Download Negotiating Complex Licensing Agreements I - The Art of Negotiation
In this overview of licensing negotiations we will address three areas: In the first part of the article, our focus is on the art and artistry, the issues and interests, the options and opportunities, and the alternatives and end-games that occur in a complex licensing negotiation. In Part Two, we do a brief review of opportunities to extend a licensing program during the renegotiation process. Part Three is a case history of a complex negotiation.
Part One is applicable to all licensing negotiations (and most other negotiations, in fact). The second part is aimed at existing licensors and licensees—those with both mature and growing programs in renegotiation—and is meant to stimulate some creative thinking on the part of program managers as they face a new negotiation with a key licensee. We also deal with the single most important concept for any negotiation: the BATNA—best alternative to a negotiated settlement. Finally, we conclude with a brief case history of two large companies negotiating a new license in the food industry.
The Process and Art of Negotiation
There are a variety of viewpoints written on negotiating a license, but the most important element may be sensitivity towards the other side and its positions. In this section we look at some considerations and techniques for managing the negotiating process and bringing it to a successful conclusion. Much of this is based on our own experience over the last two and one-half decades, as we have engaged in license renegotiations for trademarks, technologies, brands, copyrights and software; and have engaged in those negotiations in North America, Asia, Europe and Latin America.
We in the licensing business often think that the problems of negotiating are unique, particularly the problems of coming to a fair and successful agreement. Licensing people all agree that the licensing business is very interesting and very different, and in some ways is unique in the service that it sells. However, we are certain that the negotiation process that one goes through in licensing, while complex, is not unique.
Whether the issue is a successful negotiation of a merger or acquisition deal, a reorganization under Chapter 11, a personal appearance contract, or a major licensing agreement, there are great similarities in the process. The essence of the negotiating process is basically the same, the core motivations of the parties are the same, the types of self-interest can be categorized into a few groups, and common negotiating techniques can be made effective across all types of negotiations.
What is a Successful Negotiation?
In an ideal world, a successful negotiation is one where both parties get everything they want. This, however, never happens. Each license agreement that is negotiated calls for givebacks and takeaways on the part of each party. A successful negotiation then is one in which each party feels that on balance their goals and interests have at least been advanced through joint decision and joint action on the negotiations. Even if those goals have not been fully met, each party must feel that they have attained a meaningful portion of their goals.
Perhaps the best way to define a successful negotiation is as a means to advance the full set of your own interests through joint decisions and actions of the two parties in the negotiation. The key is to understand your own interests and those of the other party, and then to identify alternatives that will address both sets of concerns. In addition, it is important to understand what is happening away from the negotiating table. While the facts and issues being negotiated face to face at the table appear to be of paramount importance, oftentimes the behind the scenes plans, processes, positions and postures can be equally important as internal in-fighting and/or jockeying for position may be taking place behind closed doors, on one side of the table.
Identify, Assess and Prioritize Interests of Both Parties
Success in negotiating an agreement is to completely understand the interests of your own team and those of the other negotiating team. We not only need to understand what those interests are, we have to assess them and then prioritize them as a reality check. However, understanding the key interests of the other side is, if anything, more important to a successful negotiation.
There are both tangible and intangible interests on the table, some visible and some invisible. The tangible interests are obvious and include such things as a longer term, more frequent renewals, broader product definition, a higher royalty rate or greater guarantee of royalties. Perhaps better advertising allowances or other marketing considerations come into play. On the other hand, the intangible interests, while less obvious, may be equally important. They can include reducing tensions between the two parties, building a relationship of mutual trust with an established licensee, ensuring that the licensor’s reputation is maintained at the highest level, and helping to see that there is a friendly, if not cordial relationship between the two parties as they move through the negotiations into implementation. Each of these intangibles can have as much bearing on the negotiating process as the tangible and specific financial interests and goals.
It is important to understand that when negotiating, the interests of your side are both objective and subjective. There are objective standards such as an absolute royalty percentage below which you will not go. On the other hand, a subjective interest might be a requirement for a creative commitment to the licensing program by the licensee that is more difficult to measure and negotiate. It is also important to not allow the hard or tangible issues to drive out these critical soft issues. For example, objective negotiating goals in terms of dollars of time cannot totally push out considerations such as reputation, quality, creativity and emotional commitment.
Interests drive specific issues and positions. Each party in a negotiation has specific interests and these form the bases that drive the negotiating process. If one can distinguish core interests from specific issues or positions then one has taken the first step toward ensuring that an effective negotiation can follow. Too often, one of the negotiating parties will focus solely on a specific issue such as maximizing percentage royalty rates. In fact, what the overall interest may represent is a need to maximize early cash flow as opposed to the specific issue of high-end royalty rates. Recognizing this key interest can then lead to many different solutions to address it.
