Adapted from “For Better or Worse: How Relationships Affect Negotiations,” by Kathleen L. McGinn (professor, Harvard Business School), first published in the Negotiation newsletter.
Six years ago, Esther Lorenza, an experienced entrepreneur and the founder of a new Internet and catalog retailer, concluded that only one supplier could meet her unique product specifications and high standards for quality. There were just two problems. First, her start-up was still in the conceptual phase, while the supplier was an international, $10 billion public corporation. Second, the supplier had never created anything like the product she had in mind. (The names and industry specifics of this story have been altered to protect confidentiality.)
Undeterred, Lorenza called the corporation’s regional vice president, whom she knew from other business ventures, and made her pitch. Though doubtful his company would consider the idea, the VP made an introductory call to the COO on Lorenza’s behalf. The COO was skeptical as well but arranged a lunch for Lorenza with the CEO, who was also the founder of the corporation. The CEO was intrigued by Lorenza’s description of the possible partnership. After three hours, the two founders had discovered a wealth of mutual interests and the deal was on.
Today, the supplier is a $21 billion company with a new division that produces an entire line of products stemming from the deal. Last year, Lorenza sold her business, which had grown approximately 500% annually, for more than $350 million. The deal that made it all possible began with a relationship between Lorenza and the regional VP. This connection resulted not only in huge profits for everyone involved but also in a close alliance between the founders of the two companies.
Though not all negotiations involve such high stakes, many do involve interpersonal relationships, just as Lorenza’s did. A critical decision in negotiation is choosing whom to deal with in the first place. When many partners are available, we often turn to people with whom we’re familiar and comfortable. Lorenza didn’t cold-call the most appropriate VP—she called someone she’d known for years. It’s natural to attempt to reduce “search costs” by turning to someone you know and trust. When trust is critical to negotiation success, selecting known partners also increases the likelihood that the other side will be willing to make a deal.
Have you bought a house or a car recently? If so, you may well have made the purchase through someone you know and were happy you had done so. In one study, researchers found that people who used their social ties when making a large purchase were more satisfied with the process—and with their purchase—than were people who dealt with strangers.
Negotiating with friends and acquaintances saves time and increases joint gains—but only up to a point. Researchers have found that people with strong outside alternatives tend to reap smaller profits in negotiations with friends than they would in negotiations outside their network. Conversely, parties with fewer options gain more when dealing with friends.
Some negotiators trade away possible economic gains in favor of maintaining or enhancing a relationship. People in committed relationships, whether business or personal, often signal loyalty by choosing to ignore negotiation opportunities with others. Whether this is a wise move or not depends on your long-term objectives for the negotiation and the relationship.