Negotiate in Three Dimensions

WHY ARE WE BORN with two eyes? 

One reason, of course, is redundancy: it’s good to have a backup, in case we lose an eye to an accident or illness.
But there’s another consideration. Having two eyes is different from having, say, two kidneys, or two lungs.
Having two eyes gives us the extraordinary ability to see the world in three dimensions. Yes, it’s certainly possible to get along in the world with only one eye—and many people do—but “binocular” vision gives us the enormous advantage of depth perception. When seen with two eyes rather than one, a formerly flat world acquires all kinds of useful complexity.
This is a book about seeing the world in three dimensions. More specifically, it’s about learning to negotiate in ways that recognize—and take advantage of —the rich complexities of human interactions. We call our approach 3-D Negotiation because it draws on three distinct dimensions to achieve great outcomes. But before getting into the specifics of our approach, let’s look at the alternative, which we’ll refer to as one-dimensional negotiation.

Negotiating in One Dimension 

There are many kinds of one-dimensional negotiators; in fact, the world is full of them. But most fall into one of two broad categories, which for the purposes of this overview chapter we’ll call “win-lose” and “win-win” negotiators. Whether you’re a pro or a novice, you’ll instantly recognize these two types. They offer competingseminars. They do battle in academic journals. And in many cases, they engage at the table.
Win-lose bargainers are from the old school, although you can certainly still find plenty of them plying their trade in the boardrooms, town hall basements, rented conference facilities, and the other venues where negotiations take place. Their bookshelves bulge with manuals on adversarial ploys, such as Robert J. Ringer’s Winning Through Intimidation and Jim Camp’s Start with No. They battle and scrap for the best price, the biggest share of the pie, and so on. They sit down at the bargaining table intending to walk away not only with their share of the goodies, but most of yours, too.
Win-win negotiators, by contrast, have for some time now represented the new way. They promise innovative solutions, more value, and better relationships. The win- win library consists of books that emphasize the cooperative potential of negotiation, including valuable 1 ones like Getting to Yes and Getting Past No. Win-win types don’t sit around cooking up unilateral ways to get more than their fair share at the table; they’d rather engage in joint brainstorming sessions to come up with creative solutions that “make the pie bigger” for all.
Experience has probably given you an intuitive feel for the pluses and minuses inherent in each approach. Yes, the aggressive win-lose negotiator gets a better deal some of the time. But he or she may damage relationships in the process, may overlook more creative agreements, and may even precipitate a deadlock, thereby causing promising discussions to break down unnecessarily. (Although, as we will emphasize in later chapters, some discussions deserve to break down.) The earnest win-win player may be more focused on creativity—and almost certainly has more friends—but may come up short in tough encounters. It’s a trade-off,and not always a beneficial one. In the name of long- term relationships, naive win-win negotiators may give up achievable gains in the here and now.
So win-lose and win-win negotiators couldn’t be more different, right? Well, no. In fact, we see them as being very similar in a fundamental way: they are both one- dimensional negotiators. They both concentrate almost exclusively on the face-to-face and tactical aspects of negotiation. They view the negotiating process mainly in terms of actions at the bargaining table, which of course comprises not only the conference room, but virtual tables (phone, fax, e-mail, etc.).
Negotiating advice from both camps focuses mainly on how best to deal directly with the other side. From the win-lose side of the house, this means tips on how to size up your opponent’s weak spots; who should make the first offer; how much to demand; how to persuasively overcome objections, decipher body language, and threaten to walk away; and how to profit from various ploys—the “powerless agent” story, the “good cop, bad cop” routine, and so on.
Meanwhile, the win-win playbook shows how to build trust, communicate clearly, probe for real interests behind bargaining positions, brainstorm new options, avoid cross-cultural gaffes, and successfully counter the ploys used by their hardball counterparts. But note again that the focus is on the tactical. The players are predetermined, the chess board is set up; all that remains is for the game to be played there and then, whatever the choice of approaches may be.
In our experience, most people consider negotiations to be one or the other of these approaches, or a blend of the two. And obviously, win-win negotiators and their win-lose counterparts do more than interact at the table; they also prepare before they get there. But mainly, theyprepare by planning their face-to-face approach and tactics. Take a look, for example, at the many negotiation seminars offered by the venerable American Management Association, which are mostly listed under the category “Communication and Interpersonal Skills”: Negotiating is what happens at the table. It is about tactics and dealing directly with the other side.
Years of doing deals and analyzing negotiations have persuaded us that this apparently commonsense focus on the table often fails. It routinely misses the larger potential game that can really drive the outcome. Even if they don’t recognize it or acknowledge it, one- dimensional negotiators are actually playing in a 3-D world, and they often pay a steep price for their very limited approach. They, or the people whom they represent, are the losers.

