Ch 2 - Leveraging The Power of Framing (Summary from 'Negotiating the impossible')

Stalemate over Royalty Rates

WE WERE NEGOTIATING A large commercial agreement.1 The company I was advising was an earlystage venture that had developed a potentially game-changing product in a multibillion-dollar industry.
The folks on the other side of the table were hoping to license our product and help bring it to market. As a result, we had to negotiate a wide range of issues: licensing fee, royalty rate, exclusivity provisions, milestones, development commitments, and so on. We got stuck on royalty rate—that is, the percentage of sale price they would pay us for each product they sold.
There had been some early discussions in which the two sides had very informally agreed that a 5% royalty rate was reasonable. As time went on, it seemed that we had slightly different interpretations regarding how this percentage would be applied. Our view was that 5% was low, but would be acceptable as the rate they paid to us initially. As the product gained traction and was validated by the market, we felt the royalty rate should increase to a more appropriate, higher level.
We understood that our technology was still in a development phase, that early sales momentum might be slow, and that their heavy investments in manufacturing warranted a concession from our side.
Their perspective was quite different. They argued that because of their investments, the royalty rate should initially be close to zero; after two to three years, the 5% rate would kick in; and after that, royalty rates should go down, not up. Why should they go down, we asked? "Because in our industry, we always see royalty rates go down over time, not up. That's just how it is," they replied.
After some further probing they provided additional rationale: "If we are selling more of your product over time, you should be willing to accept a lower percentage."

Our initial hope was that we would be able to avoid confronting this issue head-on because the value of the overall deal was quite high, and with so much money to be made, this should not be a deal breaker for them. As the days passed with little progress, we realized that they really were stuck on the idea that “royalty rates are supposed to go down.” Were they worried about the precedent this might set in their other deals? Was it something they had promised their board, and now they did not want to lose face? Were they simply trying to get better financial terms? Try as we might, we could not get the numbers to work with rates going down over time. And if we tried to accommodate their desire for lower rates in the first year or two, it further increased our need for higher rates later. What to do?

WITHOUT MONEY OR MUSCLE

There are times when two sides have incompatible positions and one has to yield. There are other times when each side compromises, meeting in the middle (for example, we could have agreed to a flat royalty rate over time). And then there are times when the laws of physics do not necessarily apply to negotiations: things can go up and down at the same time.
The breakthrough came when we noticed a flaw in how we were going about the discussion: we were stuck negotiating royalty rates in one dimension (over time), when our differing perspectives made clear that two dimensions were in play: the passage of time and the quantity of sales. Maybe we could leverage this to create a royalty schedule that went both up and down. If the other side needed to show rates going down over time, perhaps we could accommodate this and still safeguard our financial interests when the product sold more. With this in mind, we sent them a royalty table that no longer listed rates over time. Instead, we created a two-dimensional chart that listed rates as a function of time and quantity sold. It looked something like Table 1.



For each year, instead of one royalty rate we would have a range (with a minimum and maximum) based on quantity sold. Notably, the maximum royalty rate for each year would decrease over time (top row), which we hoped would meet their demand for diminishing royalty rates. At the same time, the actual royalty rate for each year could increase year after year if we sold more. Our expectations for how the royalty rates would actually materialize is shown in Table 2, with highlighted cells showing our internal projections.



It worked. The other side argued over some of the numbers in the table, but this new proposal helped reframe our dialogue and avoid impasse. The two sides were no longer arguing over royalty trajectory or the rationale for whether it should go up or down, and in the weeks ahead, the issue went away completely. The final agreement contained a simplified version of the royalty table (with fewer columns and rows) that accounted for time and quantity. While perhaps not substantively different from what could have been accomplished by agreeing to royalty rates on one dimension, this stylistic approach helped our negotiating partner feel more comfortable with how the deal looked, and let us feel comfortable with the financial outcome.

PAY ATTENTION TO THE OPTICS OF THE DEAL

Pay attention to the optics of the deal. It's not just the substance of what you offer that matters, but how it looks to your negotiating partners and to their audience.

HELP THE OTHER SIDE SELL IT

Think about how the other side will sell the deal, and frame the proposal with their audience in mind.

MAKE IT SAFE FOR THE OTHER SIDE TO ASK FOR HELP

Make it safe for the other side to ask for help on optics. Build a reputation for rewarding transparency and not exploiting their moments of weakness.

AVOID ONE-ISSUE NEGOTIATIONS

Avoid negotiating over a single divisive issue. Add issues or link separate one-issue negotiations.

NEGOTIATE MULTIPLE ISSUES SIMULTANEOUSLY

Negotiate multiple issues simultaneously to help identify wise trades and to reduce the risk that concessions will not be reciprocated.

DIFFUSE THE SPOTLIGHT

Don't let any single issue become too prominent. Educate your audiences about how to measure success, and limit the amount of attention given to any one issue.

SPLIT ONE ISSUE INTO TWO

If there is only one issue, try to split it into two or more separate issues.

UNMASK THE UNDERLYING INTERESTS

Incompatible positions might be hiding reconcilable underlying interests.
Understanding why the other side wants something can lead to better outcomes than continuing to argue over competing demands or trying to meet in the middle.

FIRM ON SUBSTANCE, FLEXIBLE ON STRUCTURE

Be as firm as needed on substance; be as flexible as possible on style and structure.

GETTING UNSTUCK IS A WORTHY ENOUGH SHORT-TERM GOAL
 

A wisely framed proposal need not resolve the entire dispute. Sometimes just getting unstuck is the key to paving the path towards eventual agreement.

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