think his way will only work under the following conditions:

1)      Both sides agree that the potential “deal-breaker” exists.

2)      Both sides agree to deal with it last.

3)      You acknowledge that by investing time in this negotiation — which has serious   problems – you are passing up the opportunity to do other business.

The pitfall here is that your counter-party might not understand that you consider a specific point to be a deal-breaker.  If I am engaging in drawn-out discussions over many months and the other side suddenly comes back to me with a proposal that contains what I feel to be a deal-breaking point, I am going to be very angry if I think he has just wasted my time.

Look at this example.    We are negotiating for sales training services, and I have the responsibility for finding a sales trainer in Shanghai.  My company policy –set by the New York HQ — is to pay all service-related expenses 90 days after completion of the contract.  I am negotiating with a sales trainer who wants to be paid in advance.

IF he tells me that we have a significant disagreement with the payment terms BUT he thinks we should “shelve” that issue – or delay dealing with it until later, maybe I will agree.  Then we can discuss all the other points, and if we find that our companies are a very good fit, we may be able to work out a special case.  I will have my boss contact the head of HR in New York and we will find a compromise – maybe pay him 20% up front, 50% within 30 days of the training, and 30% after 90 days. 

BUT – and this is important – if we meet 5 times and I reveal a lot of sensitive information about my company and THEN he tells me about his company policy on pre-payments for the first time, I may feel he is not honest or competent.  I may feel that he has wasted my time – or tricked me into telling him too much about my company.  We have a special term for people who do this – we say they negotiated in “bad faith”.    Not only will they not get this deal, but we will never discuss any future business with them. 

Western negotiators tend to be very sensitive about wasting time in drawn-out negotiations that don’t result in a deal.  Sometimes this can be useful to Chinese negotiators – it can put pressure on western counter-parties to reach an agreement or grant concessions.  But it can also cause problems if the other side assumes you are negotiating in bad faith and are therefore not a suitable business partner.

If you are a buyer, your LIM on a whiteboard would start with a single point — your M.  Say rmb 1,000. Your I would be lower — maybe 750.  You L is theoretically 0, but let’s say that a reasonable figure is 500.  You have a line from 500 (on the left) to 1000 (the point where you started the line).

Your seller also has a LIM, but his moves in the opposite direction.  He will start high — maybe rmb 1,500, and draw his line in the opposite direction.  His I might be 1100, and his M could be 800.

Are you going to reach a deal?  Where?

Your starting position is 500 while he starts at 1,500.  Pretty big difference. If you are not careful, this could get personal and emotional.  His offer sounds unreasonable — yours is insulting.  But hold on.  

His counter-offer of 1100 and yours of 750 are still pretty far apart.  But if the negotiation continues, it becomes clear that neither of you are in BATNA territory.  Your LIM-MIL profiles overlap from 800 to 1000.  That means that THEORETICALLY you should be able to do come to an agreement at around 900.

What can go wrong?  2 things.

1)  Your opening offers can be so far apart that it seems unlikely you’ll ever reach a deal.  That’s the danger of setting unreasonably high Ls (opening positions).  If the buyer has offered rmb 1 in the opening round, the seller would probably walk away and invest the time in finding other counter-parties.   And that leads to the next problem;

2)  Lack of visibility.  If both sides in the above negotiation had showed each other their positions at the very start, then this deal could be arrived at quickly and easily.  But transparency is not a common tactic in China, and very few counter-parties will show you their M (bottom line price) at the beginning of the negotiation.   

Like:  L is what you would like to get from the negotiation.  This is your opening position.  If everything goes really well and you score a big success from your negotiation, L is what you are going home with.  Make sure you start off asking for enough — but not for so much that the other side thinks your are crazy, naive, dishonest or all three.   If your L is too high, then you may not get a second chance at negotiating — particularly if your counter-party is a MNC sales or purchasing department that works with a ’short-list’ system.  The goal of their first round negotiations may to set a short-list of 3 – 5 counterparties, and then conduct the real negotiations only with members of that group.  Set your LIM too high, and you may find yourself out in the cold — or forced to offer a price concession just to get to the second round.   

Intend:  I is what you can reasonably expect from the negotiation.  This is industry average or your existing arrangement.  I changes over time as international business cycles and prices shift.  You have to know what your I is likely to be — and to make sure that your boss agrees with you.  Figuring out I can be easy if you work with a stable, deep market that has many buyers and sellers.  If you are selling a unique or new product, figuring out I can be tricky.  For most of us, I is an established industry benchmark, price of a major local supplier or the price you are already getting (or giving).  Watch out for inflation-indexing schemes that can change your I as the economy changes — and make sure the terms are favorable to you.

