By Maurice Schweitzer
In a recent interview with The Wall Street Journal, powerhouse entertainment executive Shonda Rhimes said, “Never enter a negotiation you’re not willing to walk away from. If you walk in thinking, ‘I can’t walk away,’ then … you’ve already lost.” This all-or-nothing approach has become the standard for what’s considered to be success in negotiations, but it doesn’t have to be. Maurice Schweitzer, a Wharton professor of operations, information, and decisions, has written a paper with Einav Hart, management professor at George Mason University, that answers the question: When can negotiators get the best deal by not squeezing their counterpart? Schweitzer joined Knowledge at Wharton to talk about the paper titled “When Should We Care More about Relationships Than Favorable Deal Terms in Negotiations: The Economic Relevance of Relational Outcomes.”
Knowledge at Wharton: Can you summarize this research and explain why you wanted to study negotiating?
Maurice Schweitzer: I teach negotiation here at the Wharton School, and I see it as a really rich and interesting decision problem where we have interests that are congruent. We both want a deal. Maybe there are ways for us to make each other better off, but we also have some competing interests where, for example, I want a higher price and you want a lower price. We have this interesting mix of congruent and competing interests that makes the decision process pretty complicated. In this project in particular, what’s so interesting is the way people think about negotiations is often narrow and often wrong.
Knowledge at Wharton: That’s quite a statement. Why do you think it’s wrong?
Schweitzer: We often think of a successful negotiator as somebody who’s really tough, who’s hard-nosed, who’s going to walk away. In the words of some very popular press books, it’s things like Never Split the Difference or Getting More. The idea that we can win a negotiation leaves the impression that we’re really competing with our counterparts. In some cases, you can win a negotiation by beating up your counterpart or deceiving them or leveraging your opportunities to take more of the pie. There are some cases where that happens, and maybe that can work, but I think the vast majority of cases are really quite different.
For example, in the United States, 80% of the economy is in services, where we think about negotiating somebody’s job offer or negotiating with the babysitter, where so much of the value that gets created happens after the negotiation ends. That’s the part that’s typically missing. If you look at negotiations in movie clips, if you look at negotiations the way most scholars have been studying them, we focus on the exchange of offers or demands, and then we might focus on the deal or the outcome that we get as we shake hands and sign an agreement. But so much of the time, the real value gets created later.
Imagine that I hired you, but through the negotiation I really squeezed every opportunity I had to claim surplus. I figured out the very least I could pay you, and I knew you didn’t have good alternatives, so I demanded that you couldn’t have very many benefits. By the end of the negotiation, I’ve created a competitive dynamic in our relationship. Now we’re working together, and I ask you to take on an extra assignment or mentor a new employee or stay late. I’ve damaged our relationship in ways that might really impact the economic outcome that I ultimately get. It could be that I’m paying you a lower salary, but the work product is far less than it would be if I had really built a great relationship through a much more collaborative negotiation process.
Knowledge at Wharton: In this paper, you and your co-author created this new negotiation paradigm called the Economic Relevance of Relational Outcomes (ERRO). Please tell me about it.
Schweitzer: We created this concept to think about the importance of the relationship to economic outcomes. How does our relationship, as we develop it through the negotiation process, impact the post-negotiation outcomes that we really get?
We’re thinking about drawing a very crisp distinction between some transactions. Imagine that I’m buying a used car from you. We reach a deal, shake hands, sign the paperwork, and I drive off with my used car. I never see you again. Maybe there, if I engage in aggressive bargaining, I start high, I concede slowly, I express anger. Maybe I use deception. I might do things that are really tough on the relationship, where at the end, you’re like, “Wow, that was tough. He really got a great deal, but I never want to do that again. I wouldn’t want to work with him again.” I’ve extracted a couple hundred extra dollars, and I’m driving away, and we’re not going to deal with each other again.
That type of transaction characterizes some of the negotiation context that we’re in, and I think that’s actually where so much of the popular press and the academic press have focused. They are an important segment of our economy, but my point is that’s not actually the biggest sector of the economy. Most of our negotiations are really quite different, so more like a salary negotiation with an employer and many things in between. It could be negotiating with a caterer or negotiating with your babysitter. There are all kinds of places where it may even be the case that we’re better off not negotiating, which is an idea that I think is anathema to a lot of negotiation scholars. Sometimes we’re better off not negotiating because by negotiating, we’re creating some sense of conflict and reframing our relationship as if we have opposing interests. If a lot of the value is created after the negotiation, then we really need to be mindful of that relationship. The hard-bargaining tactics may ultimately harm the economic value that we derive after the negotiation.
The key question to ask is: How much does the relationship matter? The paradigm that we created has the negotiation as well as a second stage, where people are actually working with each other and creating value for each other. What we found is if you harm the relationship through the negotiation process, you end up with a lower economic outcome, even if the salary or the deal terms might be favorable.
Knowledge at Wharton: You’re talking about taking a look at whether you’re going to have a lasting relationship, and if so, perhaps you need to come to the negotiating table in a different way. Correct?
Schweitzer: That’s exactly right. Think about does the signed agreement, do those deal terms reflect the total value of the exchange? Or is there really important work that happens after the negotiation concludes that’s going to impact the total value that you get? When that’s the case, when we get a lot of value after the negotiation, then the relationship really matters. I think intuitively maybe we get this idea. That is, we don’t hammer away at our babysitters, squeezing every quarter we can. We’re often eager to make them happy because the value that we derive really comes after we’ve talked about price. I think that’s really an important distinction, so this ERRO paradigm that we introduce is to think about what is the economic impact of that relationship? Is it high, or is it low? And that should guide the way we approach the negotiation.
Knowledge at Wharton: As you’re talking, the word that I keep thinking about is “compromise.” Would you say that fits into this paradigm?
Schweitzer: Absolutely. The idea is to think about the right approach, and what we’re saying is that in the negotiator’s toolkit, one idea is to not negotiate. The second idea is to be very generous in negotiation, where it could be that what I want to do is take your perspective, and figure out a way for you to be happy and thrive. Imagine I was hiring you as a new employee, and you were asking for things, but maybe there are other things that might make you better off. And I say, “Look, I really want you to take this internship,” or “Here’s a class you could take on the side, and we’re happy to fund that.” I might create an environment that’s even better than you anticipated, where I might say, “Look, I really care about your long-term career development. I really want you to stay here as long as you’re happy to, but I really want to invest in you, and I want you to reciprocate and invest in our organization and feel a sense of identity with us.” It could be that I go above and beyond in a way that ultimately creates more economic value for me. But that’s different than I think the way we typically think about negotiation.
Knowledge at Wharton: This idea has implications across a number of sectors — education, politics, business. What is the one big takeaway that you want people to get from your study?
Schweitzer: I think the key idea is to recognize the economic value of the relationship, where the relationship sometimes is not very important, but quite often it’s extremely important. New technologies have made relationships even more important, even when we might not interact with each other again. Companies like Airbnb or Uber with reputation ratings have figured out a way to transform a seemingly single-shot transaction. That is, I rent your house, and I’m planning to never do it again. That’s a single transaction, but there’s a long-term reputational consequence, and that long-term, repeated interaction potential makes the relationship important. And because the relationship then becomes important, we want relatively privileged relationship outcomes. So, I might try to help you out. I might make a concession, I might compromise, or I might not even negotiate — because even though I might be able to obtain a better deal, ultimately it’s not a better total outcome.