Rudimentary Heuristics to Support the Concept of Optimization in Negotiations

Today’s post is from Dr. Lloyd M. Rinehart, an Associate Professor of Marketing and Logistics in the College of Business Administration at the University of Tennessee and author of numerous publications including Creating Reality Based Relationships Through Effective Negotiation: Academic Concepts and Research Support, Creating Reality Based Relationships Through Effective Negotiation: Understanding the Negotiation Process, and Effective Negotiation: Understanding the Negotiation Process – A “Road Map” to Successful Sales and Purchasing Negotiation Performance in the Value System. Lloyd can be reached at Rinehart <at> utk <dot> edu.

This post is based on my presentation at the 2009 MPower BPX roundtable and subsequent thoughts that arose out of my resulting discussions. The concepts that I introduced in the session included the definitional parameters of seven relationships that evolve out of negotiations. These seven relationships, which were covered in the doctor‘s review of my presentation in What Relationships Do You Have With Your Suppliers, include:

  • Non-Strategic Transactions,
  • Administered Relationships,
  • Contractual Relationships,
  • Joint Ventures,
  • Specialty Contract Relationships,
  • Partnerships, and
  • Alliances.

I am going to expand on the concept of definitional parameters of relationships in one form, but in order to do so, I am going to consolidate the seven relationships into three relationship categories:

  • Transactionally Driven (Non-Strategic Transactions and Administered Relationships),
  • Contractual / Investment Driven (Contractual Relationships and Joint Ventures), and
  • Relationally Driven (Specialty Contract Relationships, Partnerships and Alliances).

Generally, whether or not it is actually the case, managers perceive that between 30% and 40% of their relationships fall into each of these general categories. Before we continue, Let me define the characteristics of these relationships. They are built on the three dimensions of trust, interaction frequency, and commitment to the relationship. In other words:

  • Does the party trust the other party?
  • How much does the party interact and exchange with the other party?
  • How committed is the party to the other in terms of dependence and investment?

Transactionally Driven Relationships are low on trust, low on commitment, but can have a range of interaction and exchange.

Contractual / Investment Driven Relationships are “slightly” higher on the trust, interaction frequency, and commitment dimensions than the Transactionally Driven Relationships.

However, those that are Relationally Driven are significantly higher on the trust dimension, while that other dimensions have a range of values.

That brings the discussion to one of today’s hottest terms in business — “collaboration”! Unfortunately, that term, like many others, means about whatever the author would like it to mean (and, consequently, that leaves the readers to interpret the concept as they desire as well!). Herein, I am going to constrain “collaboration” to be situations in which trust in the other party is HIGH. That means that of the relationships listed above, “collaboration” occurs about 30% to 40% of the time.

Now wait a minute! I said that this post is the result of my thoughts and subsequent discussions, which included a discussion with Michael. My understanding is that some of Michael’s contributions to the space deal with the concept of “optimization” in sourcing and procurement. My definition of “optimization” includes the attempt to minimize or maximize inputs that capitalize on the best outcomes across the integration of the inputs. My first exposure to the concept of “optimization” was in mathematics and micro-economics. The micro-economics applications focused on how companies could optimize the characteristics of their operational inputs and outputs.

However, here we are talking about negotiation, which means that at least two parties, rather than one entity, need be optimized. Here is the problem with the percentages given in this post. Those relationship assessments were originally generated from the perceptions of only one of the parties to the relationship. Therefore, the original data does not actually represent the “dyads” (perceptions of both parties on the relationship.) While most managers view negotiations as being too sensitive to allow external researchers to become involved, we can successfully simulate similar relationship perceptions in contrived environments. The contrived environment allows the opportunity to pair up the parties into “dyads” for dyadic assessments.

Outcomes of those assessments indicate that, in reality, only 13% of the relationships reflect situations where BOTH parties perceive high trust in the other party. In this situation, both parties feel comfortable enough in the negotiation to share information with the other party and work together for the purpose of “optimizing” the joint inputs to the relationship between the “two parties”. That is how I define “collaboration”, and the data indicates that it probably does occur 13% of the time. It is also important to recognize that the process of “working together” in the negotiation process involves a “collaborative” strategy in which the parties are attempting to “optimize” the outcome in a “Win – Win” sense.

However, there is another situation, that constitutes 1% of relationships, where balance in the negotiation occurs. That is when both parties approach the negotiation and relationship from a “competitive” strategy perspective. In this case, both parties are very skilled and effective negotiators and collectively drive each other to outcomes that are similar to the “collaborative” outcomes, but instead reach that position by pushing the other party “hard” to achieve a mutually beneficial outcome. In other words, both parties are approaching the relationship from a Transactionally Driven perspective. Therefore, I believe two diametrically opposite relationship perspectives can lead to similar outcomes, even though the negotiation strategies are very different. However, regardless of the strategy implemented, the parties must thoroughly understand the negotiation process.

Before concluding, one other problem must be identified with this discussion. The 13% of the original 30% to 40% of relationships that were perceived to be “high trust” and the 1% of the relationships that were perceived to be low trust leaves 86% of the relationships unaddressed. Those are relationships that are unbalanced in the level of trust between the parties. If one trusts the other party less, then that party will most probably implement opportunistic strategies which will be “self” beneficial and, of course, at the expense of the other party. Therefore, it is critically important that both parties in a negotiation fully understand the negotiation process and know how various strategies can contribute or detract from the desired outcomes of the negotiation.

I hope these thoughts stimulate discussion (both pro and con) that may advance the quality of decision making in your organization.

Thanks, Lloyd!.

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