Learning from Leon

This past Saturday my wife and I said farewell to our loyal friend and companion, our dog Leon. Leon passed away in our arms, fighting the pre-euthanasia sedatives as hard as he fought the cancer which ultimately ended his seven years of life. While I am deeply saddened by his passing, Leon taught us many great lessons, a few of which I wanted to share in this post. I hope that I can use these lessons for the rest of my life in remembrance of him.

When we adopted Leon, we were told he was found in a junkyard with his mother and a handful of siblings. The rescue organization said he was several weeks old when he was rescued, so who knows what kind of hardships the mother and puppies had to endure. From the onset of our adoption at around eighteen weeks, it was obvious that whatever events had taken place had left their mark on Leon’s psyche. He was scared of nearly everything and exhibited so called fear-aggression to us and nearly everyone who came near him.

Leon’s picture from the rescue agency website

But Leon’s story is one of redemption. As hard to handle as he was, an adolescent hell on four legs, he did not give up on change. After considering giving up on him, my wife and I hired a trainer, the late Jack Pitt, to work with Leon and help him deal with his fears in a less aggressive manner. With Jack’s assistance, Leon began to become de-sensitized to the things that scared him so deeply before. His true nature, a loving dog with some quirks, started to emerge.

Along the way, Leon’s journey from the junkyard to becoming a “good boy” will encourage me to believe in redemption for others. To consider someone’s past as a reason for their behavior and to practice empathy. And to not give up on someone being capable of change, merely because their past is a little muddy.

Leon loved routines. Starting when he was a puppy, he was keenly aware of the time we usually took a walk, when he would eat breakfast, lunch and dinner, and when we threw him the ball. By his pleadings, he helped encourage us to become more structured in our routines. Structuring our days to make sure Leon’s routines were met, we avoided his disapproving barks and whines but also encouraged us to become better stewards of our time.

In addition to his daily routine reminders, Leon also gave us unconditional love throughout his life. It didn’t matter if we were in a bad mood, busy, walking his sister doggie Kaya, forgot to feed him, or had not played catch with him; he wanted to be with us. Dogs assuredly watch and assess us all the time. It’s their ability to not predicate their affection for their owners on anything but the most basic requirements that is most admirable. Leon was no different and I hope I can follow his lesson in caring for others and expecting little, if anything, in return.

I will miss Leon greatly but the pain of the last few months since he was diagnosed is far outweighed by the love and value he brought in return over seven years. I hope that others will have similar experiences and learn just as much from their love ones and we learned from Leon.

Avoiding the Bad

Last week I was listening to the Art of Manliness podcast with guest John Tierney, who recently co-wrote a book called The Power of Bad: How the Negativity Effect Rules Us and How We can Rule It.

As the title would indicate, John and host Brett McCay discussed how humans are much more sensitive to bad events than good ones, and how this sensitivity shows itself in our daily lives. For example, John cited research that showed that it takes at least three good events to outweigh one bad one in our minds.

As companies consider future real estate decisions, it may be helpful to think about how to avoid bad outcomes before achieving outstanding ones. Most of us are in positions where we are in service to something or someone else, whether it be a business unit, client, or shareholders. While it may not fit our current narrative to the customer, the truth might be that the customer really wants to avoid negative outcomes much more than receiving great service.

Avoiding negative outcomes and great services are not mutually exclusive. But if we can design our systems, processes, and tasks in a way that protects against negative outcomes first, at least the research shows that we are tailoring our services to what people care about most.

Maintenance Responsibilities for Industrial Occupiers

One of the main areas I recommend industrial occupiers pay close attention to in lease negotiations are the responsibilities of who maintains, repairs, and replaces building systems and components under a lease.

Leases follow the 80/20 rule. 80% of lease content most likely won’t impact operations or P&L. 20% of lease content will. Maintenance, repair, and replacement provisions are always in the 20%. Therefore, it is smart for companies to conduct due diligence and structure maintenance, repair, and replacement provisions in a way most suitable for operations.