The 3-D Negotiation Alternative 

So what is this larger 3-D game? Like any good bargainer, a 3-D Negotiator must master the tactical, at- the-table, face-to-face techniques that rely on effective communications and interpersonal skills. But as we’ve said, 3-D Negotiation involves not one, but three dimensions, all of which are in play more or less concurrently throughout an effective negotiation. The three dimensions are: 

1. Tactics 

2. Deal design 

3. Setup 

By now, you’ve already got a sense of tactics—at least of the win-win and win-lose kind. The second dimension, deal design, will likely be somewhat familiar to you as we begin to shift our focus away from one-dimensional moves at the table. So let’s look at deal design before getting into our much less well-understood—and most powerful—third dimension.

The 3-D Focus on Deal Design 

Here is deal design in a nutshell: negotiation involves the art and science of drawing up deals that create lasting value. Deal design employs a good old-fashioned tool—the drawing board—in new and productive ways.
This is where the win-lose negotiator, in particular, comes up short. In the win-lose mind-set, the broad outlines of the deal are self-evident. So the core challenge of negotiating lies in choosing the best tactics to win— the best price, the most generous terms, or whatever.
Here’s what we mean by a systematic approach to deal design: when a proposed deal does not offer enough value to all sides, or when its structure won’t achieve its purposes, deal designers must go to work on the drawing board, sometimes on your own, sometimes with your team, and sometimes in concert with the other party.
Their deal designs create value, often unexpectedly, guided by general principles and specific techniques.

Maybe we need to make a definitional aside as we introduce this term. “Back to the drawing board” sometimes has a negative connotation—that is, scrapping a failed project and having to start over—that we don’t intend. Rather, we use the drawing-board metaphor to invoke notions of creativity, invention, and fresh thinking guided by potent underlying deal-design principles.
Smart people working at the drawing board can sometimes discover hidden sources of economic and noneconomic value, then craft agreements—design deals —that unlock that value for the parties involved. For example: Is it really a pure price deal? Does some sort of trade between sides make sense and, if so, on what terms? Can we unbundle different aspects of what looks like a single issue and give to each side what it values most? Should it be a staged agreement, perhaps withcontingencies and risk-sharing provisions? If there’s a contract involved, should it be an unusual kind of contract—one with a more creative concept and structure than we’ve used before? One that meets ego needs as well as economic ones? 

