Fair Play Negotiation – Final Offer Challenge
There are plenty of strategies that people can adopt, to improve their chances of reaching a successful outcome in a negotiation. The understanding of each party’s interests and suggesting alternative solutions are a couple of good examples.
However, the negotiating parties can still end up in a prolonged and expensive process if one party does not want to play fair. To overcome this, consider what is known as ‘final offer arbitration challenge’.
In this process the two parties agree that an independent arbitrator will make the final binding decision for the negotiation. The key difference is that the arbitrator can only make a choice about one offer or the other in absolute terms. The arbitrator cannot opt for a third, mid-point outcome.
The purpose of this method is to get each party to offer something that is reasonable from the outset because if they don’t, then they may get stuck with an adverse decision.
For example, in an insurance claim, the fair value for a claim may be $2m. Let’s say that in a typical situation the claimant lodges a claim for $3m but the insurer puts in a low ball offer for only $1m. Both parties start at opposite ends of the scale knowing they will haggle each other (and spend lots of time and money doing so).
However, if the final offer arbitration challenge is applied both parties have to put in more sensible offers. If they don’t, the arbitrator only has two choices. If the $1m offer from the insurer is clearly not sufficient, the arbitrator will have little choice but to rule that the $3m claim be the payout value. So the insurer is encouraged from the outset not to offer only $1m. The insurer must offer something that is reasonable or it will face a $3m payout instead.
The use of the final offer arbitration challenge does not preclude the parties from undertaking a preliminary negotiation first or even settling on their own. What it does aim to achieve is to get the parties to each propose credible, reasonable and fair offers from the get go.
(Note: Use of this methodology still requires negotiation experience and maturity. It also requires a legal framework that allows an arbitrator to make a final binding decision).
Reference: “How to Make the Other Side Play Fair”, Nick Veasy, Harvard Business Review, September 2016.
There are plenty of strategies that people can adopt, to improve their chances of reaching a successful outcome in a negotiation. The understanding of each party’s interests and suggesting alternative solutions are a couple of good examples.
However, the negotiating parties can still end up in a prolonged and expensive process if one party does not want to play fair. To overcome this, consider what is known as ‘final offer arbitration challenge’.
In this process the two parties agree that an independent arbitrator will make the final binding decision for the negotiation. The key difference is that the arbitrator can only make a choice about one offer or the other in absolute terms. The arbitrator cannot opt for a third, mid-point outcome.
The purpose of this method is to get each party to offer something that is reasonable from the outset because if they don’t, then they may get stuck with an adverse decision.
For example, in an insurance claim, the fair value for a claim may be $2m. Let’s say that in a typical situation the claimant lodges a claim for $3m but the insurer puts in a low ball offer for only $1m. Both parties start at opposite ends of the scale knowing they will haggle each other (and spend lots of time and money doing so).
However, if the final offer arbitration challenge is applied both parties have to put in more sensible offers. If they don’t, the arbitrator only has two choices. If the $1m offer from the insurer is clearly not sufficient, the arbitrator will have little choice but to rule that the $3m claim be the payout value. So the insurer is encouraged from the outset not to offer only $1m. The insurer must offer something that is reasonable or it will face a $3m payout instead.
The use of the final offer arbitration challenge does not preclude the parties from undertaking a preliminary negotiation first or even settling on their own. What it does aim to achieve is to get the parties to each propose credible, reasonable and fair offers from the get go.
(Note: Use of this methodology still requires negotiation experience and maturity. It also requires a legal framework that allows an arbitrator to make a final binding decision).
Reference: “How to Make the Other Side Play Fair”, Nick Veasy, Harvard Business Review, September 2016.