As a starting point, I suggest companies assess what the impact will be if operations dedicates the time and resources to maintaining, repairing, and replacing building systems during the lease. Would the company be better off if the landlord was responsible and passed through the costs? Are there reasons the company would prefer responsibility, such as site security or, for larger firms, potential cost savings. Whatever the answer, it will help to inform any initial discussions with prospective landlords.

Next, companies should conduct due diligence on what the age, condition, and useful life are of the components of the space being potentially leased. It should be standard practice to find out the age, condition, and useful life of the major building systems (structural, roof, HVAC, electrical, parking areas, etc.) before agreeing to maintain anything in the letter of intent or proposal. A property condition assessment report can be helpful in this area.

Lastly, companies should protect themselves against unfair replacement practices. Exposure to capital replacement costs should typically be limited to the amount of time remaining on the lease term and amortized according to GAAP or other reasonable useful-life schedules. Normal wear and tear should be expected in exchange for the rent.

Nothing is free. The landlord and/or the tenant will bear the costs of maintaining, repairing, and replacing within a property. Therefore, I would suggest the focus for industrial tenants should be:

  • What general maintenance, repair, and replacement arrangement is best for the operation
  • What property systems or components should not be the tenant’s responsibility
  • Preventing operational disruption by addressing the near-term replacement of building systems or components prior to signing a lease
  • Outside of requirements caused by tenant improvements, are there requirements such as ADA which are not being met in the space currently
  • Making sure there is limited exposure to unamortized capital replacements
  • If a property management fee is charged, it is commensurate with the market rate and justified by the responsibilities of the property manager

2020

One of my goals this year is to write a blog post once a week. Look forward to sharing my perspective in 2020.

Significant News in Logistics & Industrial Real Estate

Week of October 13, 2019

Welcome to Significant News in Logistics & Industrial Real Estate, a weekly and monthly newsletter where I highlight and comment on the most important stories in industry, the economy, and industrial real estate.

REAL ESTATE
Key Themes

  • Demand for industrial space picks up after a slow start to 2019
  • Industrial users are not only demanding variable footprints but also a variety of clear height, land, and power requirements
  • A future with autonomous vehicles should be considered when designing today’s commercial real estate

The U.S. industrial real estate market continues to thrive supported by e-commerce and warehouse/distribution demand. After a slow start to 2019, demand picked up in the Third Quarter of 2019 with 48.7M square feet absorbed according to Cushman & Wakefield’s latest report. Year-to-date absorption registered 148.8M square feet and is on pace to break 200M square feet for the sixth straight year. 


For the first time in nine years, construction supply is on track to exceed demand by around 70M square feet in 2019. However, much of the 337.6M square feet in the pipeline is either build-to-suits (72.5M square feet) or pre-leased (72.3M square feet) with the remaining 109.3M square feet going towards speculative construction. The amount of speculative new construction should provide additional avenues for tenant growth in tight markets and is not expected to adversely impact rent growth or market values.


With the slow down in demand, asking rents rose 3.2% year over year in 3Q 2019 down from 7.2% in 3Q 2018. Rents are projected to rise modestly has the economy likely grows slowly or contracts slightly. I would anticipate the strongest rent growth in the primary markets but also in some secondary markets like Salt Lake City, which is one of the hottest markets in the U.S. right now. #industrial real estate

Amazon continues to open massive fulfillment centers across the country such as a 1 million plus square foot facility in Channahon, Illinois, about 11 miles southwest of Joliet. Sure, e-commerce is driving smaller buildings in some infill markets but big box distribution centers are not going away. What is changing is the efficiency within the big box. Amazon is rumored to be their fourth or fifth version of a multi-level fulfillment prototype which combines racked storage with sortation in a vertical delivery system. If distribution does skew more into smaller footprints, it is likely to be due to continued developments in how product is stored and moved in the box and not just getting close to the customer. #Amazon #e-commerce #Chicago

To say that FedEx has been in the news lately is an understatement. Two real estate deals involving FedEx were notable this week. First, FedEx filed a $212M building permit with Memphis, Tennessee to improve and expand its presence at the Express World Hub at the Memphis International Airport. The total investment of the expansion is expected to be more than $1B is scheduled for completion in 2025. The State of Tennessee provided more than $20M in tax brakes for the new hub. 