A Few Deal-Design Examples 

Conventional wisdom says that we negotiate to overcome the differences that divide us. So, typically, we’re advised to find win-win agreements by searching for common ground. While identifying common ground almost always helps, many of the most frequently overlooked sources of value in agreement arise from differences among the parties. Deal-design principles can systematically point to agreements that create value by dovetailing differences.
For example, when Egypt and Israel were negotiating over the Sinai, their positions on where to draw the boundary were incompatible. When negotiators went beyond the opposing positions, however, they uncovered a vital difference of underlying interest and priority: the Israelis cared more about security, while the Egyptians cared more about sovereignty. The solution was a demilitarized zone under the Egyptian flag.
Differences of interest or priority can open the door to unbundling different elements and giving each party what it values the most at the least cost to the other (as the Egyptians and Israelis did): a core principle of deal design. A good win-win negotiator may well come up with such creative agreements through focusing on interests, not positions, and brainstorming options. The distinctive contribution of deal design, however, is to crystallize and much more systematically develop the 2 underlying principles.Let’s look at an example of another kind of difference, focusing on how divergent forecasts can fuel joint gains.
Suppose an entrepreneur who is genuinely optimistic about the prospects of her fast-growing electronics- components company faces a potential buyer who likes the company but is much more skeptical than the entrepreneur/owner about the company’s future cash flow. They negotiate in good faith, but at the end of the day, the two sides sharply disagree on the likely future of the company and so cannot find an acceptable sale price.
Instead of seeing these different forecasts as a barrier, a savvy deal designer would perceive opportunities to bridge the “value gap.” One option would be a deal in which the buyer pays a fixed amount now and a contingent amount later, with the latter amount determined by the future performance of the company.
Properly structured, with adequate incentives and monitoring mechanisms, such a contingent payment (or “earn-out”) can appear quite valuable to the optimistic seller—who expects to get that earn-out—but not very costly to the less optimistic buyer. The seller’s willingness to accept such a contingent deal, moreover, may give the buyer the confidence he or she needs to go through with the deal. The two-step payment process may make the deal sufficiently attractive to both parties —and more attractive than walking away.
As we will demonstrate in later chapters, a host of other differences make up the raw material that skilled deal designers transform into joint gains. For example, a less risk-averse party can “insure” a more risk-averse one. A more impatient party can get more of the early money, while his more patient counterpart can get considerably more over a longer period. Differences in cost or revenue structure, tax status, or regulatory arrangements between two parties can be converted into gains for both. If one party mainly cares about how a deal looks to a key constituency, while the other focuses onsubstance, the right deal design can create value for both.
Indeed, for a savvy deal designer, conducting a disciplined “differences inventory” is at least as important a task as identifying areas of common ground.
By now, you should be getting a better sense of what we mean by the second dimension in our 3-D scheme: deal design on the drawing board. While our first dimension, tactics, focuses mainly on the interpersonal process at the table, deal design shifts toward substance and outcomes, often significantly away from the table itself.

The 3-D Focus on Setup 

The third dimension, setup moves—often the most potent actions a 3-D Negotiator can take—completes the shift in focus. These moves take place entirely away from the table. In a nutshell, here is what we mean by setup: negotiation involves moves away from the table to set up the most promising situation once you’re at the table. Before taking a seat at the table, the 3-D
Negotiator has taken advantage of powerful negotiation principles—carefully developed in later chapters—to create the optimum conditions before the parties face each other directly. In other words, the table has been set well before the tactical interplay (the focus of win-win and win-lose negotiators) begins.
What does “setting the table” mean in this context? Simply put, it means acting to ensure that the right parties have been involved, in the right sequence, to deal with the right issues that engage the right set of interests, at the right table or tables, at the right time, under the right expectations, and facing the right consequences of walking away if there is no deal. Before worrying too much about tactics, the 3-D setup architect works hard to optimize these elements—the scope, sequence, and choices about the process itself—within which interpersonal dealing will play out.If the setup at the table isn’t promising, the 3-D Negotiator doesn’t merely resort to bullying (like the win-lose type) or turning up the empathy and personal charm (like the win-win negotiator). Instead, he or she takes action away from the table to reset the table more favorably. The 3-D Negotiator understands that a bad setup makes tactics at the table more or less irrelevant— and that a great setup, conversely, makes good tactics all the more effective. In fact, it can help the tactician achieve otherwise impossible results.

