Ethical Negotiation: Not an Oxymoron

JULIA TAYLOR KENNEDY: You're listening to Impact from the Carnegie Council. I'm Julia Taylor Kennedy.

Each episode, we explore a topic in global business ethics. This time it's negotiation.

This is the second part in our series produced in collaboration with EthicalSystems.org. It's a free online site connecting corporate leaders with the latest academic research on ethical workplaces.

To learn more about what an ethical system is, you can stop now and just download our latest episode.

How does behavioral science impact negotiation? We'll get to that a little later. But the overlap between negotiation and ethics is pretty clear.

HAL MOVIUS: Whenever you say negotiation, people bring to mind a very strong connotation of exploitation, deception, kind of clever ruses, and difficult tactics.

I'm Hal Movius. I'm president of Movius Consulting.

JULIA TAYLOR KENNEDY: Movius is a negotiation consultant, and despite what he just said, he thinks negotiation is a wonderful process when it's properly used. The first thing Movius does for potential clients is to reframe the term negotiation.

HAL MOVIUS: A definition I like is negotiation is a process by which two or more parties—and they're almost always more—with compatible and conflicting interests try to reach agreement on a decision or transaction.

JULIA TAYLOR KENNEDY: Unfortunately, many still define it another way—getting the best price or the best deal from the opposing party. And that kind of negotiation can be pretty intimidating.

Here's a really common one: you have a long-term relationship selling a product to a buyer and then the buyer decides to pay 10 percent less for your product.

HAL MOVIUS: Exaggerated demands, threats, coercion—people saying things like, "There are plenty of other companies who would love to do business with us. Frankly, if you can't come to our price, then I'm not sure how much we have to talk about today."

JULIA TAYLOR KENNEDY: These hard-driving tactics can catch a supplier off-guard.

HAL MOVIUS: They think, "Gosh, okay, I'm stunned. They want 10 percent. Maybe I should counter with 5—I'll just counter with 5." Then you've immediately taught the other side that all they have to do when they want a concession is to demand one.

There has to be a different response. I need to become inquisitive and say, "Why is it that you need the 10 percent?"

Even then, people across the table who have learned hard-bargaining techniques won't necessarily tell you, and you have to guess.

JULIA TAYLOR KENNEDY: Movius says this nuanced approach to negotiation is taught too rarely . . . and without it, negotiators act out of instinct or emotion.

HAL MOVIUS: People who are more relationally focused can become unnerved when they come across somebody who's sitting on the other side of the table and seems to not give two hoots about the relationship—who just wants to get what they want at all costs. People need help managing their emotion and keeping their poise when they're in a situation that is making them very uncomfortable.

JULIA TAYLOR KENNEDY: And because they're uncomfortable, their best intentions to behave according to their values can go out the window. Instead, people start adopting the aggressive tactics they see across the table. And here's where behavioral ethics starts coming into focus.

MAX BAZERMAN: I've long taught negotiations, decision-making, and now ethics by letting people see the mistakes that they make in their own behavior.

Max H. Bazerman, Jesse Isidor Straus Professor at the Harvard Business School and the co-director of the Center for Public Leadership at the Harvard Kennedy School.

JULIA TAYLOR KENNEDY: In his classes, Bazerman gives students and business executives exercises to show how their behaviors don't fit their ethical codes.

MAX BAZERMAN: I certainly see a lot of students, a lot of executives who are fascinated by the fact that they did something that surprises them and they're dramatically motivated to change.

JULIA TAYLOR KENNEDY: Because what Bazerman teaches his students—and what many of the executives he trains already know—is that negotiations never really end.

MAX BAZERMAN: We have repeated interactions with the same players and we have a reputation that's at stake. If you thought about how do you develop a good, long-term relationship even if your goal is to make profit out of that long-term relationship, that seems highly dependent on the other side obtaining a good deal as well. Otherwise they're simply going to move on to other alternatives than you at the next move.