Second, a 252 door terminal FedEx leases in West Jefferson, Ohio was sold by Griffin Capital Essential Asset REIT for $30.3M or $120K per door to Sealy & Company. No word on what FedEx is paying but if one assuming an 8% return that would equate to a monthly rent per door of $800. #FedEX #Memphis #Terminal

Autonomous vehicles are predicted to change real estate and logistics in many ways and developers are starting to design properties accordingly. In the industrial real estate world, autonomous vehicles would likely impact site selection, employee parking, truck court design, and overall ingress/egress pathways onto sites. I wrote about this topic back in 2017 when the technology was just starting to clear pathways to full autonomy in the form of driver assist technology, otherwise known as Level 1 autonomy. Now we are seeing Level 3 autonomy in vehicles, meaning the vehicles handle driving tasks but still may need intervention. Level 4 and Level 5 are what we think of as the driverless stages, where in certain environments the vehicle is driverless (Level 4) and in all environments the vehicle is driverless (Level 5). Most do not believe these latter levels are achievable in the near future, with most predictions falling in the middle part of the next decade.


Since the average useful life of an industrial property is 40 years, even if we are 10 years away from Level 4 or 5 autonomous vehicles they will likely impact industrial buildings being designed and built today. Randy Thompson with Cushman & Wakefield’s Build-to-Suit group, recently wrote an article for Area Development where he discussed “Future-Proofing” buildings to account for autonomous vehicles. We will likely see future industrial property design include smaller to no employee parking lots, expanded and separate drop-off areas, and smaller truck court areas as autonomous trucks become more common. In addition, since an autonomous vehicle does not need to rest, secondary and tertiary markets may become more attractive for distribution into even infill areas. #AV #technology

INDUSTRY
Key Themes

  • The logistics industry is investing heavily into technology to improve supply chains and support customers
  • Various economic and industry indicators point to a balancing trucking industry in 2020 and steady growth in the warehousing sector
  • Companies continue to enter and exit the last mile delivery space as Amazon and FedEx expand their last mile services

Logistics companies continue to invest heavily in technology to enhance a variety of functions and needs in their organizations. One area getting a lot of investment is technology to help increase visibility in the supply chain. Offering customers the ability to understand where their freight is located in real-time should increase as the Internet of Things (IoT) populate throughout the supply chain. Companies such as Flexport, who recently purchased container tracking company Crux, have made significant investments in “bolt-on” technologies to enhance their current and future tracking capabilities. 


In addition to serving external customers, companies such as Merck KGaA have partnered and acquired technology to allow them to better predict inventory requirements throughout their own supply chains. The large pharma company has partnered with TraceLink, Inc. to use analytics and machine learning to predict and prevent drug shortages. Merck not only wants to save lives by eliminating drug shortages in their supply chain, but also a lot of money. According to the research and analysis firm Gartner, pharmaceutical companies carry an average of 156 days of inventory compared to 78 for consumer product retailers and 57 days for IT equipment sellers. By better predicting inventory requirements, Merck could reduce its inventory requirements and expedited shipping charges allowing them to save potentially hundreds of millions of dollars. 


