Negotiation: The Final Offer Arbitration Challenge

Negotiating and Bargaining
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Chloe Xu
Director, Australia

Negotiation: The Final Offer Arbitration Challenge

Being unreasonable in negotiations makes the process dysfunctional and costly. Also it harms the relationship between the parties involved. To promote reasonableness in negotiations, Bazeman and Kahneman (2016) introduce a new tool that borrows ideas from resolving labour disputes: The 'Final-offer Arbitration Challenge'.

In short, as a negotiator, you can start by asking your counterpart to make a demonstrably fair offer. Then, if the offer is unreasonable, you challenge your counterpart to take his offer and yours to an arbitrator who must decide for one or the other (instead of splitting the difference between them). The strategy works because it exposes the unreasonableness of one party’s position and may cause the party subject to the challenge to quickly return to the table with a more reasonable position.

The Final-offer Arbitration Challenge strategy makes sense in any dispute where the following conditions are met:
  • You have made a reasonable offer that has been countered with an unreasonable one;
  • You are certain about what a fair resolution should be. Historical data or records, and feedback from an independent panel might help you to determine fairness;
  • Escalating the dispute into litigation is impossible or would be costly; and
  • Neither side can easily walk away. If the two parties’ positions are polarized and neither side is willing to bargain, the strategy won’t work, as the other side can just abandon the negotiation.
Note that using the strategy of final-offer arbitration challenge requires negotiators to develop new negotiation skills of assessing fairness objectively and issuing the final-offer arbitration challenge. Meanwhile, it may result in significant organizational culture change. Companies interested in the strategy should actively create a supportive environment that rewards on using the strategy, and not punishing for its possible negative outcomes. Finally, it is important that top leaders firmly endorse the strategy.

Source: Bazerman, Max H., and Daniel Kahneman, "How to Make the Other Side Play Fair: The Final-Offer Arbitration Challenge Gives Negotiators a Valuable New Tool." Harvard Business Review 94, no. 9 (September 2016): 76–81.

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