Need to negotiate a contract: Here is some guidance

We all need to negotiate contracts from time to time. Whether it is a new employment contract or in our professional capacity as customers of suppliers or vendors of goods and services. Some negotiations take longer and are more complex (think trade negotiations between countries) than others. There is a trade-off between the value of the contract and the time spent on the negotiation. And the party that better manages this trade-off typically captures more of the value of the contract.

The research from Karine Lamiraud and her colleagues provides a few useful hints about this trade-off between time and the value of contract negotiations. First, take a look at the value created by two parties negotiating a contract to supply medical care to a hospital. This is a lab experiment, so negotiations were simplified and restricted to 30 minutes. But what is interesting is that most of the progress is made in the early stages of the negotiations. Pretty soon after the start, both parties have established their positions and made initial concessions. Then they dig in. There is hardly any movement in the value created from the contract after the initial phase. In fact, the only thing that increases after this initial phase is the likelihood that the contract negotiations stall and are being aborted leading to no sale at all.

Value created in contract negotiations over time

Source: Lamiraud et al. (2023)

One way to deal with such a deadlock is to bring it out in the open. Admit that both sides have moved as far as they can and that any further negotiation is unlikely to change things. So, let’s all save our time and agree to the deal now. The only time stalling and blocking further negotiations works is if one side absolutely needs the deal to go through, in which case the side that doesn’t need the deal to go through can effectively blackmail the other.

But in trade negotiations, typical sales negotiations, or employment negotiations, neither side is dependent on the deal, so stalling and trying to play stubborn does not work. It just delays the inevitable as a certain group of trade negotiators from the UK have found out the hard way when they visited Brussels for years without getting any meaningful concessions…

The other two possible ways to break the deadlock are to hire an independent third party (a mediator) whose job is to help both sides identify quick wins and build trust or to increase transparency by inviting both sides to share their individual priorities and goals in the negotiation. The research found that in both situations, the total value created with the contract was some 5-10% higher than without a mediator or increased transparency. But, alas, this added value predominantly accrued with the buyer, not the seller. This is why it is also important to understand who is buying and who is selling in a negotiation.

In trade negotiations, this isn’t always clear since one country is trying to buy market access to another country by selling market access to its domestic markets. Who is the seller and who is the buyer in that negotiation? Well, it’s simple, the bigger country has more to sell than the smaller country, so the bigger country is de facto a net seller while the smaller country is a net buyer. Thus, the bigger country has more to gain from reducing transparency and not disclosing its own priorities while the smaller country should aim for higher transparency and use third party mediators to get a better deal. Again, if certain UK negotiators had known these stylised facts about negotiations, they would probably have been better at doing their job.