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What are the theoretical underpinnings behind negotiation? Can these ideas have an impact in business?

By Finnbar Cornwall 20 November 2014

In 2008 I was serving as a British diplomat at the UK Embassy in Baghdad, Iraq. During my time I was part of a core team, led by the British Ambassador and Simon McDonald, the UK Prime Minister’s Foreign Policy Adviser, which secured a new treaty authorising UK military forces to remain in Iraq. I observed how Simon McDonald re-defined our negotiating strategy to secure Iraqi support and took away some key ideas about the art of negotiation which have changed the way I do business.

 

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The key negotiations took place over one day in mid-December 2008, when Simon McDonald flew to Iraq. At this point we were under significant time pressure to conclude a deal because the UN mandate authorising foreign military forces’ presence in Iraq was due to expire at the end of 2008. The British Prime Minister had publically promised that UK forces would remain in Iraq to complete their mission, which required negotiating a new bi-lateral treaty with the Iraqi government to authorise the continuing presence of UK forces in Iraq. However the Iraqi PM was reluctant to publicly support a new agreement due to domestic political pressure to show that foreign troops would leave Iraq.

  

Simon McDonald’s approach was to firstly slim down the list of issues to be negotiated and focus on the fact UK forces were protecting an Iraqi oil terminal from insurgent attacks. This oil terminal was vital to Iraq’s economic interests as it was the hub for the export of the majority of Iraq’s oil, which provided the bulk of revenues to the Iraqi governmental budget. McDonald explained that in order for UK Forces to continue playing this role, a new agreement was needed.

 

I initially thought this approach was a sign of weakness because by reducing the scope of our negotiation we were giving up on things that were important to us. In fact this allowed a few key issues to emerge and highlighted to the Iraqis that a deal was better than no deal at all.

 

We then offered the Iraqi’s two take-it-or-leave-it deals: one that gave them nearly everything they had asked for but no protection for the oil terminal; and the second, a much simpler deal, that did. This made the Iraqis realise the trade-off they had to make to secure protection for the oil terminal.

 

We also hinted at unspecified retaliatory measures if no deal was reached. For example, the UK would have to leave Iraq sooner than anticipated, which would impact how the UK would view future requests for Iraqi support in other areas, such as trade and cultural exchanges. However, attached to the second deal there were clear promises of support in these areas.

 

The lessons I learnt from this episode included the importance of focusing on my negotiation partner’s key area of interest, being willing to use brinkmanship, and using unspecified implications of conflict in the future coupled with an alternative of beneficial cooperation.

 

Later, I encountered the work of the Nobel Prize winner Thomas Schelling, who applied game theory to social, political and economic problems. Schelling’s work on conflict resolution formalised and put a framework around ideas I had picked up in a real-life setting.  It showed that a party can strengthen its position by overtly worsening its own options, that the capability to retaliate can be more useful than the ability to resist an attack, and that uncertain retaliation is more credible and more efficient than certain retaliation.

 

I now understand how all of these factors were vital in securing the new treaty with the Iraqi government. We had weakened our own position by giving up on issues we had been fighting hard for. Further we had used uncertain retaliation by hinting at how the failure to secure a deal would have unspecified impacts on other areas of the UK-Iraq bi-lateral relationship.

 

I was also drawn to Schelling because of his background. Like me, he spent the early part of his career involved in governmental-level negotiations, where he learnt in a hands-on environment working on negotiations with European governments, primarily in connection with those governments' contributions to the new NATO defence establishment.

 

Further, like me, he picked up on what had worked during actual negotiations. Interestingly, he says himself that the two articles ("Essay on Bargaining", American Economic Review, 1956, and "Bargaining, Communication, and Limited War", Journal of Conflict Resolution, 1957) which the Nobel selection committee considered his contribution to "understanding cooperation and conflict", were completed before he had more than a smattering of acquaintance with formal game theory.

 

Other than Schelling’s work, the other idea I find infiltrating all areas of my life is the concept of a Best Alternative to a Negotiated Agreement (a BATNA).  For example, recently I was buying a new suit and trying to negotiate a discount. This arose because when I returned to collect the suit after alterations I discovered it was now on sale. I wanted to secure the suit at the new sale price.

 

Initially the shop assistant was reluctant to give the discount. In the shop I found myself thinking about the ideas I had learnt and how to apply them to this negotiation. I drew on Schelling’s work by hinting at my uncertain retaliation that if I didn’t secure a discount it might impact how I felt about this shop, which could impact my future purchase decisions.

 

I was aware that the shop assistants key interest was to secure this and future sales. I indicated that a positive experience here would make it more likely I returned. I also weakened my own position by saying that although I had statuary right to return the suit I recognised that the suit had been altered for me and therefore I wanted to complete the sale.

 

I was also aware that my credible BATNA was to return the suit and buy another at an alternative shop, which I explained to the shop assistant.

 

All of these tactics helped give me the confidence to negotiate with the shop. I turned down their first two offers, of 50 per cent of the sale difference and then a credit note for a full amount, and secured a full refund for the difference.

 

This may be a trivial example, but understanding the theoretical underpinnings behind negotiation helped me to apply many of the lessons I learnt in war-zone environment in Iraq to a suit shop on Jermyn Street in central London. That is why I see these ideas as having the greatest impact on how I do business, both now and into the future.

 


 

 

Finnbar Cornwall is an Associate at McKinsey & Company. He has an MBA with Distinction from London Business School.

 

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