Part 2: BATNA – Yours and Theirs
In our last blog we reviewed traditional negotiating techniques and concluded that they all suffered from the unfounded assumption that “you had to deal with the cards you are dealt”. However, none of them focus on changing the circumstances surrounding your negotiations.
If you had to pick a date when modern negotiating began, 1981 would be a good choice. That’s when Roger Fisher and William Uri, members of the Harvard Negotiation Project, published the best-selling book, Getting to Yes. In that groundbreaking work Fisher and Uri coined the term “best alternative to a negotiated agreement” or “BATNA”.
At this point, negotiation was about to change from theatrics to a science.
With BATNA, the initial focus of any negotiation was what the world would look like if negotiations failed. Before you negotiate your Deal A, you need to fully understand Deal B, your alternative. The thrust of their work was that to be an effective negotiator you had to understand leverage, not just negotiating techniques.
But the core of BATNA – leverage analysis – does not stop with an analysis of your alternatives. It’s equally important to realistically estimate your counterpart’s alternatives. If the other side doesn’t do Deal A with you, what does their Deal C with another party look like? The goal is to be able to understand the strength of your next best alternative in relation to their next best alternative.
Although an entirely new framework for business negotiations, BATNA was really a variation on the game theory developed by Nobel Laureate John Forbes Nash (the subject of the book and movie “A Beautiful Mind “). His theory, The Nash Equilibrium, was a highly mathematical process to analyze the strategic interaction of multiple decision-makers. The theory worked so well that it remains the cornerstone of the US nuclear arms policy, the so-called theory of Mutual Assured Destruction.
- Understanding your BATNA
The first step in using BATNA negotiations is to understand what your world looks like if you don’t do your preferred deal. That involves determining the cost to you – in terms of both rent and top line revenue impact – of doing a lease in your preferred building versus settling for your second-choice building. If the cost differential to you is relatively small, you may choose to take a tough stand with your preferred building. However, if your second-choice building is materially more expensive, your strategy may be markedly different.
- Understanding the BATNA of the landlords.
The traditional process that most brokers follow for tenants does a pretty good job of dealing with the first step of a BATNA discussed above. Almost all brokers get proposals from multiple buildings and many even put the economics terms in a comparative financial model. A few even discuss with the client what the business impact would be of choosing one location versus another.
But that’s only looking at the tenant’s BATNA. That’s only half of the process. The other key is understanding each landlord’s BATNA. This part of the analysis puts the full-service brokerage shops in an awkward position since landlords are also their clients. But without a full and honest discussion of the landlord’s BATNA you will never know how much money you may be leaving on the table.
How would your negotiations with your preferred building change if you learned that the landlord had a loan that was maturing shortly and that without leasing up the space that you’re considering, it would be unlikely that the landlord could successfully refinance? What if your preferred building were part of a private equity fund that was maturing so it was likely that the building would be sold in the near future? Wouldn’t it be useful to know what the value of the property was with your lease in place versus selling the property with the vacancy? It’s difficult for full-service broker to have complete and unbiased discussions with you about the BATNA of the owners of the buildings you’re considering, since those owners are often clients of their firms. But without understanding the BATNA of the landlords you will never know how much money you may be leaving on the table.
The underpinning of BATNA is that effective negotiations is not a matter of theatrics and but a process of understanding the relative leverage of the parties. Once that premise is accepted, then preparing for negotiation is less a matter of practicing the “good cop/bad cop” routine and more a matter of (1) developing and optimizing your alternatives and (2) understanding the alternatives available to the other parties with whom you are negotiating. It’s simple: the party with better alternatives in a negotiation wins.
All the traditional negotiating techniques in the world won’t help you as much as an understanding of your BATNA in the BATNA of the owners of the buildings you are considering.
Part of this wisdom is embodied in the English proverb “don’t put all your eggs in one basket”. Every farmhand knows that if you have all your eggs in one basket and stumble on the way back from the henhouse, then you’re having oatmeal for breakfast. That’s why it’s important for you to have truly viable alternatives in your real estate search and understand the full business implications of those alternatives.
If we were to update that English proverb to reflect the modern negotiating strategy of BATNA, we might revise it to say, “don’t put all your eggs in one basket, and understand the baskets of the other guy”.
When you’re doing your next real estate deal, don’t negotiate until you have created multiple alternative deals and understand the BATNA of your preferred outcome. That simply a matter of not putting all your eggs in one basket.
But don’t just focus on your world. You must understand your preferred building’s BATNA if you choose not to make a deal with that building. What does your preferred landlord’s basket look like if they stumble in making a deal with you? If they might be having oatmeal for breakfast, maybe you have the leverage to push harder.