Another area where companies are investing heavily is automation within their supply chain. While vehicles get a lot of the press, automation of other functions may be equally or more important to the improvement of a company’s supply chain or those of their customers. For example, Amazon recently purchased digital customs broker INLT to help their third-party sellers import goods through U.S. Customs without an outside customs broker. Other companies, such as Shopify, have acquired technology firms to help automate and improve functions such as material handling, storage, and other warehouse functions. 
In addition to acquisitions, logistics companies are also partnering with technology firms to offer better service to their customers. The LTL carrier Estes Express has recently partnered with nearby Warehowz to give customers access to their available warehouse space on-demand. Flexe, a competitor of Warehowz, has developed a customer base of direct-to-consumer companies who can take advantage of the flexibility and cost savings of unused warehouse space. 


Information security is another area where logistics companies have invested and collaborated for the good of the industry. The Blockchain in Transport Alliance (BiTA) is a consortium of technology and transportation firms formed to create blockchain standards for the freight industry. The consortium has 500 members with over $1T in revenue annually. Their newest member, Prologis, is perhaps an acknowledgement of the important role large real estate owners can play in the security of information and the overall security of the supply chain.


Lastly, there are concerns that the investment and development of supply chain technologies is creating an abundance of ‘unhelpful’ solutions. The pace of technological growth is seen by some to exceed the logistics sector’s ability to consume. Furthermore, many technologies have been designed with only part of the supply chain in mind and therefore can create barriers to future integration efforts. #technology #Flexport #Crux #Amazon #INLT #IoT #Estes #Warehowz #BiTA #Prologis #blockchain

Various economic and industry indicators point to a somewhat improving picture for logistics in the U.S. The trucking industry is expected to rebound in 2020 with truckload rates potentially seeing growth in early 2020. The trucking market appears to be headed towards a equilibrium between freight and capacity next year, but certain challenges remain. J.B. Hunt, for example, missed on profit expectations last quarter due in part to increases in its costs for recruiting and retaining drivers.


Meanwhile, warehousing continues to steadily grow as e-commerce companies continue to gobble up space. According to the CSCMP Logistics Manager Index, the pace of growth is expected to be less than years prior and warehouse capacity is expected to increase for the first time since June. With the growth in warehousing, material handling orders have increased as well. The Conveyor Equipment Manufacturers Association (CEMA) reported its August 2019 booked orders increased 58.1% compared to August 2018 and were up 27.2% over July 2019. #trucking #J.B. Hunt #CSCMP #material handling

Last mile delivery is a dynamic part of the supply chain as companies are continually announcing reductions or expansions in the service area. Last week, Inpax Final Mile Delivery announced it was laying off at least 718 workers and Letter Ride over 900 workers after losing contracts with Amazon, reportedly due to Amazon’s review of their safety practices.  Following Schneider’s announcement that they were shuttering their final mile delivery business last month, FedEx announced this week that it is expanding its FedEx Freight Direct service, which delivers bulky items into residences and businesses, to cover 80% of the population. #last mile #Inpax #Letter Ride #Amazon #FedEx

ECONOMY
Key Themes

  • A handshake agreement has halted some of the trade war between the U.S. and China
  • Economic indicators were mixed with the Federal Beige Book indicating slow growth in the U.S. while retail sales saw a slight dip in August

There was a bit of good news this week regarding the trade negotiations between the U.S. and China. The so-called Phase I handshake agreement postponed certain tariffs on goods from China in exchange for promises to purchase large amounts of agricultural goods from the U.S. However, trade experts warn that the agreement is just a temporary pause to allow for further negotiations to take place and many of the promises made seem unrealistic or uncertain. For example, China promised to purchase $50B of U.S. agricultural goods-which is double the most they have purchased from the U.S. previously. Also, many more important issues remain unsolved such as intellectual property rights, national security concerns, and tariffs not discussed under the Phase I agreement. #trade 

Economic indicators were mixed this week with some positive indicators from consumers and negative markers for retail sales. The Federal Beige Book, which summarizes the areas which the Federal Reserve considers when making decisions, reported slower growth in regions throughout the U.S.  In particular, the Midwest and Great Plains are growing slower than the South and West regions. Some manufacturers are starting to layoff workers due to weak orders while others are cutting hours in order to retain their workforce and avoid potential re-hiring and retraining costs in the future. The big question is will the weakness in business confidence seep into the consumer sector, which is still seen as an engine of growth. Average hourly earnings are up 3.2% YOY, household savings rates are triple what they were in 2005, and consumers have less debt overall. However, retail sales fell 0.3% in August, the first monthly decline since February, which is potentially an indication that the consumer confidence is softening. #growth #consumer confidence #retail sales

