Recently in Negotiation Category

Chinese negotiators talk dumb but get rich. Americans in China talk smart, but...

Americans believe that the richest guy in the room is usually the smartest - largely because CEOs view power as a product of intelligence.

In China, however, the smartest guy is rarely the richest guy - and the richest often takes pains to appear a bit dim. (You can trace this back to Sun Tzu and the value that Chinese negotiators place on misdirection.Or maybe they are simply playing to the massive egos of certain American CEOs and decision-makers. Whatever the cause, it is something that Western negotiators have to build into their strategy when doing business in China. )

It's particularly important when you have someone else representing you in China - and also when you have local partners- to know who is smart and who is rich.

Remember that the definition of partnership in China is a lot broader than in the West, and for the purpose of negotiating it generally includes suppliers, distributors and employees.

If you come into a Chinese negotiation with the goal of being right, you may very well win.

But, if you want to be the richest guy in the room, though, you may have to take a page from the Chinese negotiating book - looking dumb but getting what you want from the deal.

Americans like to look like the smartest guy in the room - but end up giving up IP, assets and opportunity to the "idiots" who grabbed value.

I still hear Americans cursing the incompetent, ignorant, backwards Chinese counterparty - whose stupidity resulted in him getting 99% of the value of a deal gone wrong. Well, maybe the Chinese counterparty wasn't the dumb one.

1. Did he have an interest in you succeeding?
2. Was your deal structured in such a way that he had a financial incentive for figuring out a way to make the business work?
3. Were you a short term partner but a long term competitor?

This is one of those issues that may pop up in a variety of negotiating cultures and situations, but is sure to be an issue in China - so be prepared.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

1. Western negotiating tactics can have unforeseen - and unfortunate - results when employed with Chinese counterparties.

China's macro-economy is certainly slowing, but the frequency of Chinese-Western negotiation has been on the upswing as more and more Mainlanders with Money (MWMs) start investing, spending and relocating to North America and Europe. Western negotiators may be eager to transact with a new set of potential buyers and partners from China, but American and European sellers have to be aware of cultural barriers that can drive away business before they even know there is a problem.

Good Cop- Bad Cop (GCBC) is a common bargaining tactic that can drive an otherwise promising international deal off the rails. GCBC can be a very effective technique both for buyers and sellers, and is a standard part of the American business repertoire (it shows up often in the UK as "Mutt and Jeff").

For those unfamiliar with the tactic, a negotiating team takes on opposing roles - one person is the aggressive, irrational and vaguely threatening "bad cop" while the partner takes on the role of reasonable and rationale "good cop". The problem is that the tactic is loaded with social and cultural meanings that don't translate well - particularly when the counterparty is from China.

2. "Good Cop - Bad Cop" is Not Universal

The general pattern of GCBC is to split the negotiating team and deploy the bad cop - Terrible Ted in our case - against Bud the Buyer. A typical scenario is for the GCBC team to make their initial contact together and then for Nice Ned (good cop) to excuse himself or be called away.

Once Terrible Ted is alone with Bud the Buyer, the bad cop's aggressive and menacing nature surfaces. Nice Ned's role is to provide relief - and he returns to the negotiation just in time to rescue Bud and act as the voice of calm rationality. In many instances, Ned will physically restrain or block Ted and send him away. In the Western scenario, Good Cops are the savior, the protector, the rescuer in times of distress - and the tactic often conjures up at least vague notions of verbal threats or even physical harm.

Bud the Buyer is expected to team up with Nice Ned to neutralize and escape the attack of Terrible Ted. Bud gets relief and protection from a recurrence or continuation assault of bad cop Ted - who has already attacked once and behaves irrationally and threating. Bud is relieved and forms a bond of trust and gratitude with Ned - and the two friends quickly agree to deal terms.

3. Chinese Don't Find "Bad Cop" Amusing

Chinese negotiators don't use Good Cop - Bad Cop. The threat of violence (even if it is verbal) deployed directly against counterparty outside the organization isn't considered funny or light-hearted. If a Chinese person is menaced or intimidated it tends to trigger cultural responses different from those in the West.

