6 additional pitfals to avoid during a negotiation: Cognitive Biases

It was Richard Feynman who gave the most profound warning: “The first principle is that you must not fool yourself — and you are the easiest person to fool.”

Following my post which highlighted the importance of identifying Logical Fallacies and showcased the 6 most prevalent ones with practical examples, I feel that it is time to also  touch upon another significant field that can become a pitfall in a negotiation, that of “cognitive bias”.

Read on if you want to find out and become conscious of 6 prevalent tendencies to self-deceive yourself by restricting into thinking in a particular way i.e. fall a victim of cognitive biases.

Gaining consciousness of this “bad reasoning” will assist to identify them and so, improve your negotiation skills.

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Do you see a duck or a rabbit?

DEFINITIONS

Cognition is the mental action or process of acquiring knowledge and understanding through thought, experience and the senses.

As per the Webster’s Dictionary (Consice Encyclopedia)

“Cognition includes every mental process that may be described as an experience of knowing (including perceiving, recognizing, conceiving, and reasoning), as distinguished from an experience of feeling or of willing”.

So, a cognitive bias is a tendency to commit certain errors in the process of reasoning.

How is this different to a Logical Fallacy?

“A [Logical] fallacy is an actual mistake in reasoning. A cognitive bias is a tendency to commit certain sorts of mistakes. Not all fallacies are the result of cognitive biases, and having a cognitive bias doesn’t guarantee that you’ll commit the corresponding error”. AskPhilosopher’s

6 COGNITIVE BIASES TO WATCH OUT FOR

There are many cognitive biases (see list here).

The below 6 form a useful reference list of some fairly common ones that you can identify even on a daily basis:

1) Forer Effect or Barnum Effect 

This describes the effect when individuals believe that general enough statements that could apply to a wide range of people are supposedly specifically tailored for them.

This effect can provide a partial explanation for the widespread acceptance of e.g. astrology as well as, some types of personality tests.

Below is a interesting video highlighting how this effect works:

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2) Bandwagon effect

The tendency to do (or believe) things because they are popular at the time. This is also known as herd mentality or groupthink.

Examples can be found in politics and consumer behaviour. Look at how the “cool” product, a popular leader or the latest fad attracts consumers – until the next one comes along. For example:

A political party holds a rousing rally, with music, speeches and much cheering. Those who go are encouraged to ‘keep the faith’ and ‘bring others on board’ and otherwise keep the bandwagon going. (changingminds.org)

Popular diets, popular books and popular “5 step to success” schemes may fall in this category.

3) Framing effect

Drawing different conclusions from the same information, depending on how or by whom that information is presented.

“This course of action has a 20 percent failure rate,” few managers would approve. When that same solution is presented as having an 80 percent success rate, the same manager is going to consider it more deeply—even though a 20 percent failure rate means the same thing as an 80 percent success rate! The frame changes the decision’.” Stever Robbins – The Path to Critical Thinking

4) Pareidolia

This is a psychological phenomenon during which vague and/or random stimuli (often an image or sound) are perceived as significant.

e.g. seeing a face in the clouds, the face on mars, and hearing non-existent hidden messages on white noise or on records played in reverse.

Face-on-mars

5) Stereotyping

This is the expectation that a member of an ethnic, religious, geographic, gender or other group has certain characteristics just because they belong to that group, without having more information about this person.

As an example:

What comes to mind when you hear the word economist? Probably a male figure of some sort.

Substitute the word “economist” for “nurse”, “teacher”, “scientist” or “doctor”.

Well, there you have it.

6) Halo effect

The “what is beautiful is good” effect.

The Halo effect describes the tendency we have to form perceptions of one’s personality (or other characteristics) based on a particular likeable or unlikable element such as the person’s physical attractiveness.

“One great example of the halo effect in action is our overall impression of celebrities. Since we perceive them as attractive, successful, and often likeable, we also tend to see them as intelligent, kind and funny”. (psychology.about)

The above six cognitive biases are just a small sample of the wide variety of bad reasoning out there. However, these are a good start on the journey to establishing integrity in thinking towards a successful negotiation.

How many of them can you identify in your daily interactions?

Image courtesy of Wikipedia

“The rabbit–duck illusion is an ambiguous image in which a rabbit or a duck can be seen….. The image was made famous by Ludwig Wittgenstein, who included it in his Philosophical Investigations as a means of describing two different ways of seeing: seeing that/seeing as”.

The 4 absolute basics to a contract deal (the 4Ps)

What are the absolute basics towards a steady foundation for a written deal?

Imagine that you have been working on a deal for weeks and during a meeting with the supplier (or customer) you reach a breakthrough agreement. Both parties are quite excited and shake hands. Is this enough?

