Deal Design Guidelines: Set Yourself Up for a Better Deal

Deal design decisions are often left to chance in negotiation. When we take time to consider a broader array of deal design possibilities, we open ourselves up to a stronger agreement.

By — on / Dealmaking

deal design

Without realizing it, we leave many of our most important decisions in negotiation up to chance. When talking to a potential negotiating partner, we may assume that we have met the best person possible to do this particular deal. We make tacit assumptions about whether we’ll negotiate in person, what we’ll discuss, how long the negotiation will last, and so on.

This type of automatic decision making may lead to good deals, but it can prevent us from reaching great ones. By taking time to ask ourselves deliberate questions about deal design before and during our negotiation, we can set ourselves up for a more productive and rewarding agreement. Here are three key deal design questions to consider:

1.Which Parties Should Be Involved?

In their book 3-D Negotiation: Powerful Tools to Change the Game in Your Most Important Deals, David A. Lax and James K. Sebenius advise us to begin our preparations for negotiation by taking ample time to think about who should be involved. More often than we’d think, the answer isn’t obvious. For example, when entering a dealership to buy a car, you may think that you and the dealer are the only two players. But what about the sales rep, the sales manager, the financing manager, your spouse, your kids, and so on?

The more you think about the various parties who could or should be involved, the more likely you are to identify new sources of value and promising deal structures. In particular, Lax and Sebenius advise us to pinpoint the “highest-value” players—those who can ensure that our deal creates the most possible value; the full set of potentially influential players; potential deal blockers; agents and other representatives; those who must sign off on a deal; and those who must implement a deal. The art of negotiation involves mapping out these parties and their interests. By doing so, we can arrive at a clearer understanding of whom we should approach and in what order.

2. Where Should We Negotiate?

One of the first deal design decisions we typically face is whether to meet in person, talk over the phone, communicate electronically, or combine these formats.

Optimistic about winning a “home-field advantage,” most people prefer to negotiate on their own turf, writes Tufts University professor Jeswald W. Salacuse in his book Negotiating Life: Secrets for Everyday Diplomacy and Deal Making (Palgrave Macmillan, 2013). Your familiarity with your office will help put you at ease when facing a challenging negotiation. In addition, when negotiating at home, you can control the environment, including the arrangement of the meeting room. Meeting on your own turf is also cheaper and more convenient.

But traveling to your counterpart’s office to negotiate a deal offers important advantages, according to Salacuse. First, it sends the message that you are willing to “go the extra mile.” Second, it gives you an opportunity to learn about the other party’s organization and culture. Consequently, you might suggest alternating locations to give both parties a chance to learn and demonstrate their commitment.

As for negotiating via phone or computer, these choices can be convenient if time or money prevents parties from coming together. But when vocal or visual cues are lacking, negotiators tend to have difficulty picking up clear social cues from one another. Misunderstanding, conflict, and wasted time can result and make closing the deal difficult.

3. Should We Present a Draft?

Rather than negotiating a deal from scratch, you might instead present another party with a draft agreement, or standard-form contract, prepared with your legal counsel. Draft agreements are a commonly used tool in high-stakes government and corporate negotiations, according to Salacuse. Though such drafts aren’t always appropriate, they can increase your influence in the negotiation, according to Salacuse.

Due to the anchoring bias, a decision-making bias first documented by psychologists Amos Tversky and Daniel Kahneman, the person who makes the first offer in a negotiation is likely to sway the discussion in her favor. The same may be true in dealmaking for the person or team that presents a draft agreement. In addition, when negotiators work together on a draft agreement, they literally get on the same page from the start. This collaborative process can improve their odds of finding common ground as compared with simply exchanging a series of proposals.

What other deal design questions do you think are important to ask?


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