At the mild end of the spectrum, Chinese will feel embarrassed or disturbed (loss of face or mianzi) but the specter of institutional force can have far greater repercussions in China - where "Bad Cop" has a much deeper and more sinister meaning. A Chinese negotiator who is confronted by an aggressive and menacing counterparty is likely to withdraw from the negotiation completely and cut off all future contact with the organization that employs the bad cop.

Good organizations don't deploy Bad Cops in China - where harmony and surface appearances are valued highly.

4. Henpecked Husband and Tough Lihai Wife

But, China does have its own version of a negotiating team, but the function is completely different from Western versions. Anyone who has ever spent time shopping in Chinese family businesses is familiar with the henpecked husband and the tough (lihai) wife. Poor Paul and Lee Hai the Tai Tai (the tough wife) seem to mirror the Western Good Cop - Bad Cop, but there is a significant difference.

In China, the violent, aggressive behavior is not directed at the counterparty, but rather gets directed within the team or organization. Lee Hai terrorizes Poor Paul - and Bud the Buyer has the role of savior and rescuer who must protect Paul from mistreatment within his own house. Lee Hai is only a threat to Poor Paul - and Bud is expected to make concessions and compromise on deal terms in his role as benevolent, powerful buyer.

The Chinese side is elevating Bud's stature, giving face - and appealing to his sense of noblesse oblige to persuade him to buy more, faster or at higher prices. Poor Paul is an object of pity whom Bud has the power - and duty - to protect.

Larger Chinese corporations have co-opted the Henpecked Husband - Lihai Wife dynamic by substituting the absentee owner or overscheduled boss as the internal threat. The Chinese salesman or purchasing agent will blanch at your offer, shaking his head and confiding that his boss would punish him mercilessly if he even takes that offer back to the office.

Once again, you are given face and status - but are being pressured to make concessions due to your position of power and security.

5. Chinese Negotiators React to GCBC Well

Not only do the tactics have different goals, but the impact on the counterparty is completely different.

In CGBC the outside counterparty is facing the high pressure, aggressive actor right away. To Americans with experience and relatively high tolerance to pressure tactics, the entry of the Good Cop is a relief and a return to balance. We view the Good Cop as "normal" and equal to us in terms of temperament, power and outlook, while Bad Cop is the aberration and outlier. We are accustomed to institutional give and take. We view organizations as manageable, malleable to some degree, and transparent. Otherwise we have the choice of walking way.

If the counterparty is Chinese, then once the Bad Cop makes his appearance the damage is permanent and the game is over. In China, face and guanxi undermine the whole GCBC scenario. Aggressive, irrational behavior is not a cultural norm among harmony-conscious Chinese, and once the Bad Cop starts making threats the negotiation is lost and withdrawal is the only reasonable option.

Chinese institutions are a law unto themselves, opaque and ultimately unmanageable.

Those with power and connections never encounter the Bad Cop. Successful negotiation in China is not about relief or being saved - it's about avoidance. Once Bad Cop starts shouting and threatening, the Chinese side has already lost face and been humiliated.

Poor Paul instead appeals to the Bud the Buyer to rescue HIM from Lee Hai - the Tough Wife / Bad Cop. It's a passive aggressive manipulation - Poor Paul is giving face and placing himself in a subordinate role. This pressures you to make concessions in your role as the high-power actor. You gain face - but lose deal points. As a result you are speared any contact with Lee Hai.

6. Western Negotiating Tactics: Too Muscle-Bound for Chinese?

Westerners believe that strength and success go hand in hand when negotiating, but Chinese are adept at negotiating from positions of weakness . As more Chinese buyers and partners start knocking on American and European doors, Western negotiators might want to re-think some of their tried & true tactics. Bluffing, posturing, and positioning work well with local counterparties, but may have unintended consequences with Chinese negotiators.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

While most negotiators are aware of how quickly combat can threaten the success of a deal, few are aware of how concessions, the opposite of combat, can just as quickly ruin a negotiation.

In order to be a truly skillful negotiator, it's important to recognize the value of compromise. Choose your battles wisely- you will be amazed by how smoothly a negotiation progresses when both parties are willing push combativeness aside for compromise.

