Negotiating losses in times of crisis

 

Even in the midst of crisis life must go on. So, too, must business. But businesses are operating in highly unusual and disrupted circumstances. Leaders can try and use good judgement to help them cope, but what if conditions have altered so much that previously negotiated agreements and contracts are now proving to be problematic? Insurance policies and even force majeure clauses can cover some but certainly not all scenarios.

The current situation lands the business leader in potentially treacherous territory: negotiating losses. That would not be a happy task at the best of times but in a crisis it is an even more daunting prospect.

Niro Sivanathan, Associate Professor of Organisational Behaviour at London Business School, is an expert in the tricky business of negotiations. He has been teaching a popular negotiations elective for more than years. He recognises that negotiating losses – which could in turn become conflicts or disputes – is an inevitable consequence of where we are.

As Dr Sivanathan points out, the impact of COVID-19 will affect existing deals, supply chains, transportation and shipping. Deliveries will not take place on time, and services will either not be rendered or will fall below their usual level. As a result, there may be severe implications for company cashflow.

All these consequences may lead to conflicts, disputes and difficult conversations with clients and customers.

How can you resolve all this, through what are likely to turn out to be complex negotiations? Fortunately, as Dr Sivanathan points out, the science of negotiation has been studied by psychologists for several decades. This is a discipline we can get better at.

Many people may feel that they are not good negotiators, because they assume that negotiators are born, not made and they lack confidence or are apprehensive at the bargaining table. But that is a myth.

There is no need to rely on taking big risks or attempting to follow intuition. Two good books worth studying are Getting to Yes by Roger Fisher and William Ury (1981) and the more recent Negotiation Genius by Deepak Malhotra and Max Bazerman (2007).

An important difference to grasp between negotiating a deal and negotiating losses, Dr Sivanathan says, is that in a deal there is usually an upside for both parties. But when you are negotiating losses the important phenomenon of loss aversion comes into play. Specifically, “losses loom larger” on our decisions than gains. The fear of loss can exacerbate an already difficult situation and lead to greater conflict and disputes. It can have a profound impact on people’s behaviour.

The psychologists Daniel Kahneman and Amos Tversky pioneered research into our biases, of which loss aversion is a key one. Over 30 years, Kahneman and Tversky systematically uncovered all the ways we deviate from rationality. (In 2002 Kahneman was awarded a Nobel prize for economics.)

Kahneman and Tversky’s prospect theory challenged the mainstream economic view that the rational person seeks utility in a more or less objective way. But it turns out that, psychologically, the pain of loss is greater than joy of gain, in perhaps as much as a 2:1 ratio. Losses loom larger than gains and this affects the decisions we make.

If you drop and break a £200 bottle of wine, Dr Sivanathan says, the pain you will suffer is greater than the pleasure you might have experienced in receiving a £200 bottle of wine as a gift.

This thought process affects negotiations. In normal times a buyer and seller might be able to find a middle ground where both are happy. There is “positive utility” for both sides. But in the context of COVID-19 you are negotiating losses and the pain involved will affect your behaviour. The landing zone where both sides can find satisfaction can be much harder to locate and settle on.

This can make people far more competitive, Dr Sivanathan says, and tempt them to use hardball tactics to recoup losses. People may also adopt riskier behaviour to reduce losses. This further complicates the situation. Parties come to the table with lots of emotions, mainly negative ones. They may be angry or even spiteful, seeking revenge. In the context of COVID-19 people are wrestling with uncertainty about their personal health as well as their financial health.

“Negative emotions generally result in negative consequences at the bargaining table,” Dr Sivanathan says. People are less collaborative, and this affects the problem-solving mindset. The process becomes a tug of war rather than a joint problem-solving task.

Inaccurate judgements might also be made. People will misread the situation. There may be far more conflict, and small sparks may escalate into spirals of hostility.

In a state of heightened emotions systematic errors may be made because of two principal self-serving biases:

1. Fundamental attribution error

This is the tendency for people to underemphasise situational explanations for other’s behaviour while overemphasising dispositional and personality factors. This especially occurs when the other person’s observed behaviour is negative behaviour. We assume others have bad intentions when things go wrong. With our own behaviour, we tend to attribute to the situation and downplay internal traits. “We judge other people by their actions and ourselves by our intentions,” as it is sometimes said. For example, a delay on fulfilling an order is the other party’s fault – “They should have been better organised.”  If we fail, it is directly due to COVID-19 disruptions.

2. Egocentric bias

This is the tendency to rely on our own perspectives, without taking into account the views, perspectives and knowledge of others. As a result, we tend to overrate our abilities, believing ourselves to be smarter and better at taking decisions than the average person. This leads to ill-founded overconfidence.

