Professor Nalebuff, you believe that many negotiations aren’t handled right. How so?

Most people don’t know what they’re negotiating about – and that’s where the problem begins. We need to find out what the negotiations involve and then discuss how to split the gains fairly.

Let’s assume we’re not negotiation experts. What exactly is the “negotiation pie”?

I’ll give you an example. Imagine two people. Person A has EUR 5,000 and can get one percent interest on this amount, i.e. EUR 50. Person B has EUR 20,000 and can get two percent interest, i.e. EUR 400. Together, they could get three percent interest on their combined amount of EUR 25,000, i.e. EUR 750.

What figure makes up the pie? The EUR 750, surely?

No – that’s the mistake most people make. In reality, it’s all about the extra amount that each person receives as a result of joining forces. Previously, they would have received EUR 450 in total; now, it’s EUR 750. So the pie is only this EUR 300 difference and this is what needs to be divided equally. That’s unfair though. After all, person B has invested four times as much initial capital in the deal.
Yet the extra EUR 300 is only achievable when they both invest together. Both parties are equally needed, so both should get the same amount.

It’s hard to believe that the stronger party in the negotiation would agree to a deal like that.

It’s wrong to equate strength with size. Just because, as in our example, one side has more capital, that doesn’t mean that they’re actually stronger. I’ll give you another example, this time taken from a real scenario. My mother’s landlord wanted to sell the house my mother lived in. He offered her the chance to buy the house before he officially put it on the market. By doing so, he wanted to save on the estate agent fees. My response to him was that my mother should receive half of this cost saving because, if she were to refuse, he would have to pay an estate agent the full amount anyway. He accepted the argument.

Okay, that’s understandable so far. But what do we do when the pie is less clear-cut?

Often, the true benefit of a deal is only clear in retrospect. In that case, there’s nothing wrong with determining the pie afterwards. We can agree in advance how we’re going to split it – e.g. fifty-fifty – But we’ll only know what we’re dividing up after a certain amount of time has passed. There are plenty of examples of this, too.

We’re intrigued, tell us more.

A few years ago, I founded the company Honest Tea together with a former student of mine, Seth Goldman. A little while later, Coca-Cola wanted to acquire our business, but it was clear that our company wasn’t really big enough yet. We agreed to complete the sale in three years’ time. Until then, Coca-Cola would support us with production, sales and procurement.

Of course, Coca-Cola didn’t want to pay more just because we had grown with their help. So we agreed with them that they would pay in full for the production volume that we could achieve on our own but only pay half for everything above that. The same principle applies, you see – while it’s true that Coca-Cola is a bigger company, the deal wouldn’t have come about in the first place without us.

Doesn’t that simply kick the can down the road? Ultimately, the parties still always need to agree on what is and isn’t additional profit?

Of course, there can still be differences of opinion. Either way, however, we have changed one fundamental thing: we have transformed the negotiation into data analysis. We may discuss what data forms the basis for the negotiation or what the data means, but we are no longer talking about fair splits. I’ve been accused of thinking like Mr. Spock from “Star Trek” because I like to approach negotiations from a purely logical perspective. To be honest, I find it strange how little logic tends to feature in negotiations.

Doesn’t that create new issues though? Businesses could be tempted to keep back data so as to manipulate the pie to their advantage?

That can be a problem so it’s crucial to clarify how to negotiate as soon as the negotiations begin. Of course, the “Split the Pie” method only works if both sides are willing to participate. At the start, I therefore need to clearly communicate to my counterpart that my aim is to work together and get the biggest possible pie for each of us. If we agree on this, I can then also expect and demand a certain level of transparency. This worked well in our negotiations with Coca-Cola; they had much better data than us, of course, which they shared with us.

At the end of the day, we still rely on the other side being honorable though, don’t we?

Yes, that’s true to a certain extent but it’s also in that party’s interests to create a reasonable data base. For example, I was once asked to advise city authorities on negotiating an airport rental agreement. In all honesty, I knew nothing about how an airport works from an economic perspective, so I asked the operating company to provide me with their data. After all, I ultimately had to give the mayor a recommendation. Without data to back up the decision I wasn’t prepared to recommend to the mayor that we were being offered a fair deal.

What do we do if our negotiation partner is opposed to the “Split the Pie” method?

If that happens, you have to accept the situation and take a different tack. There are plenty of other negotiation tactics, including tricks and feints. I think it’s a shame but, while you can lead a horse to water, you can’t make it drink. Unfortunately, many people automatically try to build pressure into their negotiations, simply because it’s encouraged in our culture. In reality, nobody actually wants to deal with someone like that.

Mr. Schranner, during your time in the police, what was your toughest case?

I was involved in a hostage situation. I was in the same room as the kidnapper; no barriers, no SEK team [the German Special Task Force]. The kidnapper had a gun in his hand and said “Outside – or I’ll shoot the hostage.” That in itself was a formative experience.

How did you resolve the situation?

I negotiated. The first thing you have to do in a situation like this is release the pressure. I told the kidnapper he was making the decisions and that he didn’t have to do so immediately. I assured him that he had control over the situation and was responsible for how it played out. Then, I offered him a deal: We’ll talk for five minutes and then you can decide. We started talking and I was eventually able to persuade him to relent, which gave me the crucial advantage.

Today, you advise politicians and businesses on deals that run into the millions. Are there parallels between the two situations?