Certain cultures consider this to be enough.

Irrespective of the integrity (character) of both parties though, it is always best to write things down as a Letter of Intent (LOI) or a Memorandum of Understanding (MOU) or Agreement (MOA).

But what do you actually need to take down as a minimum to make this deal valid, workable and to later avoid disputes.

Read on if you want to find out the 4 elements that are widely acknowledged as the absolute basics to a deal.

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The 3 Ps

A deal is considered to be valid if it refers to three basic elements commonly known as the 3Ps. These are:

  1. Parties
  2. Price
  3. Product

It is quite obvious that if we do not have the parties that are covered, the price agreed (and what is included and excluded in the rates) and the product (an exact description of what the product/service is and any agreed variations) then, really, there is no deal. As without these elements there is inadequate clarity to any deal.

3Ps augmented – (the IRON TRIANGLE contribution)

I don’t believe that the above are enough though in the current environment as I have elaborated here based the concept of the Iron Triangle.

This concept reflects the importance of the balance between i) the Scope-Product, ii) the Price and iii) the Performance-Quality-KPI expectations when agreeing a deal.

What the Iron Triangle concept contends is that if these three elements are not in balance the deal is in high risk of failing.

As you can see, the Iron Triangle concept adds to the 3P concept one more element. The element of Performance-Quality-KPI as an absolute basic to any deal.

SUMMARY – the new model = The 4 Ps

So, in summary, combining the two models, the absolute basics to any deal are as follows:

1. Take down the deal in a written agreement (LOI, MOU,MOA etc)

2. Include the below in the written agreement:

  1. Parties
  2. Price
  3. Product
  4. Performance (Quality – KPIs)

What are the elements you use as the absolute basics in a written deal?

 

Image courtesy of anchor1203 / www.flickr.com]

This post was first published on the CILT Australia blog page

5 Approaches to a Negotiation – (Negotiations and everyday life)

The ability to negotiate effectively is one of the key skills to have in life.

Do you have a practical model to think about a negotiation? Something that will work at a fruit market as well as a high status negotiation table.

Read on if you want to find out about a model I have found extremely useful and easy to explain to my 9 year old, as well as, esteemed colleagues and can be used as an additional framework for any occasion.

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WHAT IS YOUR PREFERRED STYLE?

Before you read about this particular model check the below case study and choose your 2 preferred responses.

This will provide an indicator to your preferred negotiation style.

CASE STUDY

You hire a component for a particular gadget and the contract is up for renewal. Your supplier, who you have used for a while has good service quality but not excellent. Your company is expanding with the requirement for this component increasing by 30%, and therefore are looking for a reduction in the price. You would settle for no price increase; your boss would be satisfied if an increase was held to 2 per cent. Your supplier’s first offer, taking into account the increased volume, is at the same unit price as last year. How do you respond?

Potential Responses

  1. Accept the offer
  2. Explain you were looking for a 10% reduction, ask to be met halfway, i.e. a 5% reduction in the unit price
  3. Explain that you should also be looking elsewhere as a matter of company policy
  4. Stress the 30% increase in business you have to offer and the fact that the basic cost of the equipment has fallen, due to improvements in technology
  5. Suggest improved payment terms and a longer contract period in exchange for a better offer.
  6. Show appreciation for the offer that has been made and mention the ‘bad time’ users have given you over servicing

Now, spend a minute to consider your answers. Remember choose only two of the above six choices.

Ready. Well done! Let’s move on.

THE MODEL

Categorisation is essential for it is the way to frame and really understand how things work. In this model, the negotiation approaches are split in the below general categories (the #numbering corresponds to the above suggested responses):

  • Logic #4
  • Threat #3
  • Emotion #6
  • Compromise #2
  • Bargaining #5
  • and then there is Acceptance #1 but then this is not really a negotiation (if Acceptance is the first response).

So, which were your preferred responses?

Your choices are an indicator of what is your instinctive preferred style is.

What you choose to use at every negotiation should be quite different and should dependent on the context, the relationship, the required outcome etc.

Using one behavioural style at every negotiation despite the different power dynamics and the different preferred outcomes is not wise as this would not enhance the potential for maximising the value of the deal.

For example, as an extreme case, imagine you have decided upon a collaborative approach for R&D (mutual product development) with a supplier but your natural style is to Threaten (#3). Well, this is not an approach that builds bridges towards greater collaboration.

WAYS TO USE THE MODEL AND BE EFFECTIVE AT A NEGOTIATION

1. Know what you naturally prefer (in this CIPS white paper there is a test that more accurately measures your negotiation style)

2. Pay attention on what is the preferred method from the other side.

An easy way to do this is to identify key themes. Notice again the above 6 responses and compare them for key differences.

