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How to value what is on offer

29 March 2017 - By Paul Sills

Too few people know when to close the deal they are negotiating, particularly when trying to resolve a dispute. However, the same comments can be made for commercial negotiations.

The issue is that negotiators often do not know how to correctly value what is on offer. So this article might better be called: How do you value what is on the table?

The answer lies in correctly identifying and then valuing your alternatives. Any negotiation has one or more alternatives. Your alternatives are the unilateral actions that you or your client can take away from the negotiating table that do not involve any participation from any other party.

The classic alternative to the mediation of a dispute is litigation or some other form of third-party determination. A party can always unilaterally elect to litigate. In the commercial context a unilateral alternative would be to walk away from the deal. In peace negotiations, one side can always unilaterally elect to continue fighting.

All of these alternatives have advantages and disadvantages and, more importantly, they effectively have a price. Understanding in clear terms the value of your alternatives enables you to know when what is offered in negotiation is within the zone of acceptance. That is, the moment that an offer on the table improves your position by even a dollar compared to your best alternative, then you are in a position to close the deal. Continuing to negotiate beyond that point may improve on that position, but may also put it at risk.

Parties will often react emotionally to what is going on in negotiations. As a result, they may fail to correctly identify the value that is being offered, and whether that offer is acceptable or unacceptable when compared to their alternatives. For example, parties in disputes will evaluate offers they receive against their idea of a perfect world (if they are the plaintiff — getting 100 cents in the dollar; if they are the defendant — not paying a cent).

Those comparisons are unrealistic. If the parties are in dispute and in mediation, then the starting point is invariably that they are no longer dealing with a perfect world scenario. Holding on to that pipe dream will only cause trouble when negotiating.

Parties walk away from negotiations because they perceive a lack of value on offer. Often those negotiators will, with the passage of time, come to realise that what was on offer had the potential to become an acceptable solution, if only they had valued their positions correctly. Valuing your alternatives is an exercise that must be done before you sit down to negotiate.

Paul Sills is an Auckland barrister specialising in commercial and civil litigation. He is also an experienced mediator.

Last updated on the 29th March 2017