What Is Leverage? 10 Rules for Using it Well
What is Leverage?
What most consider to be negotiation power — leverage — actually relates to two factors: how much each party needs that deal relative to the other, and the relative value of each party’s best alternative to that deal.
For instance, consider who had stronger leverage in the negotiations between the U.S. government and housing contractors after Hurricane Katrina.
By any measure of conventional strength — financial, economic, military — there is no more powerful entity in the world than the U.S. government. And yet, just after Katrina, the government also was desperate for housing for those displaced. Housing contractors, in contrast, were not nearly as desperate. Most were doing fine at the time.
The government was getting publicly beaten up each day it failed to provide housing for those displaced. In other words, it had a weak alternative to deals with those contractors — and it was getting worse each day. But the contractors already had regular customers — decent alternatives to doing deals with the government.
So don’t assume a party has more power just because it is big. Of course, size can have a significant impact. A company’s size may lessen its level of need for any one deal, and may allow it to develop better alternatives to a deal with the smaller company.
This following question posed to me by a client from a very large company raises issues all negotiators should understand.
“How can we use our large size and power to get our best deal, yet still avoid alienating smaller companies with whom we want a future relationship? After all, we value our reputation and don’t want them to feel we’re just imposing our terms.”
Initially, recognize that negotiation power is not solely dependent on conventional notions of economic strength.
But even if a large company has the leverage, should it simply impose its preferences? Not if it cares about a relationship with that smaller company, and about its reputation.
Instead, do the following (which also can apply to small companies with very strong leverage):
1. Value your reputation as a goal.
Explicitly value your reputation as a goal and measure success — in part — based on how your counterpart views you after the negotiation. And evaluate your front-line negotiators in part on how well they achieve this.
If your counterpart feels you unfairly imposed your solution and the deal involves an ongoing relationship, this will have a cost to you. Measure and evaluate it.
2. Downplay your leverage.
Large companies get overly aggressive reputations when they discuss how little they need the deal and overtly point out their great alternatives. If you invite five vendors to your office, put them in adjoining rooms and work them against each other, they likely will leave with a bad taste in their mouths. It’s a blatant leverage play that signals you only really care about price for their commodity and don’t much care about the relationship.
Learn How Trump Uses Leverage
On the other hand, assuming you value the relationship, you often can develop better alternatives and increase your leverage without being overtly aggressive. In fact, smaller parties may already understand their weak leverage, so explicitly raising the subject may itself be overkill.
3. Emphasize “fair” standards.
Consistently emphasize the fairness and reasonableness of your terms with applicable standards such as market value, industry precedent, an expert’s opinion, tradition, etc. Focusing on helpful standards depersonalizes the environment and helps your counterpart believe your terms are objectively fair, independent of your size and leverage.
4. Concede some items.
Initially build in some terms you can and will concede. Don’t go to the mat on minor issues. And be the one to make the last concession, which should be on a minor point.
By making these concessions, you will give your counterpart significant psychological “wins” at a very low cost to you. The value of that feeling to your counterpart likely will be more important to you than the value of the conceded items.
5. Don’t impose your agenda.
Finally, parties often react negatively when a big party with strong leverage overtly imposes its agenda. This especially includes requiring short deadlines, which increase pressure and tension.
Instead, control the agenda in a subtle or informal way, perhaps by soliciting their input on what to address. Then incorporate some of it, avoiding short deadlines.
Also consider going to their office or to a neutral site to conduct any in-person negotiations. While sometimes going to their “turf” puts you at a disadvantage, the psychological benefit to you of their increased comfort level may be worth this possible cost.
Size doesn’t always matter. But when it does, and you care how others perceive you, strategically exercise your leverage. You may not always be the stronger one.
6. Understand perceptions’ impact on the process.
Our perceptions and expectations create a level of reality in negotiations that often has a greater impact than the true factual situation.
How can this be? Here are some examples.
One, experts know that projecting a passionate positive attitude toward many endeavors increases your likelihood of success – regardless of how you might objectively feel. This is one reason many individuals, including top level athletes, “psyche themselves up” before significant events.
Two, if I can get you to believe I’m not desperate for a deal – even though I‘m really desperate – it often will strengthen my leverage. It does this as your counterpart’s perception of your need level, not the unknown reality, drives their behavior.
Finally, if I can get you to perceive an issue as important to me – even though I don’t care about it – I may be able to extract a greater concession from you in return when I finally concede on it.
Overall, then, become more sensitive to the perceptions and expectations in your negotiations.
