Summary
- Effective negotiation involves seven key elements identified by Harvard Law School, including interests, legitimacy, alternatives, options, commitments, communication, and relationships.
- Understanding your best alternative to a negotiated agreement (BATNA) is a critical legal and commercial tool when entering contracts or resolving disputes.
- Applying structured negotiation principles can lead to stronger agreements, reduced conflict, and better commercial outcomes for businesses.
- This article is a plain-English guide to negotiation principles for business owners operating in Australia, produced by LegalVision, a commercial law firm.
- LegalVision specialises in advising clients on commercial negotiations and contract law.
Tips for Businesses
Before entering any negotiation, clarify your interests and identify your BATNA. Focus on creating options that benefit both parties rather than taking fixed positions. Strong preparation, clear communication, and maintaining professional relationships will help you reach durable agreements and avoid costly disputes down the line.
Negotiation is back-and-forth communication designed to reach an agreement between two or more parties with shared interests. This type of communication features in your everyday life but may also be useful as a form of alternative dispute resolution (ADR) for business disagreements. Therefore, it is important to know how you can strengthen your position and better understand the other party’s perspective. Harvard Law School’s Program on Negotiation (PON) has helpfully dissected a negotiation into seven distinct yet interconnected elements. This article will explain those key factors to help you get the most out of your negotiation.
Negotiation Approach
Before you consider each element, you should determine how you will approach your negotiation. For example, do you plan to achieve an outcome most favourable to yourself and ‘win’ the negotiation, or are you working towards the best outcome for all parties?
The first approach is called distributive or zero-sum negotiation, where one side ‘wins’ and the other ‘loses’. Parties put their personal positions and differences before their counterparts. A common example of this is negotiating with a car sales associate for the lowest possible price.
The second approach is called integrative or interest-based negotiation. This style focuses on win-win situations for both parties. Parties use this approach when the issues at hand are complex, negotiations are ongoing, or they are looking to maintain their relationship. As a result, you may see this approach as more productive for your commercial dispute, where a mutually beneficial outcome could generate considerable value for your business. For example, when your employee completes a project outside work hours, you may agree that they can take time off in lieu instead of being paid overtime.
1. Interests
Interests are often referred to as a party’s basic needs, wants and motivations. People negotiate to try and satisfy their own interests or demands. Importantly, you should note that interests differ from positions. A position is what a party wants, whereas an interest is why they want it.
Following the earlier hypothetical example with your employee, your position is straightforward: to provide time off in lieu. However, your interest might be for a number of reasons, such as reducing wage costs.
Understanding a party’s interests is key to integrative negotiation. When fixated on positions, it is easy for parties to attack and defend positions. Asking ‘why’ opens up a collaborative environment and increases your chances of a mutually beneficial outcome. Interests can also play a role in distributive negotiations. They enable you to generate arguments or counteroffers depending on the other party’s response.
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2. Alternatives
Interests allow you to measure your alternatives to the agreement and paint a picture of your best alternative to a negotiated agreement (BATNA). Similarly, you will also be able to consider the worst alternative to a negotiated agreement (WATNA). Ideally, you should not negotiate for anything less beneficial than your BATNA. This is not always possible and understanding your alternatives, along with the other party’s, will be essential in a successful negotiation.
3. Relationships
The relationship that you have with the other party is very important in negotiation. Having a trusting relationship may make dispute resolution easier, whereas a hostile relationship can make negotiation more difficult. Disputes can be damaging and stressful to ongoing relationships. Because of this, you may consider emphasising the value of maintaining that relationship over the substantive issues in the dispute.
In a negotiation, relationships can help determine several important factors, including your:
- willingness to shift from your stance on certain issues;
- assertiveness when arguing for certain positions; and
- negotiation approach.
If you feel your business relationship could play a role in the negotiation, you should ask yourself some key questions before engaging, such as:
- How important is the relationship with the other party to me?
- Will I ever see the other party again?
- Is my reputation important?