Site Selection for Land-Intensive Occupiers in Infill Areas

Key Concepts

  • Industrial properties with 30% or less improvement square feet compared to land square feet (“low coverage”) are increasingly scarce in metropolitan areas of the United States
  • Land-intensive industrial uses, which typically use low coverage industrial properties, can be challenging to entitle and therefore understanding zoning is critical to a project’s success
  • Successful site selection for land-intensive industrial occupiers typically involves a proactive approach to finding and securing suitable properties
  • The ability to compare the relevant internal and external data with a robust property search and indentification process exponentially increases the effectiveness of the site search

Availability of Low Coverage Properties

Finding available infill properties for land-intensive industrial occupiers is typically much more challenging than office, warehouse or manufacturing uses. Throughout most primary, secondary, and even tiertiary US industrial markets, low coverage properties are increasingly an endangered product type. With no more than 30% of their land area covered by improvements, low coverage properties have been developed into “higher and better” uses, subject to strict zoning regulations, and even turned into other property types.

Due to these challenges, site selection for land-intensive industrial occupiers must be designed differently to increase the odds of success. A successful site selection strategy for such occupiers incorporates the relevant internal and external sources of information with a proactive approach to investigate, target, and secure properties which align with company objectives.

The Proactive Site Selection Process

The site selection process involves multiple steps which ultimately lead to a desired site at the best cost/benefit ratio possible. Generally these steps are assembling project stakeholders, defining requirements, researching the market, analyzing potential options, negotiating, and acquisition. All these steps are important but I won’t be discussing all of them here. If you are interested, there are plenty of site selection articles in industry publications which discuss the site selection process in detail.

In any site selection search that has limited property availability in a desired area, such as the infill low coverage sites considered here, companies cannot follow the same playbook as a search for suburban office building or a dry warehouse and expect great results. Instead, I think there are two key areas where land-intensive companies should focus their resources.

First, firms should use internal and external data with GIS mapping platforms, such as Esri, to identify the areas in which they would consider a new location. GIS mapping technology can easily show customer locations, competitor locations, available properties, average real estate costs, zoning, labor, drive times, and more. A much better conversation can take place when stakeholders can see all the relevant information required to make location decisions.

Furthermore, it is especially effective to use GIS mapping when searching for properties that are difficult to find. Rather than just focusing on the location of currently available properties, via GIS mapping the stakeholders can determine:

A) the areas they would consider a location (“Areas of Consideration”)

B) zoning overlays within the Areas of Consideration which will allow their use (“Entitled Areas of Consideration”)

C) all properties within the Entitled Areas of Consideration which meet their minimum physical requirements (“Set of All Amenable Properties within the Entitled Areas of Consideration”)

D) all available properties, if any, within the Set of All Amenable Properties within the Entitled Areas of Consideration

E) then layer in additional data as needed.

The second key area I would recommend firms focus is actively marketing their requirement to owners of property within the Set of All Amenable Properties within the Entitled Areas of Consideration (Item C above), investor/developers, and brokers. This practice increases the odds of finding one or more suitable sites and can also create negotiating leverage with the owners of any sites currently on the market. The marketing can be done without divulging the company name, if helpful only indicating the basic requirements and creditworthiness to further entice landlords or sellers.

Marketing the requirement to owners is the inverse of what is typically done by an owner marketing its property. Similar to an effective property marketing program, a marketing program for an occupier can be structured in the same manner with marketing materials and scheduled follow ups being made to prospective landlords or sellers.