JULIA TAYLOR KENNEDY: So in addition to making yourself or your organization happy with a negotiation, it's also important to make the opposition happy.

MAX BAZERMAN: So often there are opportunities to create joint gains by trading across issues, by letting the other side have what's most important to them where you get what you care most in return.

JULIA TAYLOR KENNEDY: For example, in a contract with a freelancer, the price of a service can come down if the volume of work goes up. Or in a contract with a factory supplier, the price can come down if there's a long-term agreement in place.

Another way to understand joint-gains trading? A love story.

MAX BAZERMAN: Think about the romantic couple who on Friday night are arguing about where to go to dinner: party A wants restaurant A, party C wants restaurant C, and they compromise on B.

JULIA TAYLOR KENNEDY: And then over dinner they talk about which movie they want to see, and party A wants one movie and party C wants another, so they compromise on a third movie.

MAX BAZERMAN: And then when they're going home they realize that party A cared much more about the dinner choice and party C cared much more about the movie choice.

JULIA TAYLOR KENNEDY: So if they had gone with one person's favorite restaurant and the other person's top pick for the movie, they would have both been happier in the end—instead of kind of disliking the food and the movie.

MAX BAZERMAN: And if you can imagine a romantic couple doing better by making wise trades across issues across time, I think you can begin to see any kind of long-term business collaboration or long-term diplomatic relationship as doing well when we can trade off issues both at a specific time but also across time to create more value for the two parties to divide.

JULIA TAYLOR KENNEDY: Boy, I think you may have yet a third act as a marriage counselor.

MAX BAZERMAN: I think I'll pass on that. My clinical skills are quite limited.

JULIA TAYLOR KENNEDY: But he has given us a nice way of understanding how negotiation can move in a more collaborative direction.

One requirement: transparency. Both parties have to know each other's priorities and preferences in order to find that optimal outcome. And to do that, they have to tell the truth.

MAX BAZERMAN: You shouldn't lie, and the reasons to not lie are numerous. It's not a nice thing to do, it will hurt your reputation, but in addition, so often people lie because they're caught off-guard. The other side catches them in an awkward situation and what I find is that negotiators who aren't prepared well, tend to lie more than people who are prepared well.

JULIA TAYLOR KENNEDY: Of course, in a negotiation, there's always the fear that the other side is lying about their ideal outcome. How to avoid that? Back to open communication.

MAX BAZERMAN: Ask clear, direct questions. The more ambiguous the information the other side is giving to you, the more likely it's going to be somewhat disingenuous. So more specificity, more clarity, will also increase honesty in any negotiation dialogue.

JULIA TAYLOR KENNEDY: Bazerman teaches all of these approaches in his negotiation classes. His students buy into the idea that negotiation is about long-term relationships, it's about finding joint gains, it's about open communication.

And yet they still resort to less enlightened tactics in their negotiation exercises.

MAX BAZERMAN: The goal is not to simply improve their intuition but to realize that so much of our behavior is driven by the environment.

JULIA TAYLOR KENNEDY: So how to change the environment to put these better behaviors in place?

HAL MOVIUS: One thing that doesn't work is to simply tell people that they have to behave ethically, and then drop them down into an incredibly competitive and dynamic environment in which they're going to have private negotiations with a counterpart and hope for the best. Good luck.

JULIA TAYLOR KENNEDY: Hal Movius has a few ideas of what could work.

HAL MOVIUS: People need a robust model of negotiation. I don't mean that they need some theoretical, abstract idea about negotiation. They need a very practical process model based on the kinds of mistakes that negotiators are prone to making.

JULIA TAYLOR KENNEDY: In other words, first they need to take Max Bazerman's class.

HAL MOVIUS: The second is that people need to practice being in that situation and managing their emotions and practice responding when difficult tactics are used.

JULIA TAYLOR KENNEDY: It's a little like exposure therapy.

