The Five Keys to Success in Reverse Auctions: Part 1

Notes on Negotiations
By Marty Latz, Latz Negotiation Institute

Do you know how Walmart has historically negotiated with new potential suppliers? I haven’t personally been involved in these negotiations, but a number of folks have shared their experiences with me.

I’ve been told that Walmart first sends out a Request for Proposal (RFP) to new potential suppliers asking for bids. Walmart then invites the bidders to send their representatives to Bentonville, Arkansas – where Walmart is based – and puts them in adjoining conference rooms. Walmart’s negotiators then walk back and forth between the potential suppliers, working them off against each other, largely on price.

Some of you may say this classic reverse auction is brutal (reverse auctions are where buyers have potential sellers bid for their business). Well, it can be brutally effective, especially if you’re buying commodities and a major differentiator between the suppliers is price.

Of course, many other big box retailers, grocery chains, and buyers of commodities run similar reverse auctions.

What should you do if you’re sitting in Conference Room A and your competitors are in Rooms B, C and D? Here are my first Two Keys to Success in Reverse Auctions (I describe my final Three Keys in my December column).

1.    Prepare a Strategic Plan and Write Down Your Goal
Auctions and reverse auctions are notoriously effective at getting bidders’ egos involved. After all, who doesn’t want to “win”? Actually, no one should want to “win” if by winning you get a deal that doesn’t satisfy your goals and interests.

According to social psychologist Robert Cialdini in his classic book Influence: Science and Practice, in 1973 ABC’s president of prime-time programming Barry Diller paid $3.3 million in an auction for a single television showing of the movie The Poseidon Adventure. The highest amount previously paid for a movie was $2 million for Patton. This $3.3 million payment was so huge ABC expected to lose $1 million on it.

Diller’s comment after he “won” is instructive. “ABC has decided, regarding its policy for the future, that it would never again enter into an auction situation.”

The solution? Prepare a written strategic negotiation plan – before the reverse auction – and identify your goal and where you will stop. Stick with it.

This will minimize the extent your ego and interest in “winning” will outweigh your strategic insights and preset evaluation of true negotiation success.

2.    Investigate Counterpart’s Interests/Options and Creatively Address Them
If you want to be the low-price leader in your industry with small margins and large volume deals – and this can be a very effective business strategy – you will love reverse auctions. Reverse auctions are designed to commoditize sellers so that only price differentiates them.

On the other hand, if this isn’t your business model, make a conscious effort before any reverse auction to investigate your counterpart’s non-price interests and focus on the long-term relationship and partnership.

How much do they value over-the-top customer service? How important is reliability to them? To what extent is your quality, efficiency and ability to consistently deliver important to their profitability? What about timeliness of response or ability to creatively address the inevitable challenges in these relationships?

Find out their crucial interests. Then address them by showing them how your option satisfies their interests to a greater degree than the low-price leader in the next room.

A client who provided laundry services to hotels once told me how he locked up a customer for a long time and prevented future reverse auctions. When his customer had a weekend crisis and called him at home Sunday morning pleading for help, he rallied his troops and worked through the night to satisfy that customer’s needs and interests.

That’s a true partner.

Stay tuned for next month’s column – where I share the final 3 Keys to Success in Reverse Auctions.

Latz’s Lesson:  Reverse auctions can be brutal for those selling anything – and that’s almost all of us. So check your ego at the door and transform them into partnership opportunities based on satisfying true interests.

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Marty Latz is the founder of Latz Negotiation Institute, a national negotiation training and consulting company, and ExpertNegotiator, a Web-based software company that helps managers and negotiators more effectively negotiate and implement best practices based on the experts’ proven research.  He is also the author of Gain the Edge! Negotiating to Get What You Want (St. Martin’s Press 2004). He can be reached at 480-951-3222 or Latz@ExpertNegotiator.com

ICLEF • Indiana Continuing Legal Education Forum, Indianapolis, IN

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