A key component of compromise is concession. Before you begin any negotiation, it's important to identify which components of the deal are non-negotiable, and which components you are willing to compromise on. While this step admittedly creates additional work for you, it will prove to be invaluable in the grand scheme of the negotiation.

What happens if you choose to skip this step and plunge headfirst into a deal? You're putting yourself (and your delegates) at risk. Lack of preparedness in a negotiation leads many negotiators to commit one of the cardinal negotiation sins: the unilateral concession.

Imagine that you are the main negotiator of a deal that has the potential to make your company a tremendous amount of money.

In your eagerness to begin the negotiation, you fail to identify which parts of the negotiation are open to compromise and which parts are ironclad. In a meeting with a representative from the opposing delegation, the following dialogue occurs:

Buyer: I'm sorry, but we've ultimately decided that we can't use you as our supplier. You're just too expensive.

You: There isn't a lot I can do about the price. Are you looking for a discount?

Buyer: Well...that's a good place to start. What can you give me?

You: Um...I can let you have... maybe 3%?

Buyer: Three percent? I'm afraid that's not enough.

You: I'm not authorized to go beyond 5%.

The entire deal has been threatened.

Blinded by panic, you've committed a major blunder: you've made a unilateral concession. The unilateral concession offers a solution that demands nothing in return.

The buyer recognized the fact that you had not considered the possibility of a discount, and he took full advantage of your unpreparedness. In an effort to save the deal, you cracked under pressure and offered a solution that will yield nothing for your delegation. While you've temporarily stopped the negotiation from crumbling, you've also made some costly mistakes:

1. You made no effort to find out what the buyer meant by saying that the price was too expensive. Too expensive compared to what? How much should it be? Has the buyer produced a cost calculation?

2. You negotiated the price instead of discussing total costs. In your panic, you made up your mind about the price without knowing what the buyer thought about the delivery time, volume, quality, warranties, performances, or other conditions.

3. By emphasizing the fact that you weren't authorized to go beyond 5% , you signaled that there was a greater discount that your boss could potentially approve.

Don't dwell on your mistakes- even the most skillful negotiators slip up. The most effective way to recover from your mistakes is to learn something from them. In next week's installment, we'll explore how you can recover from unilateral concession-making and get the negotiation back on track.

In the meantime, please feel free to share your own stories about your experience with concessions in the comments section.

Have you ever had a similar conversation? How did you recover?

This post is excerpted from Keld Jensen's book Power Bargaining: Adding Value to Commercial Negotiations.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Americans negotiating in China must understand the Chinese decision making process.

One of the difficulties negotiating Win-Win deals in China is widespread usage of gate-keepers (assistants and other access-controllers) in Chinese business.

Unlike their American counterparts, Chinese access-controllers often take on the appearance of important decision-makers, when in fact they are low-ranking functionaries.

The American gatekeeper says, "He's unavailable, would you like to leave a message?"

In China, you are more likely to hear, "He's leaving the country on business tomorrow and you need to send a detailed proposal including technical specs on your product or service by noon."

Gatekeeper as Messenger

The trick to handling gatekeepers in China is to understand that they are one-way, one-time messengers directly to your decision-makers office - and treat them that way.

You can't and should not negotiate with a gatekeeper - but you needn't obey him either. He wants a proposal that, according to him, will go right to the top people.

Treat this for what it is - a one shot delivery system. Craft your message accordingly.

Gatekeepers as information sources

The Chinese gatekeeper says a lot about the organization, decision-making structure and boss that he is working for - you just have to know what to look for.

Is he treating his boss with imperial deference? You'll be expected to do the same.

Is he hostile or condescending to foreigners? That probably means his boss is too.

Is he an informed, helpful, professional facilitator with the authority to begin and maintain a business relationship? That indicates his organization may make a good partner.

Most of all, the gatekeeper will tell you exactly what the company wants from you - he just wants it the next day, for free.

How can We handle this?

In many cases, the gatekeeper is a frustrated, neglected, disrespected poor wretch, toiling away in obscurity in the shallow end of the bureaucratic pool.

A little attention may go far. "I need your advice - how have past Western suppliers / partners handled this?" "How does your boss like to see information - tech specs, financials data or detailed explanation?" "What kind of proposals has he been happy with before?" "What would you do if you were part of our team?"