HAL MOVIUS: The third kind of intervention is that negotiators need far more guidance than they are currently getting—particularly in the corporate world—about what success means and how success is measured.

Negotiators rightly get confused when they're given high-level values they're meant to represent, but then very focused, specific measures which warp their behavior in certain ways. The job of leaders who manage negotiators is to provide them with some set of criteria that describes what it means to have a successful negotiation.

JULIA TAYLOR KENNEDY: Instead of being recognized for getting the best price or the shortest turnaround time on a product, negotiators could be evaluated by other criteria.

HAL MOVIUS: "Did the agreement improve in some way over last year's agreement or the existing agreement in how well we met each side's interests? And did we behave in a way that reflects the values of the organization or of our group in the organization?" That would be a more balanced scorecard beyond simply, in hard dollars, "How much revenue does this deal translate to?" or "How much of a discount did we get?"

JULIA TAYLOR KENNEDY: After all, the real goals of negotiation are to maintain a good reputation with current and future stakeholders, to consistently deliver on the agreement, and to be able to change agreements in good faith when business climates shift.

To illustrate these negotiation principles, Impact producer Amber Kiwan looked at the story of Dell computers over the last 15 years.

So Amber, welcome back to Impact.

AMBER KIWAN: Thank you.

JULIA TAYLOR KENNEDY: Before you tell us about a negotiation Dell entered into, can you highlight what Dell has gone through as a company over the last few years?

AMBER KIWAN: Sure. Dell used to be this leading business in the PC [personal computer] world. They were known for their efficiency, and it was working for them for a long time.

ASHLEE VANCE: It was the rise of the PC and you had companies like Compaq Computer and Hewlett-Packard that had been doing well, and obviously, selling these new machines that everyone wanted. Dell had figured out a way to streamline the process of making the computers and found a way to make them cheaper.

AMBER KIWAN: I talked to Ashlee Vance. He's a reporter at Businessweek. He's a features writer. He mostly covers tech companies, but he used to be a beat reporter with The New York Times, and that's when he did most of his coverage of Dell.

ASHLEE VANCE: They were based in Texas, so they had a lot of lower cost going for them in terms of real estate and employees, and they were ruthless about this stuff. Most of the computer-makers had been either running fairly typical factories or outsourcing that work, and Dell turned their factories into a science and managed to get the cost down.

AMBER KIWAN: It really seemed like they weren't really willing to negotiate very much. They had their standards, and they had their demands, and it had to be the cheapest and the lowest and the quickest.

ASHLEE VANCE: That became their story. They were the low-cost computing leader. They didn't spend on research and development like some of their competitors did, and over time they grew from just selling PCs to selling more corporate equipment like servers and storage systems, and grew their business that way.

AMBER KIWAN: Meanwhile, Dell was getting into the IT [information technology] business, too, and negotiating with a contractor to provide some of their services.

I talked with Steve Satterwhite, the founder and CEO of Entelligence IT, an IT consulting firm based in Texas. His company started a contract with Dell in 2001.

STEVE SATTERWHITE: We were part of their vendor team that was out designing and installing and managing their products at their customer site.

We did it all under our private label service agreement so that when our folks showed up we said, "Hello, I'm Amber with Dell. I'm here to . . . " whatever I'm here to do depending on the role, the day, the customer.

AMBER KIWAN: Satterwhite's first contract with the company was essentially a turnaround job.

STEVE SATTERWHITE: They measured customer service in their own way, but let's just say they're looking for a 9 or 10 on a scale of 10 and they called it the customer experience.

When we came in, their customer experience scores were not that great in the group in which we were working. In fact, one of the guys that we worked for at Dell coined this phrase, "We have a 'be-back' problem." And I thought, what is a "be-back" problem? He says, "You know, we send somebody out to do some work at a customer site and something goes wrong and a customer is angry and calls us, 'Hey, I need you guys to be back out here because something failed.'"