3. Get on your team people with natural talent at different negotiation style.

4. Prepare, Prepare, Prepare. Prepare on what style and arguments you should use. Prepare for what naturally you would expect from the other party. Prepare BATNA, WATNA etc

FURTHER USEFUL READING

Previous Blog posts about Negotiations:

  • Definition on what the term negotiation really means (here).
  • The first step towards an effective negotiation (here).
  • A useful guide to identify and avoid bad reasoning in a Logical argument (here).
    A checklist on prerequisites for an effective negotiation (here)

Great Books

  1. Clive Rich- The Yes Book
  2. Robert Cialdini – Influence
  3. Roger Fisher & William Ury – Getting to Yes

 

 

 

 

[Image courtesy of Andalousia / www.morguefile.com]

The Iron Triangle – A great tool for successful Procurement and Contract Management

How do you distinguish if you pay too much? What are the elements you need to have in mind when putting together a deal?

There may be a lot of books and literature that describes this point. Nothing I have found though, makes this clearer than the concept of the Iron Triangle.

The Iron Triangle was part of a presentation by Sara Cullen at an IACCM workshop in Melbourne last year (you can find this concept in her book Outsourcing: All you need to know).

After hearing about this concept, I found that I was using it in discussions with colleagues more and more and that it was very useful to clarify situations and issues.

So, I thought I’d share it with you along with some tips on how to avoid been caught in what is called the “Winner’s Curse”.

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THE EXAMPLE

Sara, in her book, mentions the example of a retailer’s IT department (the Customer) who chose to go to tender for the data centre operations placing big emphasis on the price, on the belief that the services and the providers themselves were undifferentiated. So, the lowest bid (30% below the second lowest) won the tender. Value for money was not assessed or thought it was of importance.

Very quickly in the deal though, scope and price variations became the norm. KPIs were not achieved as these had been set up as targets and not as minimum standards and the Customer had not dedicated time to develop an SLA that was customised to the Customer’s needs.

Additionally, the Customer had now to dedicate a full resource to variation management. Demand peaks had not been accounted for within the tender price and so, even more resources had to be acquired. The story goes on.

So, as you can appreciate the total cost of this contract was very high. Actually, Sara reports that it was higher than the highest bid and the Customer was constantly preoccupied with fighting fires rather than adding value.

This a typical case of what is called the Winner’s Curse.

THE IRON TRIANGLE AND THE WINNER’S CURSE

To better understand what happened, we have to look at the concept of the Iron Triangle (picture above).

The Iron Triangle reflects the basic three elements of a successful deal. These are:

  1. Scope – what the products / services are.
  2. Performance (Quality) – what standards are required for the products / services
  3. Price – what price will be paid for the products / services

Focusing on the Price levels for now, this concept depicts three different price levels with the analogous levels of Scope and Performance (Quality).

1. The Winner’s Curse – This is the price a bidder will bid in order to win a tender. (P1)

2. Price to do – This is the price required to do the job including a reasonable margin (P2)

3. Price to act in Customer’s favor – The highest bid of all which corresponds to the highest quality and scope (considered in Customer’s favor) (P3).

In the above example, what the IT department (the Customer) failed to understand is, that selecting the vendors based on the P1 price level (the Winner’s Curse) means that the Provider needed to cut corners to recover its cost and potentially make a margin.

On the other hand, the expectation the Customer has in terms of Performance (Quality) and Scope usually resembles the corners of the Triangle corresponding to price level P3.

This means that the eventual triangle the Customer would require consists of the highest Quality and Scope levels but the lowest price. This results in a skewed triangle and is unsustainable.

Hence, what ensued the deal in the above example was the breakdown of the relationship and the spiraling of costs.

So, reflecting on the Iron Triangle, sourcing should be a search for the best value for money deal, taking into account the Scope, the Performance and the Price from the start.

TIPS TO AVOID BEEN CAUGHT IN THE WINNER’S CURSE

So, what are some tips to avoid been caught in the Winner’s Curse?

  • Be informed about what you want (specifications), how you want it delivered (quality), what value-additions are required (if any).
  •  Be in the know, from a Total Cost of Ownership (TCO) perspective e.g. estimate the transition costs for changing suppliers (should you want to add them in the mix) etc
  • A deal made must include clarity around these three items Scope, Quality and Price. Be sure to cover all of those from the start.
  • Have a variation process agreed.
  • Have an exit strategy should things go wrong.
  • Know the triangle you are in at every deal and prepare for any shortcomings if in fact you are forced to go for a winner’s curse.

Do you know what triangle you were part of the last time you did a deal?

Image courtesy of Sara Cullen / www.whiteplumepublishing.com