Negotiating is a daily activity
“Liv, I need you to call the office supplier and get a 10% price reduction” or “Urmish, I need you to make this loss provision issue with the auditor go away” are business negotiating activities. Personal negotiations may be more along the lines of teenagers seeking to extend curfews or couples agreeing a vacation itinerary.
So, a negotiation is simply the process of discussing something with someone in order to reach an agreement with them.
It sounds so easy, yet is a skill elusive for many. Let’s look at some best practices used by skilled negotiators. It also helps to shine a light on the “no no’s”.
Good and bad negotiation practices
It is important to recognize that some business negotiation techniques are best avoided in personal negotiations. This might include such tactics as ultimatums or a no-deal walk-away, ones we’ve witnessed during Brexit negotiations and the Paris Climate Agreement negotiation respectively. This BLOG focuses on business negotiations rather than personal ones.
Negotiations, like problem solving, start with identifying the right problem to solve. In other words, the root issue is effectively the choice between accepting a mutually agreed outcome (deal) or accepting the best no-deal alternative. Effective negotiations are grounded in game theory. Where each party considers the other party’s possible decisions, or strategies, in formulating their own negotiating strategy.
Let’s take a look at six areas that set good negotiations apart from ineffective ones:
- Considering both sides
- Preventing fixation on one particular aspect
- Considering outcomes versus goals
- Identifying differences that offer value
- Having a clear “best alternative to a negotiated agreement” (BATNA)
- Leaving biases at the door
Applying the negotiating practices
Consider the following common scenario in accounting teams:
It is year-end. The local audit team don’t agree with an accounts receivable impairment provision in the balance sheet for three large customers. The potential impairment is material to the local entity and can’t be ignored. The receivable impairment is calculated based on the Group credit impairment model; meaning the Group sets impairment rates. The local audit team tell you that the Group model does not reflect the local country’s actual credit loss experience, so it needs adjusting. Easy enough, but the Group controller is pressuring you to refuse acceptance of a local to Group accounting difference.
Caught in the middle, you need a way out. You need to keep the audit team happy otherwise the local audit report will be qualified, and you need to keep the Group controller happy otherwise it may affect your performance review. How do you negotiate a solution to this issue?
- Consider both sides
- Prevent fixation on one particular aspect
- Consider outcomes versus goals
- Identify differences that offer value
- Have a clear “best alternative to a negotiated agreement” (BATNA)
- Leave biases at the door
One possible negotiation strategy
- You both want to avoid a qualified audit opinion. You also want to avoid a conflict with the Group controller. The audit team want to arrive at a conclusion they are comfortable with.
- The long-term play is maintaining a positive relationship with the auditor, and conversely for the auditor to maintain a professional client relationship. The auditors’ reputation is the one most at risk, if the judgement made is incorrect.
- The common ground is a clean audit report, which is more than a zero-sum game.
- The differences that offer value are less relevant in this case scenario.
- Two possible BATNAs exist: choose a new auditor OR stall the impairment discussion negotiation (it is perhaps the less plausible alternative in this case).
- The possible biases are “the auditor doesn’t understand the business”, “the client is minimizing the impairment to boost profit”, “the client doesn’t understand the generally accepted accounting principles (GAAP) requirements”, “the auditor is being unreasonable”, “the Group controller doesn’t understand local conditions”.
Understanding this dynamic, the most realistic short-term outcome is the local team updating the credit impairment process to incorporate local customer and economic conditions. A long-term play may be to replace the auditor; however, it adds little value when audit concerns are well-founded. In addition, the CFO has a responsibility for applying local GAAP and may need to update closes process metrics with the Group. Heightening the Group Controller’s awareness of local requirements should help facilitate the necessary close process metric changes.
Remember skilled negotiators play the game as handed to them, but they are also masterful at setting it up and then shifting collective focus away to maximize the odds for better outcomes.
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