Research led by Svenson in 1981 showed that 93% of US drivers thought they are an above-average driver – a clear statistical anomaly. In 1997 a poll for Newsweek magazine asked about the likelihood of different figures going to heaven when they died. Some 52% thought Bill Clinton would, 65% thought the basketball player Michael Jordan would, and 76% thought that Mother Theresa would. But when asked about their own personal chances of going to heaven, 87% of readers said they would. They were on a more saintly fast track than Mother Theresa herself. That is egocentric bias. (Another survey in 1977 led by Cross 1977 showed that 90% of faculty thought they were better than their colleagues in the classroom).

Then there is the peril of introducing the concept of fairness. Invariably it will be raised at some point in a conflict, Dr Sivanathan says. But this discourse can be nebulous, and also ends up being egocentric. Fairness can be a subjective impression, not an objective reality. It may be in the eye of the beholder. A given outcome may feel fair to one party but not fair to the other. Most parents are familiar with the cry of “It’s not fair!” in response to an outcome which, in the view of the mature adult, is entirely sensible, if temporarily disappointing to the youngster on the receiving end of the decision.

A conflict can be approached in three ways, Dr Sivanathan suggests:

a) The power-based approach. This involves the ability to coerce, make threats, use force and exploit financial or political resources.

b) The rights-based approach, which is based on independent standards, contracts, legal rights, and indeed fairness.

c) Shared interests: focusing on the underlying utilities, needs, values, concerns and desires that drive what is said at the bargaining table.

If you unpack the interests you may find common ground. The interests-based approach can lead to happier outcomes than power or rights-based negotiations. You create a sense of joint problem-solving, which can be a powerful force for boosting morale, and a sense of partnership and co-operation rather than hostility or conflict.

For example, consider the parable of the two sisters arguing over who will get to eat the last orange. They agree to do what’s fair. They halve it. One makes juice, the other uses the skin for zest. If they had moved beyond arguing over the orange to unpack the interests, they could have traded off on the interests – one sister could have gotten more of the orange to make more orange juice, the other sister more of the peel to make a stronger chocolate orange cake.

Another element to consider in negotiation is the use of threats. Here the clear message is: do not make threats that you are not willing to follow through on. If you don’t deliver on a threat you will lose credibility and suffer reputational damage. They should be handled with great care. Threats are not there to punish the other party, they are there to push parties towards interests, Dr Sivanathan says.

Threats may also trigger an automatic response to fight back. If you are faced with a threat it may be best to ignore it. Don’t retaliate.

A final aspect to consider is the medium through which you carry out the negotiation. In the middle of a pandemic, face-to-face is not possible. So what are the alternatives?

It is worth considering the “media richness” of the setting for negotiations. Audio and visual cues work in two dimensions. Text (for example in an email) does not give you either. A phone call is an audio-only experience.

A second question: is this a synchronous or asynchronous process? These dimensions are critical to negotiations. It may seem frictionless to send off an email, but it is a more limited form of exchange. (It is of course possible to be more blunt and direct in an email than you might be in person. This is a factor that has to be handled carefully, however.)

An example of how different cues impact our judgement is best exemplified by the US Presidential debate in 1960 - the first one to be televised - between John F Kennedy and Richard M Nixon. Radio listeners formed the impression that Nixon was a stronger performer, while on TV Kennedy was seen as the winner. Words were not enough: the dark and stubbly features of Nixon were no match for the sunny, charismatic demeanour of the young senator from Massachusetts.

Individuals make very different attributions depending on what cues they get. Don’t shoot yourself in the foot when negotiating losses by using a medium that doesn’t work for you.

How do you cope with a power imbalance as a negotiator? Power in a negotiation, Dr Sivanathan says, is determined by your “BATNA” – The best alternative to a negotiated agreement.  Even if you face a more resource rich counterpart, if you have stronger alternatives than your counterpart, within the context of the negotiation, you are deemed to have more power. So try to think creatively about alternative outcomes.

It may also be possible to reframe an apparently deadlocked situation in terms of what potentially the counterparty may gain. This helps steer away from loss aversion. Reframe the losses and gains. Build a bridge into the future. Move away from the element you are stuck on – get onto a different dimension or element that works for them. Find a way to somewhere else.

Ask yourself what the conversation or discourse is like in your negotiations: is it retrospective or prospective? Backward-looking (“…but we shook hands on this…”) or forward-looking (“how can we both come out positively?”).

View negotiations not as a tug of war but rather as a joint problem-solving activity. And if you can control your own behaviour first, other people’s behaviour is more likely to follow and mimic yours.