Must:  M is the point at which you say ‘take it or leave it’.  M slots in just above your BATNA, which we talked about last week as your Best Alternative To No Agreement.  Professionals know not to do the “walk-away” too often — but they also know that sometimes a slow walk to the door is the best negotiating technique in China.  When the other side says, ‘no deal’ to your last offer then you have no choice but to leave the table.  

Make sure that everything is cordial and professional,however, since there’s a good chance that they will try to call you back to the table.   Try this:  “I’m sorry, Bob, but it just doesn’t seem like we’ll be doing business this time.  Good luck, and if your situation changes please get in touch.  I’d love to be able to do a deal in the future.”   It’s much better at keeping the door open than saying, “Go to hell you lying, cheating bastard”.  Just a thought.  

M is relatively easy to set.  It’s marginally above your BATNA.  If your BATNA is maintaining the arrangement you have with an existing supplier or client, then you can figure it out to the 3rd decimal point.  If your BATNA is bankruptcy, unemployment and ruin — then you had better know that walking in and set your targets accordingly.

BATNA is what happens if the negotiation doesn’t result in a deal.  You are back where you started from – and have lost time, effort, expenses and energy.   BATNA, often referred to as the ‘no deal option’, is your worst-case-scenario.

Why is BATNA so important?

Experienced Chinese negotiators use their BATNA as the starting point for establishing the LIM framework. The whole purpose of negotiating is to improve you situation, so BATNA is a crucial benchmark.  Sometimes, however, inexperienced negotiators don’t consider their own BATNA or misunderstand what their true BATNA is.

BATNA helps negotiators in 3 ways:

1) Tells you when to walk away.  If the proposal is below your BATNA, its time to go.
2) Helps you set your goals and LIM
3)  In the longer term, understanding your own BATNA helps you run a more efficient department or company because it shows you how to raise your no-deal option.

Raising your BATNA is important because the higher your BATNA, the stronger your bargaining position. 

Let’s take a look at 2 scenarios. 

1 – Bob wants to buy a pair of shoes.  He goes to Xu Jia Hui where there are many department stores, malls and shoe stores.  Since he has so many options, his BATNA is very high – if he doesn’t like the prices or selection (i.e.: his Negotiating Variables) in one store, he knows he can easily go to another.  Bob enjoys a very strong position and receives good service from a wide range of sellers who want his business.

 

2 – This time, Bob is looking for a hotel in a small town in the middle of nowhere.    It is 6:00 in the evening, and getting dark.  Bob is hungry and tired and has an important meeting first thing in the morning.   There is only one guest-house near the train station – and Bob doesn’t know of any others.  If he can’t make a deal with the guest-house manager, then he will have to sleep in the train station or on the street.  Sure, he could keep looking – but that might make his situation worse if he can’t find an alternative quickly.  In this case, Bob’s BATNA is very low. 

HINT:  Never confuse your BATNA with your counter-party’s.  I often hear Chinese negotiators say that the other side will have to accept the terms because otherwise it will be a disaster for the Chinese side.  That’s not logical. 

Some negotiators don’t recognize their true BATNA until the negotiations have already failed.  Make sure that you don’t make this mistake in your China negotiations.

LIM describes your negotiating priorities.

Simply put,  LIM is a framework for your negotiating priorities. 

 L = Like, or your best case scenario for the negotiation. 
 I = Intend, or what you think is most reasonable.
 M = Your bottom line.  Anything lower and you will not accept the deal.

How do you arrive at the different targets?

Variables include more than just money

Your first task is to decide on the variable or bargaining points that you will offer and discuss.  This is down by analyzing your own goal system to determine what your best case scenario is.  Then break down your goal into all its component parts.  It may be that your goal really is 100% about the money and you don’t have to include anything else. Usually, however, your variables will include some TIME requirement (shipping schedule, roll-out timetable, delivery dates), TERMS (cash or charge, credit terms, payment dates, late fees) and POWER (who owns 51% of the new venture, contact disputes will be mediated in HK).  There are many others, and you have to figure out a LIM for your entire package of variables.

Setting LIM

M is your bottom line.  This may be your break-even or it may be the terms that you are already getting from an established partner.  In many cases someone higher up in the organization is involved in setting the M or bottom line terms.

L is what you can reasonably expect as your best case scenario.  Your L proposal should be ambitious and maybe a little aggressive – but not so crazy that it scares away potential partners or clients.  You probably won’t really get your L, but it will give you a chance to state your priorities and establishes a benchmark for your expectations.

I is where you think you’ll probably end up.  I could be based on the deal you are getting now or it could be industry standard for similar deals.  Some people put I midway between L and M, which is suitable for some negotiations. 

The important thing is to put together your LIM after you have developed a comprehensive list of variable and bargaining points.  If you try to analyze your variables after you have already submitted an initial proposal, you may come off looking dishonest or disorganized. 

Knowing what to ask for is a key to success when it comes to negotiating in China.