The overall objective of rational negotiation is to maximize the collective benefit that the parties derive from a given transaction or other arrangement.
In simple terms, the goal is to leave as little as possible on the table once negotiations are complete so that the rights, resources and other elements that form the basis of the negotiation are transferred to their most efficient use.
The goal of each party, of course, is not to maximize the total outcome for all parties, but rather to get a good deal for itself.
In order for a party to make a good deal, the party must have a settled objective decided initiating negotiations so that it will be possible to recognize a good deal when it is offered. Each party must also know in advance the circumstances that will lead it to walk away from further negotiations.
No one should accept a bad deal, but it does not automatically follow that walking away from an initial (unacceptable) offer is the sensible thing to do. Rational negotiation also requires the parties to factor into their decision making the possibility that conditions will change in the future.
For instance, consider a situation in which a buyer for a municipality realizes that the price quoted for the supply of some necessary item exceeds the available budget. Simply asking for a lower price is unlikely to be effective. The best way to handle such a situation might be to invite the supplier to a face-to-face meeting, to discuss the component element of the price and see if some movement might be possible.
To have much chance of success, the buyer will need to develop a negotiation game plan. Such a plan could consist of the following:
- Break down the quote into several areas for discussion. This will allow detailed attention to be given to specific areas.
- The number of components selected should realistically reflect both the type of supply that is to be made and the amount of the price. If, for instance, the quote was at a price of $800,000, it might be advantageous to break down the contract into eight sections, such as the cost of:
- The nature and cost of material;
- the cost of labour;
- the cost of shipping;
- use of subcontracted work;
- engineering component
- time to complete the work;
- specifications; and
- extras or optional features.
The buyer should carry out preliminary research and other investigations into these aspects of the contract (e.g., through discussions with the ordering department and public authorities) to identify items in each category that may allow some opportunity for cost savings.
For instance, alternative materials may be considered as a cost saving measure for certain aspects of the contract. Any savings so generated may be subtracted from cost. The buyer might also consider whether some of the required materials might be more cheaply purchased by drawing upon the municipality’s own purchasing power by pooling the requirement for a particular project with the municipality’s other requirements.
The buyer should set a target for savings in each of the identified categories (e.g. 10 per cent).
To achieve optimal results, a negotiation must be properly conducted.
To succeed, both parties must perceive the final offer as creating a “win-win” result. In a typical contractual setting, the supplier must believe the price on offer will afford a reasonable return; the customer must believe the price is fair.
To a large extent, the success of negotiations depends upon each party’s faith in the honesty of the other. No doubt each party expects the other to act in its own interest and each is prepared to tolerate some amount of tactical positioning by the other.
