Reverse Auctions

A reverse auction (sometimes referred to as a dutch auction) is a bidding process that operates differently that a regular auction where the highest bidder wins. In a reverse auction, the bidders may continue to re-bid at lower prices in an attempt to win the business. In the end the one with the lowest price wins. I’ve always felt that it is best to negotiate the final price after you have reached agreement on the contract terms as changes to the contract terms may add to or reduce your cost and may add to or reduce your risks. As such a concern that I’ve always had with reverse auctions is how to make them effective from a total cost perspective.

I suppose that if you purchased a commodity product with a simple set of terms such as a purchase order you might be able to get all parties to the auction to agree to that a standard agreement in advance. If you don’t get agreement in advance on what the terms of the contract will be, when it comes time to negotiate the contract you need to be prepared for “our price did not include that” in the contract. I personally like to negotiate the final price I will pay after I’ve agreed upon all terms in the contract. Throughout the negotiation I will document all the terms
That have added to or reduced my cost and risk based upon changes to my documents that have been agreed. I like to put a price on each change and argue that such change needs to be reflected in the final price I’m willing to pay. In doing that some negotiators will be willing to accept the original language to avoid having to provide a price reduction. One of the concerns that I have with using reverse auctions with more complex purchases is there is a disconnect between pricing and costs or risks. Your supplier with the lowest auction price may be higher from a total cost perspective when you take into account the terms they will agree upon.

I also suppose that you could require a red-line of the proposed changes to the agreement in advance of the reverse auction and could assign costs to each issue and somehow take that into account in determining the total cost of each bidder’s offer. The problem is that not all changes they propose will you be willing to accept. That complicates the negotiation and also puts you in the situation where they will say “our price was based upon our redline” and to provide you with that we need to adjust our price.

I think reverse auctions work well when you deal with standard commodities where there aren’t variables in what the supplier can provide so all are bidding on the same thing, and they work well when you have purchase orders or simple agreements that will be readily accepted.

Superimposed after the fact

In a linkedIN group someone asked what the meaning of this was as they were translating a contract. Since it was unusual I decided to post my response.

The language was included as part of the force majeure clause and one of the force majeure events described was "governmental regulations superimposed after the fact". "Superimposed" means layed on after the fact. Since the contract is effective on the date signed, the "after the fact” is referring to after the execution of the contract. The key in the clause is what does a force majeure event provide? Most force majeure events only provide for an excusable delay in performance. In that context, I would interpret the language to mean that the party proposing it wants an excusable delay in performance if there are any new governmental regulations that are enacted after the execution of the contract.

As governments are constantly publishing new regulations the language was extremely vague. It could be interpreted to give an excusable delay for any new regulations issued. For an item to be a force majeure event I want to see both a cause and effect creates a delay in performance. To do that I would first want it clarified to make sure that the regulations actually apply to the work being performed. I would also want to ensure that complying with those new applicable regulations actually causes a delay in performance.

If I agreed to allow for governmental regulations as a force majeure event, I would want to make it clear what I was agreeing to such as:
"Any governmental regulation enacted after the date of the execution of this Agreement shall be deemed a force majeure event if compliance with the regulation is required for the performance of work and compliance with the regulation causes a delay in performance.”

From a cost perspective should you buy through an OEM versus a Distributor?

On LinkedIN someone asked the question about whether it would be cheaper to buy through an OEM versus a distributor and there were so many bad responses and misconceptions that I decided that I would write a post about it.