Another benefit of actively pursuing the key areas above is the trust it can build within the organization. Many site selection leaders experience the doubt expressed by others when available properties are difficult to find. By virtually exploring all the possible properties via GIS mapping and proactively marketing to those property owners, these leaders are able to show other stakeholders that no opportunities are being left “uncovered” and the organization is doing all it can to find a suitable site. This can engender trust in the site selection process internally and help prevent the dreaded “I see available properties everywhere. Why can you find one?” response many of us have heard.

First Principles

Today I was thinking about first principles and what first principles exist in my business as an industrial real estate resource and representative. A first principle is basically a concept which cannot be divided further. In other words, it is a foundational concept and leads to other concepts which are based upon something that cannot be further deduced.

I think one first principle for my business is the notion of service to individuals not organizations. When I represent XYZ Company, I am really representing and furthering the interests of the individual stakeholders at XYZ Company. This way of thinking helps me focus on building a personal relationship with the client where I understand their particular ideas, needs, and wants-not just the company’s objectives.

While it is great to have a reference board of the companies I represent, I really should have one that has just names of the people I work with at those companies. To me, they are a first principle for my business.

INterchange 2019

I attended the Cushman & Wakefield industrial conference known as INterchange 2019 last week. As a recap, here are some of the interesting points I heard there:

Occupiers

  • Availability of qualified labor is a primary concern in site selection.
  • Tenants and landlords are investing heavily in developing or adding amenities which can help companies attract labor
  • Industrial firms may value certifications such as WELL which indiciate a higher standard of amenities and health for employees
  • Staffing companies which are compensated based on their ability to retain employees as opposed to finding them are gaining in popularity

Capital Markets

  • Opportunities for rent growth in smaller spaces, 50,000 square feet or less
  • Larger buildings (500K+) are less attractive investments since many investors do not want to allocate high levels of capital to a single investment
  • Yield pain in primary markets continues to lead to investor interest in secondary and tiertiary markets
  • Secondary and tiertiary markets often have lower yields than many new investors expect
  • Value add opportunities are seeing the greatest buyer pool
  • Core opportunities typically will see 5-6 offers
  • 3-7 year lease term is most desirable for investors
  • 10+ lease terms are discounted +/-25 basis points since investors
  • Investors want to be able to forcast their exit or increase in future value
  • With land prices approaching market building values, covered land plays are increasingly desirable

3PLs

  • Procurement is increasingly driving the bid process for 3PL customers
  • More 3PLs may look at strategic campuses of multiple buildings
  • Expect more merger and acquisition activity in the 3PL space
  • Shipping companies are aggressively expanding into the 3PL space

Los Angeles Basin Drayage Rates 2016-2019

New drayage rates released by Tina Arambulo and Eric Kenas @ Cushman & Wakefield indicate that differences between drayage rates by area are narrowing in infill areas of Greater Los Angeles while widening in East Inland Empire markets. Therefore, Greater Los Angeles importers may be less sensitive to location differences in infill areas while increasingly biased towards locations west of Fontana based on drayage rates alone.

The chart below shows the widening or narrowing of percentage differences between markets from 2016 to 2019. The negative percentage indicates a narrowing of drayage rate differences for the compared locations while the positive percentage indicates a widening of drayage rate differences for the compared locations.

Drayage Rate Delta

 

Strategic Use of Transaction Documents in Commercial Real Estate (Part 1)

The selection, construction, and use of transaction documents is an important part of negotiating any commercial real estate transaction. Transaction documents define the parties to the transaction, the business terms to be agreed upon, and the time frame in which the parties can agree. They create the playing field for the negotiation to take place.
 
A transaction document is best viewed as a tool to implement a negotiation strategy. Choosing the type and structure of a transaction document, and the frequency of a response should be depend upon the negotiation strategy designed to achieve the objective. It is therefore important that the objective and negotiation strategy are created prior to entering into a negotiation with another party.
 