Those things cost money, they cost time, they drive down customer service. You have to drive down cost, you have to drive customer service really high, and don't make any mistakes, or you won't be here. We have enough people internally and enough partners that don't approach this business in a good way. I don't need another problem, is kind of how it was put to us.

We said, "Great, I think we can do that." I had no idea what we were committing to. I'm an entrepreneur, I'm an optimist, surely we can find a way.

When we signed up the contract I said, "Why don't you send us over your methodology for how you're designing, deploying, and executing these service agreements, these statements of work, these consulting assignments." They said, "We don't have any of that stuff. That's your problem. That's why we hired you."

AMBER KIWAN: Dell had such high demands and they really pushed his company, so he sees it as this great learning opportunity. They really were able to see what they could do when faced with these really tough challenges.

STEVE SATTERWHITE: What we decided to do was to start scripting out technical consulting engagements like we were scripting out a movie. What we wanted to figure out was, where are the problems? Where do they occur? How do they go wrong?

If we had a script, not only for what to do, but what to say while we're doing it, we could not only avoid problems and fix them when they did occur, we would also massage the customer experience to let them know that no matter what was going on, we're on top of it.

AMBER KIWAN: The beginning of the relationship was great—Dell treated their employees well. But as that changed, Satterwhite became dissatisfied.

STEVE SATTERWHITE: The people that we were working for in the beginning were good actors. When they had a change of management in the group in which we were working on, I think the managers were bad actors.

AMBER KIWAN: Over time, Dell started micromanaging Satterwhite's employees and started demanding lower prices.

STEVE SATTERWHITE: You had a couple of bad actors that came in and forgot that this is a business about people, and really ran it from a series of spreadsheets and cost differentiation, really splitting hairs around fractions of success. What happened was our customer started to treat our people poorly.

AMBER KIWAN: Meanwhile, Dell was getting a reputation for unethical dealings with external partners.

ASHLEE VANCE: On the product side they were so aggressive on cost, a lot of these things that had benefited them early, I feel, came back to haunt them. I mean, there was this culture of trying to save money at all costs and in my reporting I uncovered all kinds of dodgy things or things I felt were dodgy.

In Asia, Dell had managers of different business lines who would essentially trade favors to component-makers. A component-maker would say, "I'll give you a membership to this golf course if you let me see the specs for this motherboard early so that I can make a really good bid on this part." This sort of thing was kind of rife throughout Asia.

AMBER KIWAN: Dell was also in the media in 2006 for needing to recall millions of faulty laptops.

ASHLEE VANCE: When the computers were catching on fire, you were talking about capacitors on these motherboards that were these teeny-tiny electrical components. They cost a fraction of a penny. They're like 0.005 cents each, if I remember right. Dell had essentially found a cheap supplier of these capacitors that was using a new recipe for the chemicals inside of them that turned out to be faulty. In an effort to save a few pennies on each capacitor, they'd gone to this unproven company. Dell's own internal studies showed huge rates of failure that would just be totally unacceptable.

Instead of being up-front about the problem, the company largely tried to hide it. It had customers that it knew were suffering, had computers that were likely to fail, and did not proactively tell them about this. And I think it was all part of a culture where saving a few dollars was the ultimate concern.

AMBER KIWAN: In 2010, Dell was implicated in another scandal—this time, involving chip-maker Intel.

ASHLEE VANCE: Intel had essentially been giving Dell rebates to use Intel chips and these rebates were so large that they were making Dell's profit numbers look much better than their competitors. You could make an argument that Dell became addicted to these rebates, because this is how they met Wall Street's expectations in a lot of ways.

AMBER KIWAN: The Securities and Exchange Commission brought a case of fraud against Dell and the company ended up paying a $100 million settlement.

ASHLEE VANCE: The accounting stuff looked bad, the fires looked horrible. Dell was being placed on some of these "worst companies in the world" lists.

