How to become more strategic and quantitative in any Go-To-Market, Sourcing or Negotiation Initiative
I love the show Arrested Development. So much so that on my worst days, I am tempted to go open a banana stand. After all, “there is always money in the banana stand”.
There is one scene in particular that not only makes me laugh hysterically but also summarizes the way in which we tend to approach strategic initiatives, no matter if it is a product launch, sourcing opportunity, or acquisition target.
To some degree, the sentiment of the clip above is still prominent in 2024 business.
At best, we start with the accounts we have familiarity with or that our rolodex steers us to.
At worst, we proceed alphabetically.
This is problematic because the way we prioritize targets can significantly impact the momentum we generate and, as a result, the outcomes we’re able to achieve. It helps us to optimize our resource allocation, and if done correctly, can be a source of leverage for more resistant (and often more lucrative) targets.
So what is the most effective way to prioritize targets in a strategic initiative?
One proven strategy borrowed from the negotiation realm is to perform a probabilistic BATNA assessment of your counterparties. This evaluation can be broken up into 3 main steps:
Matching Counterparty Business Intelligence To Your Differentiation – Businesses are myopic; they tend to talk about their products, services, purchasing program or company characteristics. We need to flip that script; examining the business conditions of each of our counterparties from their perspective. More specifically, we need to hypothesize the problems currently facing our counterparties and how we as a company are uniquely positioned to solve them. Earnings calls transcript, LinkedIn, news reports, sector indices, new entrants, etc. can all be leveraged to uncover this.
Probabilistically Assess Counterparty BATNA: BATNA stands for “Best Alternative To A Negotiated Agreement”. In any deal there are two effective BATNA metrics; Your BATNA and the Counterparties BATNA. Humans are intrinsically good at understanding and assessing our alternatives. We are poor when analyzing what the other side would do if we do not strike a deal. Since no one can truly know what their counterparties’ alternatives look like, we tend to ignore this evaluation altogether. The problem is, quantitatively understanding the counterparties BATNA is the most important analysis anybody can make ahead of a negotiation. So, with so many unknowns, how can we do this?
First, we start with a probabilistic assessment of the value of us solving that problem. This intrinsically is where businesses get hung-up; the use of estimating. To counter, I point to the many examples of businesses using probabilistic assessment to estimate business decisions. In O&G, we utilize a completely estimated decline curve and well outcome distribution to make investment decisions. Lending groups use probabilistic assessments to inform investment decisions. Accuracy is not imperative; the goal here is to assess these across the counterparty base to determine relative value across each. For the sake of this article, let’s define this as opportunity size.
BATNA Quantitative Score: However, BATNA is not just constrained by the estimated value add. It also enables us to measure the weakness and dependency of the counterparty on our solution. To do so quantitatively, we need to probabilistically measure several key variables in order to stack position relative to other counterparty targets. The variables alter depending on the industry and client in question, but typically measure current sector conditions, prospective revenue impact to counterparty, switching costs, correlated indices and relationship metrics. We can weigh and scale inputs to come up with a probability band of values for our measurement, accounting for the impact of any error in our evaluation. The distribution of values can help inform our starting point, our GTM order, etc..
From this analysis, I am left with the following for each of my targets:
Prospective opportunity size estimated on value
BATNA metric assessing my negotiation leverage
With these metrics in hand, I now have a means to systematically determine who to target and in what order. To do so, I generate a sequencing plot (simplified for the sake of this article):
Let’s do some quick analysis of the plot. On the Y-Axis is our BATNA ratio. In short, a lower BATNA ratio means we are better positioned to get a great outcome. On the X-Axis is opportunity size, this is the potential value of the prospect.
The lower right quadrant is most important; These are prospects who have a low BATNA ratio with a large opportunity size. These should be the first targets we prioritize. We then move systematically across this plot to determine our target order.
I’ve now moved from a scattered, non-strategic targeting approach to a systematic, strategic ordering of my prospects that I target.
Last Considerations:
Setting Initial Deal Goal: Let’s briefly go back to our analytically deduced BATNA value calculation. As previously detailed, this prescribes the purely monetary cost to our counterparty by not coming to agreement; it helps us set our goal for the negotiation. Our BATNA determines our walk away point. The difference between the two is what we call the ZOPA, or Zone of Possible Agreement. This definition is critical, since it sets the range of outcomes for our deal. We will discuss more regarding ZOPA importance in later posts, but the criticality of assessing the upper bound is centered around the fact that we want to concede (relationship enhancing). Thus, we need to provide ourselves with enough cushion such that we can.
Setting Initial Deal Terms: Typical negotiations do not just feature price but include additional issues like contract length. How can we prepare and assess the most advantageous agreement length? BATNA is not static, and once again we can use the BATNA score to inform contract length. Using probabilistic forecasting, we can determine if the counterparties BATNA will increase or decrease over time. If it is most likely to increase, we propose to secure longer term contracts. If it is most likely to decrease, we propose to secure short term contracts. Using a 1) dynamic evaluation of BATNA and 2) probabilistic evaluation of future opportunity size we can quantitatively optimize total contract value.
We’ve now done the requisite prep work required to take a strategic approach to our dealmaking. Next is actual execution. We will cover this in our article.