Dealing with gate-keepers

1. Identify what they want. HINT: It's probably not a transaction. Chinese gatekeepers are notorious for acquiring IP, plans and big-picture technical data. This can work for you or against you.
2. Control the content of your proposal or message. Figure that whatever information you provide will be lost and used against you. If it's advertising or a semi-public whitepaper - no problem. If it's highly sensitive or proprietary data, then that is a problem.
3. Information is a two-way street. Talk about "WE" a lot, and find out what others have done right in the past. Play on his desires to do a good job. "I don't want to waste your boss' time...", "I consider this a tremendous opportunity and I'm nervous about making a mistake..." Let him fill in the blanks on who makes the decisions, what their criteria will be. Try your best to get names and titles. If you can get him talking about the decision-making process, that's a win.
4. Don't invest anything you aren't afraid of losing - and that includes TIME. Gatekeepers are a direct, one-way conduit to the real decision-maker, and should be treated as such. Service providers in China have learned not to spend the time crafting detailed proposals - even outlines. Most of the consultants I know have a two page introduction prepared that they customize for prospects in China. Don't outline projects, provide timetables or analyze problems for free. Local service providers (probably related to the boss in some way) will get the actual contract based on your assessment.
5. Know your limits - and know when to walk away. If the gatekeeper was sent to steal information then this is never going to turn into a deal. Sometimes the most important piece of information is that the negotiation is not worth the time or effort.

For the 5 Most Fascinating Stories, a weekly report, click here & sign up.

Franchisee association leaders confront potential system wide disputes in many key areas such as:

Note that this list focuses on issues most likely to affect existing franchisees, i.e. your constituent members, under their existing franchise agreements. Claims arising in the sales process, e.g. fraudulent inducement or registration/disclosure violations, may also be system-wide affecting franchisees that purchased in particular time periods.

What is the best way to proceed legally? There are three choices:

1. Class actions
2. Associations as the plaintiff
3. Test cases,

Determining the best way to proceed involves questions of time, effect, and cost, as well as political considerations with respect to your membership:

What is the quickest way to resolve the problem?
What is the least costly way to resolve the problem?
What legal option offers the strongest potential impact?
What legal option will draw the greatest support from the franchisees?

1. CLASS ACTIONS

Advantages:

Potentially the largest recovery on behalf of all affected franchisees
Potentially the greatest "buy in" from franchisees, who will be members of the class

Disadvantages:

Increased prevalence of class action waivers
Selecting the best named plaintiffs
Costs of notice (possible shifting to defendant)
Delay and difficulty of obtaining class certification
Avoiding conflicts of interest by different subclasses
Pressure to settle by contingent fee attorneys

2. ASSOCIATIONS AS PLAINTIFF

Advantages

Potentially the easiest case to manage.

Disadvantages

Usually the Association cannot claim damages for its members. Claims for declaratory or injunctive relief are more appropriate.
Delay and difficulty establishing association standing:

(i) Whether the members of the Association would have standing to sue in their own names;

(ii) Whether the issues presented are germane to the Association's purpose in protecting and enhancing the economic rights of its members; and

(iii) Whether the claims asserted or the relief requested by the Association requires the participation of individual members.

Franchisors are likely to question whether the Association truly speaks for "all" or "most" franchisees. The courts have discretion to deny association standing for "prudential" reasons going beyond the three-part test above.

3. TEST CASES

Advantages:

Avoids the procedural issues inherent in class actions or association plaintiff cases, hence, may be the quickest and most cost effective solution.
The principle of "offensive collateral estoppel" means that a franchisor can be bound by the result in one case, when other franchisees present similar claims.  Well-suited to renewal issues. Well-suited to "individual impact" cases.

Franchisors are likely to react to these claims and even to potential claims - e.g. the Grill-n-Chill cases.  They may not give the association credit, but they will react!

Disadvantages:

Selecting the right cases.
Getting a franchisee to step up to the plate.
Getting other franchisees to support the funding.
"Offensive collateral estoppel" after arbitration is generally not available.
Statute of limitations concerns.

