When you are involved in a multi-issue negotiation you may have asked yourself whether you should make the first offer and if so on which issue? Should you offer something significant on a major issue? Should you offer a token offer on a minor issue? There are different schools of thought on this. Recent research from the Harvard Program on Negotiation at Harvard Law School offers some good insights for you to take advantage of this multi-issue negotiation. Additional insights are provided based on real world negotiations between a major taxpayer and the IRS.
Background
This article entitled “Offers in Multi-Issue Negotiations points out that whoever presents the first offer referred to as anchor typically “accounts for between 50% and 85% of the variance in a negotiation’s final outcome.” For single issue negotiations this has proven a valuable strategy. On the other hand ,the article points out that if you are overly aggressive this offer can backfire and result in an impasse. The question is what does the literature say about multi-issue negotiations?
Multi-issue Negotiations
When there are multi-issues, it can be beneficial to share with the other side your priority on issues and be transparent on your interests. This may allow both parties to discover areas of mutual interest. However, if the nature of the other party is to be a hard bargainer, this can backfire, and the other party can request greater concessions on other areas as a way to push you in the negotiation. One question for you to ask before presenting offers is for you to first determine their motives. Do not rush in to fast with any offers. Make sure you know who you are dealing with and their interests.
Is this a negotiation where the other party is only interested on what is best for them, or is the other party interested in win-win for both parties?
If the other party is only interested in what is best for them, the article indicates it is wiser to hold off on sharing interests and to explore their interests before making an offer.
If the other party is interested in a win-win and a longer term relationship, being more transparent can be a better way to go.
Practical application with an example with the IRS
A fortune 500 firm has a significant research credit issue with the IRS. The differences between the two parties amounted to about $30 million dollars and involved 12 issues. Four of the issues amounted to about 80% of the dispute dollars. Eight of the issues amounted to about 20% of the dispute dollars. Both parties agreed to start with the smaller dollar issues first. Four days were set up for the negotiation. The parties agreed that if they could reach an agreement of the first eight issues within two days, they would continue with the following four major issues in the next two days.
Relationship building and listening
Both parties had been in friction with each other. To help overcome this a higher level decision maker was involved to help keep the discussions focused. For the IRS, a second lever manager was involved. For the taxpayer, the VP of Tax was involved rather than the federal tax manager. To initiate the process and work on building relationships the parties met not across from one another but sitting side by side each other around a table.
Everyone was asked to share something good that had happened to them in the last 30 days.
This resulted in some humor and some humanizing of participants with each other.
Beforehand each party was asked on an 8 ½ by 11 inch piece of paper to take each of the prioritized issues and present what they saw as key facts with each issue, their feelings with each issue, and their interests. Applicable law could be cited. Note that this taxpayer is the type of taxpayer that is likely to be under audit in future years, so having a good working relationship and knowing how to address issues in the future was an interest of both parties. This was identified and promoted by both parties.
Eight smaller issues
The VP of Tax did not attend the detail of the first two days and left the Federal Tax Manager to address these issues. With each of the smaller issues they were taken one at a time with a preidentified order accepted by both parties. With each issue the IRS presented their perspective, applying the law to the facts as they saw them. The taxpayer had seen these previously identified preliminary proposed adjustment before the meeting, appreciated the summary and then was asked to respond. The taxpayer clarified areas of misunderstanding and attempted to clarify the facts and/or differences in application of the law. These resulted in clarifications that helped promote understanding. After each party listened to the other party on a given issue, in most cases the taxpayer presented a bigger picture way to resolve the issue. In a couple of instances, the IRS dropped the issue after the clarifying discussion. With the taxpayer demonstrating reasonable ways to resolve six of the issues with serious first offers and some iterations
the parties were able to reach an agreement with eight of the minor issues within the two day time frame.
Four major issues
With the four major issues the VP of Tax attended as the decision maker. He tended to be more protective of the taxpayer’s position. This changed the dynamics of the discussion to an extent, but the
push back by VP of Tax team to the VP of Tax and by the IRS leadership helped promote the idea of a listening actively and collaboration.
The issues were presented in a similar manner as indicated above. After everyone had been listened to the taxpayer took the initiative and proposed a way to resolve the issue. This was iteratively discussed back and forth with the IRS until a resolution was determined between the parties. The same technique was applied to the next three issues and an agreement was reached.
Is there really an agreement?
Once it appeared there was an agreement it had to be approved by the CFO. The CFO was concerned the agreement was too beneficial to the IRS. The VP of Tax shared that the agreement was acceptable to all of the parties. No one loved the agreement, but everyone could live with the agreement. There had been no agreed to approach to the method of determining research credit on these issues previously. With this agreement there would be a method both could accept and apply on future tax audit years. This would save time and resources for both the government and the taxpayer. A preliminary analysis of the post audit years including the current tax year by the taxpayer indicated a positive impact for the firm. As a result of this additional questioning and analysis, the taxpayer accepted that the $30 Million tax adjustment originally proposed by the IRS would now be approximately $20 million for the current tax years under audit.