Financing Staples: Getting the Scope and Sequence Right 

The 3-D Negotiator pays careful attention to optimizing the scope (the parties, interests, no-deal options) and sequence by which different potential parties are involved in order to create the most promising possible setup. Let’s look at an interesting case to give you a clear illustration of what we mean by a better setup.
The case involves Thomas Stemberg, the founder of 3 Staples, the original big-box office supply store. Thanks to a first round of financing received from Stemberg’s initial venture capital (VC) backers, the Staples concept— rock-bottom prices on office supplies for small businesses—appeared increasingly compelling, beating early sales targets by 50 percent. With these positive early results in hand, and with the threat of new competitors like Office Depot jumping into the market that Staples had started to create, Stemberg urgently needed expansion capital. Logically enough, he went back to the same well: the venture capitalists that had helped get Staples off the ground in the first place.
But during the hunt for second-round financing, the question of valuation emerged as a potential stumbling block. From Staples’s side of the table, it appeared that the VCs were closing ranks, stonewalling Stemberg, and refusing to value Staples as highly as he’d hoped. Not anovel tactic, certainly—offering less capital while demanding a bigger piece of Staples’s equity—but surprising in its monolithic nature. No matter where he went in the venture capital community, Stemberg heard more or less the same thing.
So what was the best negotiating stance for Stemberg to adopt at this point, to (in his words) “break the venture capitalist cartel”? Was the answer to be found in being a better tactician at the conference table? If so, should Stemberg concentrate on being a better win-lose negotiator of the old school? In other words, should he try harder to unflinchingly look the bankers in the eye or decipher their body language? Should he resolve to lock everyone in a room until the positive result he was looking for finally emerged? Should he just say “no”? Refuse to budge? Wear them down until he wore them out? Or, alternatively, should he resolve to be a more effective win-win player? That is, should he listen actively? Brainstorm options? Focus on what would be fair? In a word, no—on all counts. From the 3-D Negotiator’s perspective, the best way to deal with this hardball stance was not to focus on tactics and process at the table. Instead, we would argue, Stemberg needed a more promising setup, involving the right new parties and interests, that would be more receptive to the particular deal he was seeking.
Going out to generate a better financing offer would be a good move here, in line with standard negotiation advice. And Stemberg did just that. He initiated conversations with Goldman Sachs: an investment bank, rather than a venture capital firm. After talking to its venture contacts, however, Goldman initially proposed exactly the same valuation as the VCs. Rather than weakening, it appeared that the “cartel” was broadening.
Now what?In a case like this, a good 3-D Negotiator would routinely ask a series of questions (we’ll develop these for you later) in order to generate a more promising setup.
Here’s one such line of questioning: “Who are the potential ‘high-value players’ here? What parties are not now involved who might value this agreement more highly than those in the current setup?”

To answer these questions—to overcome the cartel he perceived—Stemberg visited Harvard Business School and sought out one of our colleagues, Professor Bill Sahlman, who is an expert on venture firms and the financing of entrepreneurial start-ups. Stemberg asked: “How do you break this?” Sahlman’s answer: “Go directly to the institutions: the pension funds and insurance companies . . . They may be limited partners of the venture capital firms, but they often resent handing off 20 percent of the profits and a hefty management fee, instead of keeping it themselves.”

To a 3-D Negotiator in Stemberg’s case, these institutions were potential “high-value players.” If brought directly into the deal, they would see 20-plus percent higher returns than if they invested indirectly through venture capital partnerships. By following this advice, Stemberg found his funding options greatly expanded, as several limited partners of the venture funds offered to put up their own money at Stemberg’s price.
Meanwhile, who else might be a high-value player, for different reasons? Stemberg decided that he should also make an appeal to high-net-worth individuals with independent perspectives who might support a higher valuation than the VCs. For example, he approached Marty Trust, head of Mast Industries, whose office was literally across the street from Staples’s second store.
Trust could see Staples’s remarkable results for himself.
He had the retailing background to recognize itspotential. And he understood that Stemberg had to act fast, since clone competitors like Office Depot were opening stores like mad. As Stemberg later recalled,
“When [Marty Trust] said he wanted 10 percent of the company, we’d say, ‘Fine, that’ll be $3 million.’ And he’d say ‘Fine’—and like magic, the company had a value.”
Does this story surprise you as an example of 3-D Negotiation? Didn’t the negotiations with the venture capitalists break down? Is that an example of successful negotiations? “Yes” to both of those last two questions. This is an example of exactly how 3-D Negotiators think. How so? Because Stemberg didn’t rely on face-to-face tactics to change the minds of his initial backers, whom he considered to be overly greedy. (That would have been standard, one-dimensional kind of thinking.) Instead, he changed the scope of the negotiation (the parties, their interests, the no-deal options). He favorably reset the table with right new parties whose interests were far more aligned with the deal he wanted to do. And, as we’ll see, he then sequenced the process.