We get called in to assist with extremely tough negotiations; for example, when there is only one supplier to negotiate with and failure is not an option. The same principles apply – we have to come to an agreement to prevent catastrophe. The principle of starting by releasing the pressure also applies in business negotiations, along with emphasizing the commonalities and shared history between the two parties. It’s also important to demonstrate a shared future to make it clear that both sides are interested in finding a solution. This is much more effective than focusing on the areas of conflict.

Why is that?

I can then state my demand; for example, a ten-percent price increase. Making this request forces my counterpart to respond, by either agreeing, saying “yes, but”, or saying “no” and explaining their reasoning. All three situations are good for me because they provide me with information that I can use to develop a mutually beneficial plan. For example, I could suggest implementing an incremental price increase over a period of several quarters to reach my goal. The mistake most people make at this stage is that they don’t ask; they start with a disagreement and argue.

Why do you believe arguing doesn’t work?

Arguments arouse people’s emotions, and emotions are never a good thing in negotiations. They focus the discussion solely on the point of disagreement and the past, refer to previous contracts, or encourage statements like “but you said that in the minutes last week.” This is fatal because there are only two options when negotiating – you either negotiate successfully or you end up being proved right. If I want to be right, I can take legal action. But if I want a solution, I have to negotiate – and this is when arguments don’t work because they result in justification and rationalization. What’s more, they almost always lead to the person you are negotiating with feeling attacked and, consequently, becoming emotional.

There are two reactions to this, too. Either your counterpart totally overreacts, becomes stubborn, and goes on the attack, or they completely withdraw into themselves and disengage from any negotiation.

If the person I am negotiating with becomes emotional, what can I do to take the emotion out of the situation?

When people become emotional, it’s always because they feel threatened, so you need to remove the risk of this happening and bring the discussion back to commonalities. You can highlight what you’ve already gone through together and emphasize that this situation, too, can be resolved. It’s very important to continue to negotiate, however, because taking a break at this point would be a mistake. This gives people the opportunity to talk to allies who validate them; the next day, the two sides will then simply be further entrenched.

There are hundreds of books that recommend psychological tricks when negotiating. What do you think about that?

It’s not a strategy I rate. We’re not here to play psychological mind games – those are misleading tricks for beginners that don’t actually add anything. The same applies to the outmoded image of the
“bad cop” who comes in threateningly and hammers on the table. Professional negotiators no longer act like this – at least not in the league we operate in, which involves deals worth many millions of euros.

If I find myself opposite a professional negotiator, is that to my advantage?

That’s a huge advantage. Novice negotiators often get to a certain point and then don’t know what to do – and this uncertainty leads them to become emotional. Then they start to issue threats, which
is incredibly frustrating for a professional negotiator like me. When both sides negotiate professionally, reaching a good outcome will happen much more quickly. I’d even go so far as to say that the more professional the two sides are, the better the result. The better your opponent, the better you will play the game yourself; we all know this from the world of soccer. A club facing a top Champions League club will play at a completely different level than when they face a club threatened with relegation in their own league. If the other side is really good at their job, it usually makes it much more fun, too.

It sounds as if you like to win when you negotiate. You probably don’t believe in the Harvard win-win method, do you?

It’s commonly understood that a win-win situation means both sides achieve a good outcome. What many people forget, however, is that this only works when both parties espouse the same value system and are looking for a win-win outcome. When I enter negotiations in the spirit of cooperation and make a suggestion that sounds fair to me but my counterpart rejects it because their values are very different to mine, I get disappointed. This then puts me in an extremely tricky position because emotions come back into play. Especially in German-speaking countries, many people make this mistake and shy away from conflict. They start the conversation with what they consider to be a “fair” offer and thereby try to get the negotiation out of the way. The concept is often associated with bargaining, as if negotiating were a bad thing. Of course, this mindset is not the way to achieve the results you’re looking for.

Is it different in other cultural settings?

There are a number of differences that come into play here. In the USA, for example, negotiators enter into a negotiation with more pressure. They see it as a game and are aiming to win. If you start cooperating too early on, you’ll be walked all over. There is only one solution to this – launch a full broadside in response. If my counterpart says +10, I’ll say -20 on principle. Then the Americans know the game has begun. Don’t misunderstand me; this is purely about strategy rather than tone – we always remain extremely polite.

If we look at China, how is negotiating there different?

In China, negotiators also treat the negotiation as a sort of game. The word “cunning” often has negative connotations in our culture; we say someone is as cunning as a fox. In China, however, it suggests shrewdness, so you either reveal nothing of your intentions to your counterpart, or only give them incomplete information. This is neither “good” nor “bad” but simply an alternative way of doing things. However, you do of course have to be aware as a negotiator.

You say you shouldn’t offer to cooperate too early on, yet, on the other hand, you talk about having to find a shared solution. How do you pinpoint the right time to cooperate?

One of the most common mistakes is to start the negotiation by putting forward a potential solution straightaway and presenting a finalized offer. Initially, the crucial thing is to bring clarity to the negotiations. First, you have to be certain there are no more misunderstandings. What does the person I’m negotiating with understand by “long-term” or a “reasonable price increase”? There’s no point entering the cooperative phase until any potential misunderstandings have been ironed out. Once everything has been clarified, that paves the way for each party to state their demands and work together to find a solution. You have to develop an instinct for judging the right time to do this. The more negotiation experience you have,
the easier it becomes.