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Levelling the Playing Field

What is principled negotiating? Why are principled negotiations and benchmarking so well suited to bank compensation negotiations?

When business executives talk about negotiation, they typically mention three types of negotiating strategies. The first is distributive bargaining. Distributive bargaining is a competitive negotiating strategy that is used when the object of a negotiation is to “divide and distribute” a fixed resource. The more one party wins, the more the other party has to give up. Distributive bargaining also goes by names like “zero-sum”, “win-lose”, “positional”, or “hard” bargaining. Distributive negotiations are characterized by opposed interests and when distributive negotiations conclude, good feelings tend to be the exception rather than the rule. Historically, bank negotiations have been categorized as a type of distributive bargaining.

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The second approach to negotiation is integrative or interest based bargaining. This strategy focuses on using negotiating sessions to develop mutually beneficial agreements ones that create joint value or “enlarge the pie”. Integrative bargaining is important because the “win-win’ outcomes it produces tend to be more satisfactory to all parties than the compromises reached under positional bargaining. Bank agreements are seldom characterized as the product of an integrative bargaining process.

The third negotiating strategy is principled negotiation. The term was originally coined by Roger Fisher and William Ury in Getting to Yes, the well known conflict resolution book. As it applies to bank negotiations, principled negotiating recognizes that bank negotiations are ultimately exercises in claiming value. What distinguishes principled negotiating from pure distributive bargaining is its use of external benchmarks to decide questions of pricing fairness. Simply put, principled negotiating says a bank should charge a company no more, and no less, than it charges that company’s strategic peers. Its strength lies in its ability to identify situations in which bank pricing is unsatisfactory from a fairness viewpoint.

In theory, at least, the negotiating strategy most consistent with the concept of a “banking relationship” is principled negotiating. In practice, most banking negotiations are best characterized as exercises in distributive bargaining, with banks in the driver’s seat. The competitive reality is banks are dominant players at the bargaining table. The outcome of banking negotiations is typically one-sided.

The key differences between distributive, integrative, and principled bargaining can be summarized in a matrix. This matrix is useful in borrowing cost and bank fee negotiations because it helps parties to the negotiation understand the negotiating posture and strategy type being used at the negotiating table.

Positional Bargaining

Principled Negotiating

Integrative (Soft)

Distributive (Hard)

 

Participants Are Friends

 

The Negotiating Goal Is Agreement

 

Make Concessions to Preserve the Relationship

Participants Are Adversaries

The Negotiating Goal Is Winning

 

Demand Concessions as a Condition of Maintaining the Relationship

Participants Are Problem Solvers

The Negotiating Goal is a Justifiable Outcome That Doesn’t Jeopardize The Relationship

Focus on Resolving Differences Using Objective Criteria

Trust Motives

Make Offers

Accept One Sided Losses To Reach Agreement

Distrust Motives

Make Threats

Demand One Sided Gains As The Price of Agreement

Create Trust

Explore Options

Decide Outcomes On The Basis of Objective Criteria

Reaching Agreement Is The Priority

Yield To Pressure

Getting Your Way Is The Priority

Apply Pressure

Justifiable Outcomes is the Priority

Yield on the Basis of Principle

Benchmarking makes principled negotiating work by levelling the negotiating playing field. Consider the impact of benchmarking data on the aforementioned five force negotiating model:

Intensity of Price Competition

Benchmarking data introduces a market pricing standard into borrowing cost and bank fee negotiations.  The data clearly identifies situations in which proffered pricing is unreasonable and exerts downward pressure on prices by identifying pricing that is not competitive. 

Bundling Strategy

By identifying market pricing across a broad range of banking services, benchmarking helps companies identify situations where banks are using “average-up” pricing strategies and the real cost of accepting premium pricing in exchange for credit.

Switching Costs

If a company suspects its bank pricing is out-of-line, benchmarking lets it quantify the cost of standing pat in the relationship without the cost and disruption of tendering.

Information Asymmetry

Benchmarking data addresses the issue of competitive advantage that accrues when one party has a monopoly of pricing information at the negotiating table.  With benchmarking data both parties to the negotiation know what pricing is fair and reasonable.

Negotiating Intensity

Benchmarking data produces a better negotiating outcome more efficiently than any other bargaining strategy.  By referencing a standard that’s independent of the bargaining strength of either party, it gives the negotiating process transparency. With benchmarking all parties to a negotiation know that is equitable and what the other is due.  Benchmarking makes sources of negotiating advantage like motivation, training and experience less important as variables that explain negotiating success. 

Who benefits from principled negotiations and benchmarking? Initially, corporations. Historically, they have been disadvantaged in banking negotiations. To the extent that the banks have leveraged a strong negotiating position into premium pricing, the savings that result from levelling the playing field will accrue to their customers.

Who benefits from principled negotiations and benchmarking? In the case of borrowing costs and bank fees there are no losers.

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Quotes for Genus Financial Web Site Jack’s approach to the engagement is professional, non-intrusive and results in little to no disruption to Fuji’s staff in the conduct of the reviews. It has been of invaluable benefit to draw upon Jack’s seasoned understanding and wisdom in managing the treasury function.

FUIJIFILM Canada Inc.
Tim Greening
VP Finance