AMBER KIWAN: Dell has made moves to clean up its act. Later in 2010, the company overhauled its ethics and compliance program, bringing in culture consultants and introducing ethics video games for employees. And they've gone private, which could help Dell become more long-term in its strategy, instead of answering to shareholders on the stock market.

JULIA TAYLOR KENNEDY: In all this talk of Dell—what does the company itself have to say?

AMBER KIWAN: I did contact Dell for this story, and their chief ethics officer initially agreed to be interviewed, but later backed out. Dell's corporate media team said only that the ethics and compliance program was put in place independent of the fraud settlement.

JULIA TAYLOR KENNEDY: And what was the fate of Steve Satterwhite and his relationship with Dell?

AMBER KIWAN: That same year, Satterwhite's relationship with Dell became particularly strained. He continued to feel Dell's managers were mistreating his employees.

STEVE SATTERWHITE: It would keep me up at night because I would think to myself, we're a company that has basically promised our people, "If you come into our organization, we will teach you the technical skills that we want you to learn. We will teach you how to deliver extraordinary customer service. For that, what we will give you is really great experiences and some really juicy technology that is changing the world." That was our equation.

What happens, though, is when your customer, in this case Dell, starts treating our people poorly, we're no longer meeting that commitment to our people. We're not giving them great experiences with our company.

AMBER KIWAN: Satterwhite emailed me later to add that Dell was expanding the services they asked of his company, while cutting back on contract rates.

STEVE SATTERWHITE: We decided to walk away from that business. It was one of the hardest and one of the easiest decisions that we ever made. I think it was hard because we walked away from millions of dollars of revenue. It was easy because it was absolutely the only decision that we had to make if we were to be living within our own value system.

AMBER KIWAN: Satterwhite negotiates differently now.

STEVE SATTERWHITE: Where it works the least is where you have these kind of heavy-handed, asymmetrical, top-down, one-way relationships where it's our way or the highway. That was a double-edged sword with Dell.

Today, the customers that we work with—we're very choosy about those customers. We kind of screen them for, are we going to be culturally aligned with the customers because we just know that it doesn't work when there's this kind of vendor/supplier relationship.

Everyone has goals and responsibilities that they have to meet, but we're working together—as customer and supplier—we're working together to create a solution. That's where it works the best.

AMBER KIWAN: It's quite a change he's made: from doing everything he can to deliver on all fronts for Dell, to carefully vetting his potential partners.

JULIA TAYLOR KENNEDY: It's quite a transformation that you've just described. And it seems like Satterwhite is learning from experience, the lessons that Bazerman is teaching his students and Movius is teaching his clients, that the way to cut down on unethical practices like lying and bullying is to approach negotiation as a relationship—one that is long-term, that seeks to benefit both parties.

I'll give the last word to Movius.

HAL MOVIUS: What I think is interesting about negotiation is that it's a real moment of truth for organizations. You have a set of values and principles that the organization espouses, and then you have these urgent, financial, fiduciary, legal, and market imperatives.

It really is the crucible of capitalism. You are representing an organization, you're trying to reach an agreement with another side, and there are all kinds of questions about what behaviors are acceptable and what behaviors are not acceptable in support of achieving critical goals.

JULIA TAYLOR KENNEDY: Thanks for listening to Impact from the Carnegie Council. As I mentioned earlier, this podcast was produced in collaboration with EthicalSystems.org where you can learn more about topics in behavioral ethics from top academics in the field.

A special thanks to our production team, Mel Sebastiani, Terence Hurley, Amber Kiwan, Deborah Carroll, and Chris Green. And thanks to the team at Ethical Systems, especially to Jonathan Haidt, Jeremy Willinger, Katharina Weghmann, and the late Bryan Turner. I'm Julia Taylor Kennedy.

You can find out more about this podcast at carnegiecouncil.org. You can also find us on www.policyinnovations.org, on iTunes, or wherever you download your podcasts.