Negotiation Journal 7:4 (October 1991), pp. 369-376.
Copyright ©1997 by the Conflict Research Consortium
Kesner and Shapiro question the practice of considering negotiations successful if they conclude with an agreement, and failures if they do not. They argue that this approach to evaluating negotiation has undesirable consequences. Instead, they suggest a more process-oriented approach to determining the success or failure of negotiations. The authors focus on corporate merger and acquisitions negotiations, with particular attention to the "failed" Arthur Andersen-Price Waterhouse merger negotiations of 1989.
Kesner and Shapiro argue that equating agreement with success is a product of negotiation reward structures both in experimental studies, and in practical settings. Usually experimental studies offer more incentive to the participants to reach an agreement than to not reach agreement. Studies generally focus on the quality of agreements, so results of nonagreement are disregarded as data. In practice, negotiator fee scales tend to reward agreements. Often negotiators are paid a percentage of the final settlement. Negotiators are paid substantially lower transaction fees for negotiations which do not produce agreement.
The authors argue that this tendency to equate successful negotiations with producing agreements has several undesirable consequences. First, it pressures negotiators to close deals, even in the face of less than optimal conditions. When producing no agreement is considered a failure, then even a bad deal is better than no deal.
Second, it discourages in-depth review of critical issues. Negotiators have little incentive to raise difficult issues which could become blocks to reaching agreement. Often, such overlooked issues emerge after the deal is done, and create substantial difficulties for the newly merged companies. The authors cite research indicating that the majority of mergers during the 1980s actually reduced the involved companies' profits, and failed to produce the anticipated benefits.
Third, the emphasis on producing an agreement produces escalation of commitment. This is a vicious cycle in which participants seek to justify their previous commitments in negotiation by raising the stakes. The authors note that, "individuals may even go beyond mere distortion and actually enlarge their commitment of resources to a particular course of action as a means of justifying the ultimate rationality of a course of action."[p. 373] This tendency is further reinforced by the competitive win/lose atmosphere found in hostile takeovers.
The final undesirable consequence of equating negotiation success with reaching an agreement is that it encourages misleading views of costs. Under the pressure to produce an agreement, negotiators may tend to prefer a short-term view of costs to a long-term view. Additionally, negotiators may tend to view the costs of the negotiation process as investments rather than sunk costs (money spent and gone). Viewing negotiation costs as investments intensifies the pressure to produce some agreement in order to justify that investment. It also encourages the escalation of commitment, since the failure to reach an agreement is seen as forfeiting the parties' investment.
Kesner and Shapiro argue that negotiation processes which reveal irreconcilable differences should be counted as successful. For example, the Arthur Andersen-Price Waterhouse negotiations should be considered successful. As the authors observe, "a decision not to merge can sometimes be more cost effective than the reverse."[p. 376]
In more general terms, they suggest a shift from outcome-based evaluation to process-based evaluation. Process-based evaluation criteria would emphasize the way in which negotiations were handled and the issues which were addressed. The authors suggest several criteria. First, has the negotiation identified critical differences between parties? Second, have implementation issues been addressed within the negotiation? These criteria respond to the need for improved critical review within the negotiation process.
Third, have negotiations addressed more than just financial issues? That is, have they addressed managerial, cultural and strategic issues? Studies show that failure to address such issues before merging can result in later incompatibilities which may undermine the expected benefits of merger.
The authors argue that the task of negotiators should be "reaching an outcome based on a successful process."[p. 375] Determinations of negotiation success or failure should be based on whether the outcome is the result of a thorough, informed and accurate negotiation process. In some occasions that informed decision may well be a decision not to merge. Negotiator's fee structures should be modified to reflect this process-oriented goal.
The authors suggest several practices which would improve the negotiation process. First, negotiators should have a clear understanding of the client firms' goals, both financial and otherwise. Second, negotiators should have a good understanding of the industry in general, and of the particular firms involved in the negotiation process. Keeping these understandings firmly in mind will help to prevent damaging escalation of commitment.
Third, Kesner and Shapiro recommend setting a maximum price prior to negotiations. This also minimizes the dangers of escalation.
Fourth, negotiators should address implementation issues within the negotiation process. Discussing implementation can reveal differences of opinion. Upon further exploration, such conflicting opinions might reveal irreconcilable differences.
Finally, negotiators should seek to educate their clients regarding the importance of the negotiation process itself. Negotiators should emphasize the benefits of any particular outcome, whether or not an agreement has been reached.