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Negotiation Tactic: The Reverse Auction

Thursday, January 15th, 2009
The Reverse Auction Negotiation Technique Is A Powerful Tool For Buyers

The Reverse Auction Negotiation Technique Is A Powerful Tool For Buyers

In the world of negotiations, there are few tactics as old and as well thought of as the “reverse auction”. This is a powerful negotiating technique that allows a buyer to get the sellers to offer their best pricing for the most amount of work. Not bad if you are a buyer, eh?

Here’s how a reverse action works for you if you are a buyer: let’s pretend that you wanted to build a house. You go out and get three different offers from three different home builders. As you can imagine, when you get the bids they will contain a confusing mix of different options and time frames.

Your next step will be to call a “reverse auction”. You invite all three builders to meet with you. You have them show up early and have them wait in the same room before they meet with you. After they’ve had a chance to sit and glare at each other for a bit, you then call them in to meet with you one by one.

Each builder will then proceed to tell you why they are the best and why you should avoid selecting the other builders. After you’ve had a chance to talk with all three builders, you now understand the subtleties and the risks that are involved in building the house that you want.

With all of this new information, you are now able to more clearly refine your specifications because the alternatives have become clear. You can now provide the builders with an updated proposal that they can bid on.

You will end up selecting the builder who can provide the best price while providing the most house for that price. By using a reverse auction, you were able to learn a great deal about building a house and you were able to trade off options that you originally did not know existed.

Why does a reverse auction work for a seller? Simple, there are four reasons:

  1. Competition Works: when you allow sellers who are competing against each other to “see” each other, it increases the level of competition.
  2. Apply Pressure To Management: the reverse auction technique allows you to move beyond the salesperson that you are dealing with and actually put pressure on the company’s management.
  3. Almost There Syndrome: each of the sellers has already put a lot of time and effort into responding to your original proposal. This means that they all think that with just a little more effort they can close the deal.
  4. It’s Concession Time: you know that sellers are more adverse to losing a deal during negotiations than earlier in a deal. This means that they may make concessions that they normally would not.

This negotiating technique is not without its downside. You need to keep in mind that whichever seller you select is going to feel as though they were put through the ringer. They will probably resent the auction process and will want to make up for being forced to bid a low price.

What this means to you is that any changes that you want to make to the contact after it has been signed will probably end up costing you dearly. Additionally, the seller may end up delivering the product to you late and may even shave some corners on the quality of what gets delivered.

Have you ever had a chance to use a reverse auction during a negotiation? Was it successful? Were you happy with what was delivered in the end? Have you ever had to compete in a reverse auction process? Did you win? How did you feel if you did win? Leave me a comment and let me know what you are thinking.

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What If There Was No “What If” Negotiation Tactic?

Tuesday, January 13th, 2009

The "what If" Negotiating Tactic Is A Powerful Way To Get More Information

The "What If" Negotiating Tactic Is A Powerful Way To Get More Information

During a negotiation, there often arise cases where we’d really like to get the seller to give us information that they really don’t want to give to us. If only there was some way to test the other side’s willingness to settle with us. Oh, and if there was a way to also “zero in” on the seller’s lowest selling price, this would be nice also.

It turns out that such a tactic does exist – it’s called (what else) the “what if” tactic. An example of how you’d use this tactic would be if you were buying blue widgets from someone.

You’d ask the seller to give you a quote for 100, 1000, 10000, and 20000 blue widgets (sorta like asking “what if I was to buy…”). Once you have a response to your request for bids, you’ll have lots of information about their pricing scheme, any setup charges, learning experiences, and production costs.

The “what if” tactic is very powerful when used correctly. In order to help you get the most out of this tactic, here are several suggestions that can help you get information during a negotiation:

  1. What if we change the specifications?
  2. What if we change when the work is actually done?
  3. What if we buy more items than just the ones being negotiated?
  4. What if we provide the required materials?
  5. What if we increase / decrease the warranty period?
  6. What if we increase the quantity?
  7. What if we agree to a longer contract?

Now all of these suggestions are great news if you are trying to buy something. But what if you are the one doing the selling? In negotiations, everything is an opportunity.