Now, the generic advice in this particular story—that is, to shop around for other options—is pretty standard and pretty good guidance, and it should hardly surprise you. Yet if Stemberg had spent his time indiscriminately pitching other investment bankers, commercial bankers, or many other potential capital sources, he would likely have come up empty-handed, while burning up precious time. Why? Because although these were alternatives to the VCs, in practical terms, they were not the right players.
By applying the principles of 3-D Negotiation in a systematic, disciplined way, you can learn to zero in on potential high-value players—those parties not now involved who might value a desired agreement morehighly than those in the current setup—and thereby achieve a better setup, and a better outcome. In the Staples case, the right players were the high-value ones; in other cases, we’ll show you how other kinds of players are the right ones to enhance the setup. Examples would include direct or indirect influence, a key role in deal approval or implementation, and so on.
The setup also improved in other ways as a result of Stemberg’s away-from-the-table moves. Even as he went out to the new sources suggested by Sahlman and pushed Goldman Sachs to sweeten its offer, Stemberg continued negotiating with the venture firms—but with better options in case the VCs ultimately said “no.” Meanwhile, of course, Stemberg’s effective maneuvers sharply worsened the VCs’ no-deal options. When he went back to his first-round backers, he was able to present alarming news to them. Not only were they now in the unaccustomed role of middlemen—at risk of being cut out by their own limited partners—but it began to look like they might be crowded out altogether as other investors piled in. “This thing’s filling up fast,” Stemberg declared flatly. “Do you guys want to play or not?”
It worked . . . on his terms. Despite its tough aspects,
Stemberg’s approach did not rupture relationships with his venture investors; for example, Bain’s Mitt Romney served on the Staples board for years. And the ultimate success of his table-resetting effort would also have a beneficial impact the next time he approached potential financial backers. (Hey, guys—I’ve already proven I can get the money somewhere else. Do you want to play more reasonably or not?) Of course, there’s a lot more to getting the right scope (parties, interests, no-deal options) and sequence than we’ve included here. But you get the general idea. Don’t just focus on tactics at the table; be sure the setup isright. If you don’t like the way the table is set, reset it by attacking the scope and sequence of the negotiations.

Creating and Claiming Value 

Let’s back up a step and ask a fundamental question whose answer underlies our approach: whether we act in one, two, or three dimensions, what are we actually trying to do by negotiating? On one level, everyone will answer this question differently, depending on the specifics of the negotiations at hand. (On this level, Tom Stemberg would have said, “The point of negotiating is to get the money I need quickly and on terms that I consider fair.”) But on a deeper level, the answer to our rhetorical question is always the same: Your negotiating objective should be to create and claim value for the long term by crafting and implementing a deal that is satisfactory for both (or all) parties.
What is value? Of course, many negotiations center on economic value—that is, potential financial gains to the negotiating parties. Suppose that we own a patent that could dramatically boost the value of your products in a market segment in which our firm has no interest in competing. A licensing deal could create economic value for both of us and would certainly be more appealing than the no-deal alternative.
But value can—and in many cases, should—be understood more broadly. Think of the example of Egypt and Israel negotiating over the Sinai described earlier.
Rather than a zero-sum battle over where to draw a line in the sand, they came up with a demilitarized zone under the Egyptian flag; the kinds of value they created were not mainly economic, but involving security for the Israelis and sovereignty for the Egyptians. The idea of value can go farther still; as long as one or more parties care strongly about some aspect of the process or outcome, that aspect is a potential source of value in the negotiation. So, yes, “value” can mean a discounted cashflow. But it can also mean precedent, relationships, reputation, political appearance, fairness, or even how the other side’s self-image fares in the process. The 3-D
Negotiator is a master at the kinds of cooperative, problem-solving skills that uncover joint gains, and thereby create value for all sides relative to no deal.
Value-creation falls into the “win-win,” or “non-zero- sum” aspect of the process, because value creation benefits all parties.
But that’s only half the story. The 3-D Negotiator is also a master at claiming value. This is the competitive, win-lose part of the negotiation, in which one side seeks to claim a full share of the “value pie.” Obviously, there’s an inherent tension between the cooperative moves needed to create value jointly and the competitive moves that enable you claim value individually. Managing that tension is at the very heart of the art and science of negotiation. When those contradictory tugs are badly managed, things tend to break down quickly. Hardball moves to claim value can short-circuit the moves needed to create value. Impasses arise unnecessarily, and money gets left on the table. The 3-D Negotiation techniques described throughout this book will help you solve all three of these challenges. They will help you create value, claim value, and productively manage the tension between creating and claiming.
There’s one more point to make here: negotiators need to think in the long term when creating and claiming value. Yes, there are many kinds of one-shot negotiations after which it is highly unlikely that the two parties will ever sit down to bargain together again. Most likely, you will only sell your company once. If you sell a series of houses or used cars over your lifetime, you’ll almost certainly be dealing with a different individual each time.

