New mind-set needed to tackle crisis

Across the globe, tough economic times are presenting individuals and organisations with challenging negotiations. In their business and personal lives, people are realising that they need a different mind-set and new skills as they negotiate mortgage foreclosures, broken contracts, failed deals and mounting debt.

The prospect of negotiating through such challenges can be daunting. And if negotiating unwanted debt and other losses feels different from negotiating profits and other benefits, that is because it is a different process. First, because negotiations over losses are typically renegotiations of existing deals, they differ in fundamental ways from initial negotiations over benefits. In addition, we tend to approach losses from a different psychological perspective than gains – an attitude that can prevent us from recognising the opportunities buried in difficult situations.

This article examines these situational and psychological differences with the goal of showing you how to tackle some of the most daunting negotiations you will face: those involving losses, broken contracts and other challenges created by difficult economic times.

An economic downturn can make the current terms of a deal too difficult or costly to sustain. Whether you and your counterpart like it or not, you may find that you need to renegotiate your current contract. Renegotiation of an existing agreement is likely to differ from your initial negotiation in the following three ways, according to Professor Jeswald Salacuse of Tufts University's Fletcher School of Law and Diplomacy:

- You and your counterpart know more about each other and about your transaction than you did when you negotiated the original contract. In the face of missed commitments, disappointing results and broken promises, the parties involved may end up blaming each other for a failing deal.

- Because your deal is already in motion, you generally face higher costs when you walk away from a renegotiation than from an initial negotiation. As tempting as it is to ignore growing problems, eventually you will have to face them.

- You probably framed your initial negotiation in terms of what you would each gain from a deal.

By contrast, the renegotiation is likely to dwell on allocating a loss. The threat of a lawsuit, contract cancellation or the revocation of future business may loom over the proceedings.

When worsened conditions require you to renegotiate, you and your counterpart are probably going to approach the talks with a very different mind-set than you did when you first formed your agreement. In particular, expect to confront these three challenges:

- Renegotiations are much more likely to be rancorous and competitive than initial negotiations. Why? Consider that negotiators will pay more to avoid a loss than to gain a financially equivalent benefit, according to Professors Harris Sondak of the University of Utah and Adam D Galinsky of Northwestern University. Because negative events affect us much more strongly than positive events, negotiations over costs and losses are likely to be more competitive and challenging than negotiations over benefits and assets.

- Parties to a renegotiation probably will be less willing to compromise and less likely to reach agreement. In one experiment, Margaret Neale of Stanford University, Max H Bazerman of Harvard Business School and Thomas Magliozzi found that negotiators who were led to view transactions in terms of a net profit were more willing to compromise than negotiators led to view identical transactions in terms of a net loss. Negotiators who focused on gains achieved greater overall profitability than negotiators who focused on losses.

- Renegotiations tend to lead to outcomes that create less mutual benefits for the parties involved. A 1995 study by Neale and Sondak found that negotiators are less capable of reaching agreements that trade off differences to create value when allocating burdens, such as monetary losses, than when allocating benefits. The tendency for negotiators to view gains and losses differently helps to explain why we often reach less efficient agreements when discussing losses.

The challenges of negotiating losses can cause us to put off renegotiation as long as possible – rarely a wise strategy. In a recent interview, editorial board member John S Hammond outlined three steps you can take to confront losses as effectively as possible:

- Feel the other side's pain. The next time you find yourself lying awake at night realising that high oil prices will prevent you from filling a customer's order, remember this: he is probably lying awake, too, just as stressed about the situation as you are.

Just knowing that the other party has a strong interest in working with you to resolve your problems can provide you with a psychological boost, says Hammond, so take the time to make a list of what your counterpart's pains might be. Too often, negotiators agree too quickly to whatever the other side offers, not realising that he feels pressure to concede, too. Understanding that your counterpart is motivated to work with you to solve his own problems can bring you a sense of power and help you collaborate to avoid worst-case scenarios.

- Change the players. When a deal sours during implementation, there are advantages to having the person who negotiated the original terms negotiate the revised contract. She knows the situation well, of course, and may have developed a level of rapport and trust with the other side that can help the parties revise their agreement.

But from management's perspective, the deal that results from this renegotiation may not be in the organisation's best interest. Those involved in the original relationship are sometimes too committed to it to recognise that it should end. You and your organisation might benefit from asking whether keeping the same people in charge of mounting losses will lead to inappropriate additional investments of time and money. In such cases, a change of guard may be the best solution.

- Reframe the problem. One reason renegotiations in today's economy are so psychologically daunting is that we tend to focus on potential losses compared with the expectations we had when the original deal was signed. Negotiations framed in terms of losses usually lead to inferior results.

Hammond's suggestion: Think in terms of the realities of the new status quo, not what used to be. When parties begin to look at the problem this way, they become capable of viewing any deal that realistically avoids this outcome as a gain for both parties – a mind-set that is likely to lead to greater co-operation and creativity. The bottom line: Reframe the situation so that both parties view a potential deal as a gain.

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