Why “Winning” Makes You Lose
In negotiation, everyone has goals. Whether those be profitability targets, price brackets, or something more nebulous like mutual understanding, we all establish success metrics. Having goals enables us to determine how much value is generated in a negotiation, and allow us to course-correct when it seems we’re getting the short end of the stick. But in some ways these goals can also inhibit further value generation, and focusing on achievement of small metrics can prevent an agreement from reaching its full potential.
The Infinite Game
Central to this premise is the concept of the Infinite Game. This conceptual framework begins with the assumption that parties will continue to exist and interact ad infinitum, with the goal being to generate the maximum value from the relationship in the long term. In this context, each individual negotiation event acts as an instrumental goal toward the unbounded terminal goal of mutual profitability. This is as opposed to Finite Games, in which the interaction will end at a definite point in the future, so the goal is to maximize gains during this period and minimize losses.
It would seem that these two competing ideas, infinite and finite, are not mutually exclusive in a business context. After all, if each party aims to optimize their respective gain at each interaction, shouldn’t the net result after a series of these naturally also provide mutual value? To answer this question, we first need to establish why the success vectors for infinite games are necessarily different from those of finite games.
All Roads Don’t Lead to Rome
For single-event negotiations, we’re clearly in the realm of finite games. As such the only relevant success metric is the immediate value from the contract that is derived from it. In this case, doing “whatever it takes” to generate profits is justified because all relational variables (rapport, trust, mutual understanding, etc.) that impact a party’s desire to work with you again are of little value. It is only beneficial to appear to have the other party’s goals in mind to establish short-term trust, and conceal the true competitive nature of the exchange. Since you’re only going to be working with them at this one juncture, if your partner doubts your earnestness after signage it has no bearing on the profits generated by the agreement. In this situation tactics like deception, hard bargaining, and harsh noncompliance fines are justified as long as they might increase profitability from the single contract.
Contrary to this are long-term business relationships, which should be approached as infinite games. While objectively finite from a bird’s-eye view, in the moment it is difficult / impossible to determine when / how such a relationship might end. In this context optimal profitability can result from the inverse of the finite game’s tactics for value maximization. Mutual trust is far more useful here, as it encourages increased cooperation and thus benefits business efficiency. Ensuring the other party maximizes their productive capacity is also of high importance, as their future success enables them to pass on the value of their increased profitability to your business in future agreements. If a concession on your end increases value for the other party by a higher factor, it is in your best interest to take that negative short-term exchange for long-term gains. In infinite games, then, the goal is to optimize mutual productive capacity versus the finite goal of individual gains.
To Infinity and Beyond
How do we transfer these insights into practice? Unlike in the theoretical models, business relationships never fall neatly into boxes of finite and infinite. And in action, negotiations that initially appeared to be terminated at a set date can spontaneously expand into an unbounded relationship due to unexpected success. Or, a business you had a long-term dynamic with is hit by an economic shock that reduces their potential long-term productivity. In this case, reducing your company’s commitment to the relationship decouples from the endogenous risk that disproportionately affected your partner. Both situations demand a reframing of the business dynamic; to allow failed infinite relationships to contract to finite, and surprisingly successful finite agreements to expand towards infinity.
The key to building an action plan based on these ideas is flexibility. Leaving further development possibilities open allows the potential for upscaling / downscaling based on exigent factors. To maximize flexibility, avoid establishing hard goals for negotiation. Hard-line profitability / price targets contribute to a results-oriented strategic approach, in which focusing on the approach vectors for achieving the short-term goal blinds one to the potential for “expanding the pie”. We’ve all seen the disastrous effects of businesses putting all their resources into quarterly profit margins (finite) but failing to develop infrastructure to enable those targets in the long term (infinite). Maintaining price brackets is essential, however open-ended, because the danger of approaching a finite relationship with an infinite mindset exposes you to potential value loss which does not convert to long-term gain. Establishing the other party’s potential and intentions, when paired with flexibility, allows dynamic restructuring to occur when warranted. With this framework in mind, you mitigate the risk associated with finite games while leaving you open to reap the reward of infinite games.
Intellext is an AI startup that is revolutionizing the way contracts are negotiated, accelerating time to close, and improving deal terms. Intellext’s Intelligent Negotiation Platform™ eliminates the complexities of contract redlines and stakeholder collaboration and optimizes deal terms by applying machine learning during the negotiation process.