Once you hear the buyer starting to ask “what if” type questions, you should start to be on alert to what might be coming next. Here are several ways that the seller can react to the  “what if” tactic:

  • Don’t come up with new prices “off the cuff”. Take time to plan your prices carefully.
  • Realize that not every “what if” question actually needs to be answered. You can avoid answering these types of questions by using responses such as “they won’t”, “we can’t”, or “that will be very expensive”.
  • Use the buyer’s deadline to avoid answering a “what if” question. Tell the other side that in order to answer one of their “what if” questions will require more time than they have available to negotiate.
  • If you offer a concession, then make it contingent on you receiving their order immediately.

The selling party has a counter tactic called “would you consider” which can be used in response to “what if” questions. Both of these tactics can open new negotiating possibilities that may help both parties move towards a successful solution.

Have you ever used the “what if tactic” during a registration? Did it work for you? Have you ever had this tactic used on you during a negotiation? How did you respond to it? Leave me a comment and let me know what you are thinking.

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Wachovia, Wells Fargo, and Citigroup – Now You’re Negotiating With The Big Boys

Tuesday, October 14th, 2008
Both Citigroup And Wells Fargo Wanted To Buy Wachovia

Both Citigroup And Wells Fargo Wanted To Buy Wachovia

The financial world sure seems to be intent on driving itself off of a cliff; however, that is no reason that negotiations should not stop. As long as companies are talking, there is learning for us to be doing. This time around the negotiations center on just who gets to buy what remains of the battered Wachovia bank – Wells Fargo or Citigroup? Sounds like it’s time for some negotiating…

I guess just a little bit of background would be appropriate so that we’re all on the same page here. Wachovia is a bank that made the mistake of investing too heavily in securities that were backed by sub-prime mortgages. Once folks started defaulting on those mortgages, Wachovia’s investments went up in smoke and they could no longer get credit to cover their debts. They had to put themselves up for sale or risk going out of business. Interestingly enough, the FDIC steped in and brokered a deal with Citigroup to buy out Wachovia. This allowed Wachovia to keep their doors open. Simple, eh?

Nothing ever stays simple in the world of finance for long. Wells Fargo realized that this was a great way to expand their operations on the cheap and so then they stepped in and offered more money than Citigroup to buy Wachovia. Oh oh – conflict.

Once both offers were on the table, the negotiating started. Needless to say it didn’t go well (I guess both parties don’t read this blog!). In fact, things were going so poorly, that all three sides ended up calling for a two-day timeout. The purpose of this timeout was to give everyone a chance to step back from the negotiation table and take a breather. Another big reason that the timeout was called was because the government was not happy at how the negotiations were going – they were taking too long.

Now just between us, what do you think that the negotiators did during those two days? Sit at home? Huddled with just their team to plot strategy? No way! I’m sure that all three teams reached out behind each other’s backs and had private discussions with the other two teams. This “forced pause” in the negotiations was just a bit unusual, but the experienced negotiator knows to make the best of what he/she has been handed. This two day period was just what the teams needed in order to send up some trial balloons and see what the other side thought of them. They could also do some probing in order to determine if there was any sort of offer that they could make that would effectively make the other side walk away.

In the end, this last step is exactly what happened. Just before the two-day timeout was called, there had been a deal on the table that would have split up Wachovia with Citigroup taking Wachovia’s northeast customers and assets and Wells Fargo taking the rest. However, because of the way that the deal had been structured and because they had two days to think about it, Citigroup eventually decided that they would be taking on too much risk for too little of a benefit if they agreed to this deal. In the end, Citigroup walked away and Wells Fargo will now buy out all of Wachovia.

From a negotiating point-of-view, the two-day timeout made all of the difference. Before the break, Citigroup was willing to go toe-to-toe with Wells Fargo. However, the two day break gave them time to change their mind and in the end, that made all the difference in the world.

Have you ever called for a break in the middle of a negotiation? How long was the break? When both  parties came back to the table, were things different? What did you do to secure your position during the break? Leave me a comment and let me know what you are thinking.

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