7. Research parties’ historical perceptions and expectations
We are creatures of habit and tend to repeat what we do and how we approach many contexts, including in negotiations. As a result, in preparing for significant negotiations you should:
- Research what you and your counterparts have historically perceived and expected in terms of each major strategic element (including goals, issues, reputation/styles, aggressiveness of leverage, use of standards, type of offers and concessions, and efforts to control the agenda);
- Research what your counterparts have actually done in terms of these strategies (you can often find this by contacting those who have been across the table from your counterparts in the past); and
- Pay close attention to your counterparts’ perceptions and expectations early in your negotiation and how they act and react to your moves.
For example, consider the power of finding out that real estate agents in ABC City – and the agent for the house you want to buy – have traditionally recommended that their sellers list houses at about 15% over what a comprehensive objective market value might suggest.
This way, if necessary, the seller can concede that amount and give potential buyers the perception that they got a really good deal.
Is it important to find this out before you make an offer? Absolutely.
8. Take conscious steps to manage them to your benefit
The beauty of perceptions and expectations is that you can change them. How? By using strategies and tactics involving timing, deadlines, specific offer-concession language, and others.
For example, you might include a very short deadline on your house offer and let the seller know you are still looking for a house even after making the offer. This will create the perception that you want the house but aren’t desperate.
9. Don’t cross the ethical line
Some might suggest it’s unethical to promote a misperception that a party knows is false, even if that party did not misrepresent any fact. I would respectfully disagree as this relates to most negotiation contexts.
The practical reality is that most significant negotiations involve a certain acceptable element of misdirection which all the parties understand, accept and practice.
If I’m negotiating to buy an allegedly rare artifact in an open marketplace in Mexico, I’m not going to wear a suit, an expensive watch and volunteer that I’m a U.S. lawyer. Am I a U.S. lawyer? Yes. But I’m not going to volunteer it.
Instead, I will try to create a different level of reality for that shopkeeper in the world of perception and expectations. And he’ll try to do the same for me. That’s the playing field for most negotiations.
Negotiating from Strength, Even if You Don’t Have Any
“We’re going to court,” she told me during a break in my negotiation seminar. “What else can we do? We really want to sell, and my brother-in-law’s `best offer’ for our share of the family business will only give us 10 percent of what it’s worth. Plus, the relationship is hicolumn. What have we got to lose?”
“Well, what’s your leverage?” I responded.
“We don’t have any,” she said.
Here’s what I then told her – and would advise you to do if you find yourself with seemingly little or no leverage.
10. Leverage is a relative concept: Be strategic about what leverage information you disclose.
First, analyze your overall leverage situation. As I stated earlier, a primary element of leverage relates to how much each side wants or needs a negotiated agreement.
The more you want or need an agreement, the less leverage you have. The less you want or need it, the more leverage you have.
Since this woman “really wanted to sell,” her leverage was less than if she didn’t care.
Let’s say I was selling my house, and as I was showing a couple my newly renovated kitchen, the wife told her husband she “loved the kitchen and the house.”
This couple’s leverage initially appears weak. After all, the wife indicated – within my earshot – how much she wanted my house. The more they want it, the weaker their leverage, right?
Right, except for one critical factor. We don’t yet know how much I need or want to sell. If I’m more desperate to sell than they are to buy, their leverage is pretty strong compared to mine.
In other words, leverage is a relative concept. It’s only strong or weak in comparison to the other side’s leverage.
Plus, the parties’ perception of the other side’s leverage also will impact the negotiation.
If I know this couple really wants my house, and they don’t know I’m more desperate to sell, my leverage is stronger than if they knew.
The lesson? Be strategic about what leverage information you disclose.
About Marty Latz
Renowned negotiation expert Martin E. Latz, Founder of Latz Negotiation, has trained over 100,000 lawyers and business professionals around the world to more effectively negotiate, including in Bangkok, Beijing, Brussels, Hong Kong, London, Prague, Seoul, Shanghai, and Singapore.
An Adjunct Professor – Negotiation at Arizona State University College of Law from 1995 to 2005, Latz has also negotiated for the White House nationally and internationally on the White House Advance Teams.
Latz – a Harvard Law cum laude graduate – is the author of Gain the Edge! Negotiating to Get What You Want and The Real Trump Deal: An Eye-Opening Look at How Trump Really Negotiates. He has also appeared as a negotiation expert on MSNBC, CBS’ The Early Show and such national business shows as CNN’s Your Money and FOX Business. He writes a monthly negotiation column that appeared for many years in The Arizona Republic and that now is e-mailed to almost 40,000 readers per month.