4. SOME RECENT SUCCESSES FOR FRANCHISEES

A) Protection of Renewing Franchises and Franchisee Assets

In a successful regional lawn care system, the franchise agreements had historically provided that the franchisees themselves owned their customer lists, which is the most important asset of their business. In recent years the franchisor changed the franchise agreement to provide that the franchisor owned the franchisee's customer lists. Long term franchisees coming up for renewal faced these new agreements, as they would be required to sign the "then current" franchise agreement as a condition of renewal.

Upon being retained, we created an independent franchisee association seeking a negotiated solution to protect the franchisee's ownership of their customer lists.

When the franchisor initially refused to negotiate, we filed suit on behalf of two "test case" franchisees alleging that the franchisor had breached its duty of good faith and fair dealing in purporting to require a renewing franchisee to sign a new franchise agreement that would result in the transfer of assets to the franchisor without consideration. After the briefing of cross-motions for summary judgment, the franchisor relented and agreed to new contract language for its renewing franchisees that would protect their equity in the value of their customer lists.

B) Win-Win Settlement for a National Brand Independent Franchisee Association

Following an evidentiary hearing and closing argument in arbitration as lead trial counsel, we have negotiated a win-win settlement that preserves the independent association's ability to attend and monitor all meetings of the franchisee advisory council, which the franchisor sponsors, including the FAC's private dinner meetings and or other executive sessions from which the franchisor had sought to exclude the association's representative.

This settlement achieves the association's key goal of transparency, i.e. that all FAC activities must be transparent for the benefit of all system franchisees, thus creating "checks and balances" to prevent the franchisor from exercising undue influence over FAC members and to keep the FAC from becoming a rubber stamp.

C) Protecting Franchisees When The Franchisor Files Bankruptcy

When Giordano's (a popular Chicago pizza restaurant brand) filed for bankruptcy protection due to financial problems being experienced by its shareholders, the majority of franchisees retained a bankruptcy counsel to protect their interests. The bankruptcy attorney then enlisted CDC to defend the franchisees from the Trustee's complaint that the franchisees had failed to pay royalties and to allege counterclaims in the adversary proceeding, alleging that the franchisor had breached its contracts (and the duty of good faith and fair dealing) by requiring the franchisees to pay above-market prices to a franchisor-owned commissary for basic ingredients such as cheese, sauces and dough.

In negotiating with the Trustee, a comprehensive settlement was reached whereby the franchisees will receive significant protection against unfair pricing including the freedom to shop elsewhere and to prepare their own sauces and dough. The franchisees also receive 10-year extensions of their franchise terms and reform of the advertising program.

At a recent lunch for "Old China Hands" I was asked about the differences between Chinese and American negotiation. Since these people had been around the block a few times, I didn't waste a lot of time with background.

The two main differences between Chinese and American negotiation happen at the beginning and end of the discussion. The middle part of the conversation - what most people consider the REAL negotiation - is actually pretty similar for both Chinese and Western negotiators

1. Chinese and American Businessmen Start Negotiations Differently

Chinese start with a relationship, while Americans begin with a transaction. Chinese are trying to get to know if you are trustworthy - and how long you plan on sticking around. Americans are trying to figure it how much money you are going to spend or charge - and if you've got the cash or assets to back up your offer.

Americans spend the first half of the first conversation waiting for the small talk to end so they can get down to the important part - talking about deal points, dollars and delivery dates.

The Chinese side concludes that the Americans are either sharks who refuse to reveal anything important about their character or are too dim to understand how gentlemen really do business.

2. American Negotiations End as Quickly as Possible -- Chinese Negotiations Don't End

US-Chinese deals may start from slightly different places, but they end in different dimensions. An American deal-maker wants to wrap things up as neatly and tightly as possible - as quickly as he can.

Once that contract is signed, the negotiation stops and both parties are bound to the terms they agreed to.

For the Chinese side, however, the signed agreement is more of a beginning than a conclusion. Now that both sides have agreed to general terms, it's time to start the real business.

3. Relationships vs. Contracts

Chinese do business based on relationships. Written agreements are nice for noting down important points, but the real bond that holds partners together is the relationship.

Americans do business based on contracts that both sides agree to abide by. Relationships are nice for making execution and operations run more smoothly, but the contract is what controls the commercial association.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.