Why Negotiate? Why Not Negotiate Better?

I have spent a goodly portion of my professional life negotiating agreements – time which seems like it could have been better spent doing other things.  I have come to know one thing with great certainty: Negotiations Suck.  Negotiations are random, chaotic, time consuming, risky, and error-prone. They come with economic costs and the expenditure of social capital. Moreover, not everyone is a good negotiator, and lawyers, even the best of us, aren’t good at it.   The reason for this is that the cost of negotiations is inherently a systematic problem.

So then, why do firms engage in negotiations at all when it feels like a colossal waste of time?  If you ask an economist why firms even bother negotiating and you would probably get some hand-wavy answer: it’s a price discovery mechanism that allows parties to price-discriminate.  Simply put, the seller spends the time to make sure it is getting the most revenue from the customer and the customer is getting (or at least it thinks it’s getting) the lowest possible price.  Fair enough, but here’s the thing that seems like a structural inefficiency to me.  When the legal team is given the agreement to negotiate the legal terms, the contract price is almost always already decided.  Most of what lawyers do in negotiations is to prepare for low-probability, high-impact risks.  Since the price is already discovered, the lawyers are just haggling over the allocation of risk should something in the deal go sideways later on.  

Moreover, the way lawyers negotiate contracts, namely arguing point-by-point, is not economically efficient. It’s actually an awful process.  The parties argue, lobby, bicker, bully, demand, cajole, or threaten to walk away from the deal.  The threat is a rather blunt instrument to get what you want.  This winds up being a political act, not an economic one.  One side is trying to compel the other side into doing what it wants rather than inducing it with incentives.

The awful process produces predictably awful results.  Have you ever asked your lawyer to spend more time negotiating a deal?  Worse, the current system leaves unpriced risk and time-value-of-money issues baked into every deal.  It would be folly to counter with the argument, that the pricing model assumes a certain level of contractual negotiations which is factored in.  Anticipating what concessions a customer would want and what you would agree to in the negotiations is a hard enough task in and of itself and in the real world, it is probably not accounted for by sales, FP&A, or whoever sets pricing.

This leaves us with the conclusion that negotiations not only suck, but they are also really hard to predict. Given all of this cost and inefficiency, should lawyers be negotiating less?  No, I would argue, we should be negotiating more. However, we should focus on reducing the pain and complexity of negotiation, so that we can get a fit-for-purpose agreement for every transaction.  Here’s the way in which I have tried to engineer my way out of this problem in practice for my clients.  I have spent a substantial amount of time analyzing our previous negotiations using different statistical techniques to look for patterns.  Through this analysis, I set priorities.  These priorities determined what we deemed essential to include in a contract: the must haves, the can’t haves, and the everything in between that I can rightly negotiate over.  Instead of argumentative haggling, I am able to make my proposed changes to any particular agreement, offer certain changes in concession for my terms for the best trade in order to get the priority terms included in the final agreement.  I can then generate multiple options and quantized legal decisions to delegate them to the business teams so that they could negotiate their contracts independently. Based on a pre-arranged set of deal rules, business teams are empowered to negotiate commercial, financial, and legal terms all at once for most agreements.  

The final negotiations systems we put in place yielded step-function efficiency.   Not only has my approach reduced unpriced risk and cost of time in deals, but has also shortened the duration of negotiations significantly.  But above all, the legal negotiations are economically efficient because we are able to give up something we have in order to get something we want more.  That is the fundamental axiom of economic welfare.

Disclaimer: Ozeki is not a law firm, and this blog post does not constitute or contain legal advice. Use of, and access to, this blog post does not create an attorney-client relationship with Ozeki.  In other words, if this were legal advice, a bill would follow.

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