Risk Assessment in Negotiation

An organization’s view of the risks associated with supply will differ according to its view of purchasing. If the view is that the organization is a ‘production unit’, then emphasis is placed on ‘inputs’ in terms of raw materials, components and other constituents to the production process. Other views of the organization are as a ‘communicative unit’ or a ‘capital-earning unit’. These views necessarily emphasis different types of inputs, for example in terms of knowledge and financial efficiency, all with different associations to risk.

Levels of Risks in Negotiation

The ‘production unit’ view requires that inputs are classified and categorised. Researcher uses the following classification system:

  • raw materials and supplementary materials
  • semi-manufactured products and components
  • finished products
  • investment goods or capital equipment etc.

Each of these types of supply goods presents its own purchasing problems: some require considerable technical competence, some require high administration, and others may be time sensitive in supply and production

Negotiation experts have categorized risk in other different ways, such as by the level and type of organizational member involvement :

  • Routine order products: these are low risk, with few problems in use or performance.
  • Procedural problem products: some training is required in use, with associated risk that users may fail to adopt product successfully.
  • Performance problem products: this relates to the ability of the product to meet the user’s needs, including its compatibility with existing equipment.
  • Political problem products: when there is an impact on another area of the business, politicking may arise from competition within the organization to ‘own’ the product.

Different Approaches to negotiation risks

In relating these models of risk to negotiations, the first approach emphasize price as a major focus whereas the second approach enables a broader focus on issues around the integration of product into the organisation. It can be argued that, since the latter internal negotiation as well as external negotiation with it is more ‘win-win’ oriented, as it is focused on problem solving solution building.

It is worth noting that individuals and organisations tend to be risk averse. Yet many negotiations fail to conclude with agreement – a failure which in itself can be presumed to be a risk to the parties. Expert suggest that the reasons for this lie in a number of biases negotiators have in making decisions, including: framing; overconfidence; lack of perspective; escalation; and a fixed pie view. In other words, the parties often favour the ‘win-lose’ approach. Furthermore, some researches report on a study where it is suggested that suppliers and purchasers ‘frame’ the transaction in different terms. Suppliers frame it in terms of gaining resource, are hence averse to taking risks and settle as quickly as possible. On the other hand, purchasers frame the transaction in terms ofloss and. so seek risk by holding out longer. Whilst this may at first glance favour the purchaser, recall the comment in study session 1: ‘”win-lose” turns into a “lose-lose” situation for both parties because the losing party refuses to agree further deals with the winner, or else they seek to regain their perceived loss at some future point.