Every company will have a number of markets or what are called “sales channels” that they sell through. A company may have OEM sales. OEM stands for Original Equipment Manufacturer meaning the company that is purchasing the product will imbed that product within their product and as such will not be competing against either the company or its authorized distributors for sales. The company may also sell to VARS. A VAR or value added reseller is one that adds specific value to the product and sells that. Since they are adding value to the product they too are not directly competing against the company or its authorized distributors. The company may
direct customer account sales where they usually sell to large users of their product(s). They may also sell through Authorized Distributors. An authorized distributor is a company that has entered into an agreement with the manufacturer or producer to sell products. Normal authorized distributor agreements will have agreed geographical territories that they can sell within, they will have the obligations of the distributor and company defined such as responsibilities for marketing and conduct and they will have a a defined method of compensation.There are two primary models companies have for sales to distribution. One is a simple discount off list where the volume of the distributor's purchases will increase their discount off the company’s list price as their volume increases. The other is a form price protection where the discount they receive is tied to selling close to the targeted price. Distributors can provide a wide range of services from just being an order location to providing stocking and value added services.

Each of these "channels" will have different sales terms and different pricing or discount structures. Most companies will also have a tiering approach within a channel where terms and pricing or discounts you get will be based upon the volume of business and your importance as a customer. The highest tier in any channel will get both the best price and the best terms. Lower tiers will get higher prices or less discounts and less favorable terms. Normally the best pricing and best terms would be given to the highest tier OEM accounts. That is because they provide volume sales for the company, they don’t compete with the company or their authorized distributors for sales, and there is less sales and administrative expenses in dealing with that one OEM versus dealing with multiple companies that would provide the same volume of sales. If you fall below a certain level of business a company may not sell to you for whatever channel would be applicable to your business. You can also find companies that sell exclusively through distribution. In both those situations you would need to buy the product through one of their authorized distributors.

As to what what sales channel is best strictly from a cost perspective, if you have significant volume and can buy it directly as an OEM, that is usually the best way to go as OEM’s will normally get higher discounts than a distributor. Further out of their discount the distributor has to pay for there operating costs out of the discount they earn, so they have less of a margin to work with in selling to you. If you don't have significant volume you may be able to buy it for less from one of their high volume distributors but then the issue of distribution territories can impact that. I’ve had situations where I needed to have another subsidiary buy and resell me a product simply because they could buy it from a distributor in another location at a lower cost. Another thing that can impact your sourcing decision is if there is a problem with the product and it needs maintenance or repair, who will perform that? If the distributor performs service or maintenance they may be unwilling to do it on a product that they didn’t sell.

In addition to price there is another consideration you need to take into account. When you buy from a distributor, you do not have privity of contract with the original manufacturer. The manufacturer will provide a warranty to the Distributor that they assign to you. Most of the time that warranty cannot be further assigned. If there is any problem with the purchase other than what would be covered by their product warranty, since you bought from a distributor, your sole recourse is against the distributor. This means the smaller the distributor you deal with, the less the assets, the larger the potential risk. There are only two parties that could go directly against the original manufacturer; the distributor who purchased the product from them, and any third party is injured by the product who can claim product liability negligence.

The last thing to take into consideration in sourcing is your warranty on the product. You need to read the fine print in the warranty and especially read any warranty exclusion. Many times third party repair or use of third party materials will void a warranty. If you buy it in one country or location and your local distributor won’t service or repair it because you didn’t buy it from them, if you use another company to fix it that isn’t authorized by the company to perform such work, you may have voided your warranty.

OEM can also be used in describing the source for the parts. An OEM part is one that is sold by an Original Equipment Manufacturer. That part may also be available from the manufacturer the OEM purchased the product from. Parts that provide the same form, fit and function may also be available from other suppliers or from what is called "after market" suppliers. For example you purchase an IPad from apple and the earphones that came with it break. You could buy replacement earphones from Apple (the OEM) or from a variety of other sources.

Negotiation Tactics

In the blog I've talked primarily about contract negotiation. Today I wanted to share a list of all the different negotiation tactics that I've used, seen used or read about in books or learned from training. I'd be interested in readers commenting about any other tactics they have used or encountered in a negotiation.

