Professor Horacio Falcão, a Senior Affiliate Professor of Decision Sciences at INSEAD, warns companies should not start – nor necessarily end – on “price” when it comes to negotiations.
Falcão has written on the concept of value for several years and his work includes the 2010 book Value Negotiation: How to Finally Get the Win-Win Right.
What does Falcão mean by “value negotiation”? In his book he says that value negotiation “aims to be the negotiation system that focuses on delivering the most possible value at the least possible risk in the widest range of situations.” He called value negotiation a “new branch” of win-win negotiation – specifically citing the “Principled Negotiation” approach introduced in the bestseller Getting to Yes, by Fisher, Ury and Patton.
The idea of delivering the “most possible value at the least possible risk” might sound good but it strikes me as also somewhat one-dimensional. There’s much more to delivering value than simply avoiding or shifting risk. In a collaborative Vested Agreement, for example, one or both parties might agree to take on more risk – in terms of investments, say – for the overall good of the relationship and to spur innovation.
I am glad to see Falcão has refined his thinking with his latest writings (with negotiation consultant Filip Hron) in the INSEAD Knowledge blog. They contend that “negotiations should never come down to price,” and that “focusing a negotiation on price puts both sides at risk of leaving out other interests that are more important.”
Value is difficult to define objectively, especially when two or more vendors offer the same commodity or service. So does the negotiation then come down to “price?” Falcão and Hron say “no!” on two counts. Two vendors offering seemingly non-differentiated products such as electricity, drinking water or coal will differ in their ability to address a company’s specific interest. “One will have better reliability. One will have more responsive service. One will have more competent support staff. One will have more flexible billing. And so on.”
I really like the fact that Falcão and Hron highlight that negotiations should be thought of as a system – something we have long advocated in our work at the University of Tennessee on sourcing business models. They state, “You cannot change one element of the system without sending ripple effects of reactions and consequences through that system. The likelihood and magnitude of these consequences, when they occur, and whom they affect, will vary.”
Finally, they warn negotiators should remember that “changing the price changes something else in the negotiation. That’s because price is merely one out of ten, twenty, or even a hundred interests present in the transaction.” Falcão and Hron add that “price is often dealt with last, but not because ‘negotiations come down to price’. Rather, from our observations, it appears that most people actually fear the price negotiation.”
That’s because negotiators often do not have a clear understanding of their own and another party’s interests. So the default position becomes a myopic focus on price. It is difficult, if not impossible to achieve a win-win relationship in that context.
I am glad to see academics focusing on the topic of value because value is near and dear to my heart (it is the basis of my book Getting to We: Negotiating Agreements for Highly Collaborative Relationships, and a subsequent Outsource article, ‘Getting to We: Time for a New Negotiating Paradigm‘). The Getting to We five-step process for negotiating shows organisations how to lay a strong foundation for a business relationship – including developing negotiating rules that allow the parties to then negotiate on the same page, so to speak, on deal specifics, including price.
My favorite part of Falcão’s work is his emphasis on not using power – something that we also advocate. He notes a win-win approach “happens when at least one party tries to get what he or she wants with the other party’s consent and without the need to use or display power.”
Kudos for Falcão for refining his thinking!