These are important deals, and in the following chapters we will offer you a great deal of advice for managing one-shot negotiations, which—by definition—don’t require a long-term perspective.

But in negotiations that aren’t one-shots, keeping the long term in mind when creating and claiming value is important for at least three reasons. First, many negotiations are only a single chapter in a larger, ongoing relationship that could be damaged by adversarial tactics, making it harder to strike good deals in the future. Second, many agreements deliver their value only when all parties live up to their respective sides of the bargain in the intended spirit. If parties to the agreement feel that they have been exploited or otherwise dealt with unfairly, they may live up to their side of the bargain only halfheartedly—or they may even repudiate the agreement. Third, even in the case of a true one-shot, stand-alone agreement, your approach to deal making can affect your reputation beyond the confines of that one deal. The business and personal networks within which we all interact are becoming ever more tightly connected. People talk. If you get a reputation for dealing unfairly or adversarially, it may come back to haunt you.
We stress the overall negotiating objective—to create and claim value for the long term—since this objective directly informs both how you perform a 3-D barriers audit and how you craft a 3-D strategy to overcome the barriers you’ve identified. As we analyze what is difficult about a given negotiation, we will often ask two more precise questions: What are the barriers to creating value? What are the barriers to claiming value? Similarly, in talking about crafting a 3-D strategy, we will focus on the setup, deal design, and tactical moves that will: 

(1) create the maximum possible value, and 
(2) claim a full share of that value—on a long-term basis.

Not One Dimension, but Three Dimensions 

To summarize, the 3-D Negotiator plays a more complete game than either the old school win-lose negotiator, the trendy win-win negotiator, or their many close cousins who cluster around the bargaining table. That’s why we’ve come to use the metaphor of “dimensions” to describe the three different—and mutually reinforcing— classes of negotiating moves that comprise the 3-D
Negotiator’s arsenal: tactics, deal design, and setup.
Table 1-1 summarizes each of our three dimensions. By putting these pieces together, this book will show you precisely what it means to be a 3-D Negotiator, playing the whole negotiating game rather than just the at-the- table part of it.
A final word: in most negotiations, the stakes are high.
This is true whether you’re trying to secure second-round financing, broker a peace between warring states, or close a key business deal. True, these are very different negotiating contexts, with very different sorts of things hanging in the balance: lives, profits, individual dreams.
But in all of them, the people at the table care very deeply about the outcome of the bargaining process.
Unfortunately, when it comes to negotiating success, caring deeply doesn’t make the difference. Only effective preparation and focused action make the difference— and in our experience, the best preparation is mastering the principles of 3-D Negotiation. The very first part of preparation is understanding what you’re really up against. To us, that means the barriers that stand between you and the deal you want. Diagnosing those barriers is our next order of business.

TABLE 1-1 Individual dimensions that make up an overall 3-D approach 

 
 

Ref: Chapter 1 from the book "3-D Negotiation" by James Sebenius 

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