1. Take it or leave it.
2. You've got to do better.
3. Remind them of the competition.
4. Aim high.
5. Use funny money.
6. Exercise Patience
7. I can't go further.
8. Use your Power / Leverage.
9. Nibble away
10. Look at record, prior performance
11. Let's Split the difference.
12. When they offer less offer them something of lesser value
13. Use a team attack (outnumber the other party at the negotiating table).
14. Use time to your advantage.
15. Create an reverse auction between competitors.
16. Faking or share information to drive decisions such as planned price increases .
17. Intentional overload of requests for information.
18. Elevate to a higher authority.
19. Apparently withdraw from the negotiation.
20. Tell them what will happen if don't they don’t agree.
21. Dangle the carrot of more potential business.
22. Use limited authority or the need to get higher level approval above a certain amount
23. Use limited funding levels
24. Ask “What if"
25. Cherry pick only the items you get the most benefit from.
26. Tell them what you need and why.
27. Show legitimacy of your position.
28. Create intentional deadlock.
29. Establish deadlines.
30. Use past precedent.
31. Play to the Negotiator’s needs such as being risk averse.
32. Divide and conquer members of their team
33. Change (the pace, the team, etc.)
34. Use the Good Guy / Bad Guy tactic
35. Attempt to intimidate the negotiator.
36. Stonewall – just continue to say no.
37. Provide reasons to agree.
38. Ask for a new counterpart.
39. Leak information to help them decide.
40. Put them on the defensive.
41. Make them feel guilty about their position.
42. Be unpredictable.
43. Use silence to create uncertainty
44. Set expectations early about what is possible or needed
45. Create smokescreens
46. Use shills such as another team member making a comment that could impact the negotiation.
47. Be skeptical, demand proof
47. Catch them while they are weak, or wear them down.
48. Create power seating positions
49. Do things to distract them
50. Flinch at their proposals
51. Give non-verbal signals to show apparent feelings
52. Gasp in shock or surprise
53. Set aside issues (to either buy time to decide or use for greater effect)
54. Start easy and get them used to agreeing.
55. For every concession ask for something in return.
56. In conceding let then know you are conceding and what that is worth.
57. Withdraw an offer.
58. Tell them nothing is agreed until everything is agreed (revisit prior agreements because of impact)
59. Taper down concessions.
60. Ask them why they need it.
61. Learn to say no
62. Get the other side to commit first.
63. Act dumb, ask them to explain.
64. Summarize all agreements & and control the contract.
65. Assume there was agreement on an issue.
66. Talk about the need for win-win.
67. Introduce information at key times.
68. Work their emotions.
69. Let them save face with their management.
70. Show your knowledge
71. When what they say isn’t true, let them know that you know that and don’t agree.
72. Show them your commitment.
73. Use time such as end of month or end of quarter and readiness to buy in that period to get concessions.
74. Remind them of their investment either in money or time they will lose if they don’t agree.
75. Sell your position.
76. Give them good reasons to agree.
77. Use example and analogies to drive points
78. Use graphics to get their attention.
79. Use conditional proposals and language
80. Link items for agreement, To give you this, I need to get that.
81. Use contingent pricing.
82. Provide conditional acceptance.
83. Dilute the offer with exceptions.
84. Bait and switch.
85. Get something for the prestige of doing business with you.
86. Get something for being the first to act.
87. For ever extra they want to add, identify a deduct (e.g. If they want to change for “No problem found” returns ask them for a credit for quality performance problems.)
88. Tell them its not negotiable
89. Puff the significance of concessions
90. Make an intentional mistake.
91. Be ambiguous with the intent of later claiming or interpreting it to your interest.
92. Use blocking tactics - delay coming to agreement until they have no other choices to give them less.
93. Minimize the value of their concessions to you.
94. Give them what they want, but in a manner which is to your favor.
95. Ask leading questions to drive them to a specific conclusion you want.
96. Find their company or the negotiator’s hot button and use it.
97. Avoid direct comparison by providing something other than what they requested.
98. Offer to do things they would do.
100. Avoid the add on (e.g. plus shipping and handling)
101. Manage their expectations (early and often)
102. Offer to be a reference account.
103. Ask for return for your loyalty
104. Leverage all relations you have with them (both sales and buying)
105. Look for special concessions for giving a percent or all of your requirements.