It is important that the parties at the table be able to identify the important differences in their interests. In other words, if one party has a key interest to keep early cash flow to a minimum and the other party can recognize this, then they are well on their way to addressing the underlying issue of royalties, advances and guarantees to satisfy that interest. The key concept is interests versus issues: Identifying the underlying interests and reconciling the various issues that flow from then.
“Managing the Negotiation Process”
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Negotiation is a Means to an End — The Concept of BATNA
Often, the process of negotiating appears to become the end in and of itself. In fact, we believe that in the licensing industry parties often allow the negotiations themselves to become the object. Too often people lose sight of the fact that negotiating is a means to solve problems for both licensor and licensee. When in negotiations, ask yourself a question: What is my BATNA? BATNA means The Best Alternative To A Negotiated Agreement. Ask yourself: If we can’t negotiate an agreement here, what are my alternatives? Do I have alternative licensees? Are there product lines I can add to existing contracts? Can I wait a year to introduce this product line? Can I contract and manufacture it myself, or perhaps import it?
The BATNA becomes the minimum threshold that the negotiated deal must exceed in order for it to be acceptable. With the concept of BATNA in mind while negotiating, you realize that there are a range of possible agreements. BATNA allows you to focus on the key alternatives, and when necessary, actually change the game; instead of negotiating a license agreement, for example, consider bringing in more partners on your side. Or, away from the table, find a way to diffuse or spread the risk, or enlist others in a joint venture. Considering any of these alternatives gives a new view of the negotiating process. Remember that moves and changes away from the negotiating table can improve your BATNA.
Assuming that you understand your alternatives, and have identified the best of those, then it becomes time to look at the other side’s alternatives. The more one can identify feasible and viable alternatives for the licensee or other party facing you across from the negotiating table, the better one can understand the maximum advantage to be gained at the table. In other words, if the party on the other side of the table has relatively few alternatives then your negotiating position becomes much stronger. If on the other hand their BATNA has a high degree of attractiveness, it will mean that the relative inclination to negotiate more favorable terms will decline, as the other side looks at the possibility of moving to that best alternative.
Their Problem is Part of Your Problem: The Art of Concession Management
One of the most important concepts to bring to the table when negotiating a license agreement is to understand that the opposing side’s problem really becomes yours if you are going to have a successful negotiation. You must put yourself in their shoes. Far too often I have heard the statement made in a negotiation, “Well, that’s their problem. I am not going to worry about it.” In fact, that problem becomes both your problem and theirs, because if you can’t help them solve their problem, they cannot solve yours. Consequently, it is important to the greatest extent possible, to understand the other side’s egos, needs, pressures, marketing strategy, and internal organization. The classic error we most often see in negotiations is for one side to focus on its own position without understanding the position or problems of the other side.
The best illustration of an effective way to handle the issue of “their problem is your problem” is found often in Japanese negotiations and contracts. Oftentimes when the Japanese negotiate a complex agreement that spans multiple years with multiple permutations, they put in a paragraph known as the Otawara clause (there are other descriptive terms for this clause). The so-called Otawara clause addresses the following issue: Should relative conditions between the two parties that are negotiating the agreement change substantially, then that party which has accrued greater power than the other has a commitment to renegotiate and make things fair. While this is a common approach and philosophy in Japan, it is a virtually unknown concept in American negotiating.
Someone once described negotiation to me as “The art of letting them have their own way -- to our advantage.” We agree. It fully implies that making their problems part of your problem brings you to successful conclusion. The essential task becomes to get them to see their problem in your terms. In other words, get them to focus on their problem and encourage them to do so, but within the context of your terms, conditions, mobility, and alternatives. Each side tries to optimally advance their own interests, which (hopefully) then leads to agreement. However, in order to reach that agreement, the art of concession management comes into play. Make the licensee see that your need or problem is their opportunity to advance their own economic and other business interests.
The art of concession management is straightforward. It is the ability, while negotiating, to play key elements against each other: Time versus dollars, now versus later, lower royalty rates versus higher minimums, and exposure versus obscurity. Sometimes, however, concession management becomes the end play in a negotiation and, unfortunately, too many people see it as the process of negotiation itself. Concession management is simply the means that one uses during the negotiation to get to an agreement that best addresses the most important issues. Concession management is an art form in many negotiations.
Summarizing the Art of Negotiation
Let’s return to our original question: What is a successful negotiation? It is that negotiation that best advances the interests of both parties through joint decisions and actions. The key first step is for each party to identify, assess, and prioritize their full set of tangible and intangible interests. Once the parties understand their real interests, they can then move on to the specific issues and positions that each needs to address. It is important to not let the hard issues drive out the critical soft issues that can be equally important over time. Remember too, that negotiations are a means to an end, not an end I and of themselves. In negotiating, both parties’ BATNA must always be kept firmly in mind. If there is no BATNA for one party, the rules of the game change.
Most importantly, remember that their problem is part of your problem. Understand what their needs and pressures are, and do not make the classic error of thinking that “It’s their problem, they have to solve it.” Part of the process is the art of concession management, and effectively using some of the techniques we have described here.