In this post, the first of a three-post series on the strategic use of transaction documents in commercial real estate, I review the definition and creation of a negotiation strategy. In the second post I will review the strategic use of the Request for Proposal or RFP. In the third and final post, I will review the strategic use of proposal documents and the documents used to respond to a proposal. 

What is Strategy?

Since the definition and use of the word “strategy” varies significantly in business, I think it is important to define what is meant by strategy and its use in negotiations. Strategy is simply the overall plan to achieve the objective. As a former football player, an easy way for me to think about strategy is as a game plan where certain plays would be called, adjustments made, and players used in certain situations.

A strategy will typically answer why certain actions are taken to reach a goal. In this way, strategy are not actions or tactics. Tactics are the steps taken to fulfill the strategy and will typically answer the question of how certain actions are taken to reach a goal. Bill Belichick, head coach of the NFL’s New England Patriots, is famous for defensive schemes which neutralize an opposing team’s two best players on offense. His possible strategy is to take away an opposing team’s two best players on offense because it forces the opposing offense to call unfavorable or unfamiliar plays.  Coach Belichick uses tactics in the form of defensive formations, calls, and players to execute this strategy.

In the context of a negotiation, strategy becomes the system in which a party will negotiate with one or more other parties in order to reach its desired outcome. Such a strategy will contain tactics which encourage the other party or parties to accept your desired terms. 

The Objective

Defining an objective cannot be done properly without research and critical thinking. A reasonable objective takes into account a) the overall goals and strategy of the organization, b) the market value of the parties to each other and c) the market in general. An organization’s goals for a negotiation should start in alignment with its overall goals and strategy, then consider the impact of the market value of the parties to each other and the market in general.

If the comparative value of the parties to each other is greater than the general marketplace, then a reasonable objective for each will reflect the additional value created by the other party. A Fortune 100 tenant may create additional value for a publicly held landlord who reports on the creditworthiness of its tenants to investors, for example. Conversely, an existing and valued landlord may create additional value for a tenant wishing to avoid negotiating a new lease and overall uncertainty.

Objectives should also be realistic in the marketplace, considering the market “best case” and “worst case” scenarios based on historical and pending transactions, potentially adjusted by market trends. Such scenarios should not only consider price, but also terms if available.

Developing a Negotiation Strategy

One way to create a negotiation strategy is to outline the likely steps it will take to reach the objective. In the example below, starting with the Objective in mind, there are seven steps potentially required to achieve the Objective. The amount and description of the steps should be reasonable, even though they are subject to change as the negotiation proceeds.

First Steps

Once an initial outline of the steps has been created we can start to describe the tactics we anticipate using during the negotiation. The tactics can consist of any action which can help lead to the objective. Tactics can be used again and again during negotiations. The key to success is understanding which tactics to use and when.  As the diagram below shows, tactics indicated by the letter “T” are repeated throughout the negotiations.

Second

In order to develop the negotiation strategy further, the outline with the tactics can be expanded to include if-then scenarios. If-then scenarios plan for possible actions depending on how the other party responds during negotiations. The outline with the tactics developed updated for if-then scenarios might look like the following:

Third

Once the tactics and if-then scenarios are populated, the negotiation strategy can be summarized as explaining why the planned steps and tactics will be used during the negotiation. When the negotiation begins, those planned steps and tactics function as guides to be assessed and modified depending on how the negotiation proceeds. 

While the steps to develop a negotiation strategy take some time, I believe the benefits of planning far exceed the costs. A negotiator is in the strongest negotiating position possible their objective is reasonable and achievable, the steps to achieve the objective are defined, they are prepared for the other party’s actions, and they have sound tactics to help them reach their goals. They are not victims of the market, employing “lazy” ideas such as splitting the difference, and searching for less strategic ways to get a deal done. Instead, they put the odds of negotiating success strongly in their favor.

In my next post I will discuss utilizing the Request for Proposal in a negotiating strategy as a tactic to achieve the ultimate objective. Until then, I look forward to your comments or questions.