You may choose to negotiate harder if you do not see a benefit from considering the other party’s opinion. Beyond your relationship, you may also consider your reputation if the other party is in an industry or market in which you work or operate.
4. Options
Options are the possible agreements or pieces of a potential agreement. This involves a series of different combinations of possible outcomes. They differ from alternatives, which explore what happens if you cannot reach an agreement. For example, when you negotiate to buy a car, an alternative might be to buy from another dealer or buy a second-hand car online. An option might be that you pay extra for aluminium tyres and a roadside warranty.
When you have reached this element of a negotiation, it means you are progressing towards reaching an outcome. However, be mindful that discussing options is intended as a brainstorming exercise. It is not a signal for taking offers or making concessions. The idea is that you create options first and evaluate them second.
Discussing options can empower both parties as they have a say in resolving the issues. As a result, you should take care to avoid expressing judgement or drawing conclusions.
5. Legitimacy
Importantly in a negotiation, there should be some objective standard of fairness for the claims made. This ensures that both parties have a point of reference beyond what is discussed at the negotiating table. Legitimacy not only solidifies your offers, but it assists you in questioning whether the other party is suggesting fair options as well. For example, if a car dealer offered to let you finance the vehicle, how do you know the interest rate they are charging is reasonable? A legitimate offer would be comparable to a market rate.
6. Communication
Communication is core to all negotiations and beyond voicing your position and offer. It involves listening, the tone of your voice and even body gestures or movements. By being an effective communicator, you can delve into the other party’s interests whilst also conveying yours clearly.
To communicate effectively, you should:
- ask open-ended questions to gather as much information as possible;
- listen actively and show engagement with the other party; and
- be relaxed, as stiff body postures can send the wrong message to the other party.
7. Commitment
The final element of negotiations is ensuring that there is a commitment by both parties. Commitment is an agreement, demand, offer or promise by one or more parties that formalises the agreement. Commitment is two-pronged. Firstly, you want to ensure that the outcome that you have agreed to is realistic. Secondly, both parties must be able to uphold their end of the bargain. Without these conditions, you will likely have to negotiate again.
To ensure that there is the requisite commitment, some key questions to consider at the beginning of the negotiation might be:
- What kind of commitment can I expect in any future negotiations?
- What is the other party’s level of authority?
- How authorised is the other party?
For example, if the car dealer was only an associate and had to get the paperwork signed off by the principal salesman, then it is likely that they cannot fulfil all their promises. Asking these questions before you negotiate can save you the time and hassle of having to renegotiate with the person with actual authority and commitment responsibilities.
This guide provides key information on how to manage a business dispute as quickly and cost-effectively as possible.
Key Takeaways
If you are in a business dispute and have chosen to negotiate to resolve it, this may be a difficult process. It can be helpful to understand what approach to take to achieve your desired outcome. Harvard’s PON outlines seven elements that exist in all negotiations. These elements are:
- interests;
- alternatives;
- relationships;
- options;
- legitimacy;
- communication; and
- commitment.
Importantly, Harvard has not designed these elements to act like a checklist, where meeting each requirement will mean a successful negotiation. Rather, they are simply components that you should adopt to maximise the benefits of a negotiation.
If you would like assistance regarding negotiations, LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced dispute resolution lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
Distributive negotiation focuses on one party winning at the other’s expense, while integrative negotiation seeks a mutually beneficial outcome. For complex commercial disputes where maintaining relationships matters, integrative negotiation typically generates more value for all parties involved.
A BATNA is your best alternative to a negotiated agreement. It sets the minimum acceptable outcome you should negotiate for, helping you evaluate offers and avoid agreeing to terms less favourable than your available alternatives.
Commitment ensures both parties can realistically uphold the agreed terms. Before finalising any agreement, confirm the other party has the authority to commit, as negotiating with someone lacking decision-making power may require you to renegotiate entirely.
Your relationship influences your willingness to compromise, your assertiveness, and your overall approach. A trusting relationship can simplify dispute resolution, while a hostile one may make reaching agreement harder, particularly in ongoing commercial relationships.
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