Managers who develop a real alternative before negotiating with another unit, a vendor, or a buyer set a floor for the deal and can walk away from a bad one.
An example
Each year the head of e-commerce at a home goods retailer negotiated the rate the company's own distribution division charged to fulfill online orders, and each year she lost, because both sides knew she had nowhere else to go. Six months before the next round, with the chief financial officer's knowledge, she asked two third-party logistics firms to quote the work, ran a two-week test with one of them on a single product category, and had her finance analyst build a full cost comparison. The outside price came in eighteen percent below the internal rate, transition costs included. In the negotiation she told the distribution head what she had and showed him the comparison. Two weeks later he came back with a rate within four percent of the outside quote and a faster delivery promise. She signed with distribution and kept the outside firm as a backup for peak season.
Why it works
Real alternatives make refusing a fair deal costlier for the other side, because they now risk losing the business entirely, and they tell you exactly when walking away beats agreeing. The move works when the alternative is developed in advance, priced fully, credible to the other side, and within your authority to take. It depends on the other side learning about it in a way they believe.
The thinking behind it
Roger Fisher Roger Fisher and William Ury's Getting to Yes: Negotiating Agreement Without Giving In (1981) defines a BATNA, the best alternative to a negotiated agreement, as what a party can obtain without negotiating. Knowing and improving it protects against accepting a deal that should be rejected, and it is the main source of negotiating power when the other side is stronger. Pricing and testing an outside fulfillment firm gave the e-commerce head both protections against her own distribution division.
When it fits
Start well before any negotiation where you depend on the other side and they know it: an internal service provider, a sole vendor, a single buyer. You need time, the authority to look outside, and enough budget to price or test an alternative seriously. Where policy forbids alternatives, pricing the monopoly's cost still helps.
How to use it well
Start months ahead. An alternative built under deadline is weak and looks it.
- List what you would do if no deal is reached, and develop the best of those into something you could actually take.
- Price it fully, including switching costs and risk.
- Test it at small scale where you can.
- Clear it with whoever must approve such a move, so it is real.
- Set your walk-away point from it before the talks begin.
In the negotiation, let the other side know you have a real option, without bluster. Show the numbers if that helps, and treat the alternative as a floor, never as a threat.
What it costs and where it backfires
Developing an alternative costs time and money and can strain relations with the internal party, who may see it as disloyal. Revealed clumsily, it hardens the other side. Tell the truth about it. Exaggerating your alternative, claiming quotes you do not have, or threatening a move you are not authorized to make is bluffing, and an exposed bluff weakens every negotiation after it.
When it is used on you
Find out what the other side's alternative is and what it costs them; it sets what you must beat. Improve your own alternative too, and compete on what they cannot get elsewhere, such as service, flexibility, or integration with the rest of the company.