BOOK REVIEW: “Dealmaking: The New Strategy of Negotiauctions” by Guhan Subramanian (2010)

featured image.jpgI confess that when I picked up the book for the first time I was a bit surprised. “Negotiauctions”? A book from Harvard with a spelling mistake on the front cover? Not at all. The word is just a collocation derived from ‘negotiation’ and ´auction´. The basic premise of this book is that in a interaction between the buyer and the seller you either have a one to one discussion, a negotiation, or an open market situation where the highest bidder wins, an auction. Guhan Subramanian takes this even further demonstrating how in real life we often move quite easily from transaction mode to another.

 

Key words

Business, negotiation strategy, dealmaking processs, auctioneering, leverage, contracting, contract agreement.

Summary

Guhan

Guhan Subramanian

Most people think of dealmaking as being about negotiating. Guhan Subramanian brings in not only the concept of auctioneering (getting several potential buyers to participate at the same time) but also shows how the two are compatible with each other.

“A negotiauction is the commonplace situation in which negotiators are fighting on two fronts – across the table for sure, but also on the same side of the table, with known, unknown, or possible competitors.”

 Most deals, says Mr. Subramanian, have both negotiation and auction elements. However, academics have until now treated them as two very separate issues and research has been developed in different silos. And yet, experienced dealmakers are “constantly combining these two mechanisms.”

There is a little bit of terminology to get through if you have never studied negotiation; there is the BATNA (Best Alternative to a Negotiated Settlement) and ZOPA (Zone of Possible Agreement).  Other than that, it is very accessible.

Dealmaking

The book does not require deep knowledge of dealmaking jargon.

The author is remarkeable in that he simultaneously holds a position at the Harvard Business School and the Harvard Kennedy School of Law. He is in a unique position trying to bring together the legal and the business aspects of negotiations.

The book is also a good read in that it brings in some well-known and varied examples of negotiating. This goes from the negotiation for the sitcom “Fraser” to Mr. Subramanian own personal negotiations with a local builder for a fence around his garden. This makes the theory very easy to digest and should give you a more complex idea of which strategy to employ whether you are a buyer or a seller.

The book is a great read and has lots of excellent advice.

   

Interesting quotes from the book:

 Best-practice BATNA analysis requires constantly asking yourself, “And then what happens?” until you are satisfied that all parties involved have reached stable ground and won’t react to your moves any further.

 Research shows that people are highly aware of differences within their own group, but these same people tend to treat other groups as monolithic. This is a mistake.

children

Everybody experienced value creating moves since early childhood.

One of the core challenges in negotiations is to identify value-creating moves: things that are cheap for me to give and valuable for you to receive, and vice versa.

 E-auctions are excellent at creating competition on price, but not good at providing meaningful competition on non-price terms like quality. As a result, procurement officers began to recognize an important distinction between commodities, which were appropriate for e-auction, and more complicated goods and services, which were not.

 So when the number of potential buyers is large, use an auction to maximize value, but beware that it’s possible to have too much of a good thing.

 When relationship and deal execution matter, you should stay clear of auction-like mechanisms, which signal the opposite. The benefit is often a more favorable resolution of problems down the road.

 As one practitioner put it to me, “Auctioning is not something that works for most companies. It has huge internal risks with the employee base.

 The most important factor in determining whether to hold a sealed-bid auction or an open-outcry auction is the number of potential bidders. The minimum number of initial bidders in an open-outcry auction is thought to be in the range of five to six.

 Your reservation value is determined by your BATNA (best alternative to a negotiated agreement).

Seller gains money

All-pay auctions are bad for bidders and great for sellers.

 All-pay auctions are bad for bidders and great for sellers.

 The winner’s curse problem tells us only that the winning bidder will lose, on average, unless bidders adjust their strategy to reflect the problem.

 Anyone who has ever won in a sealed-bid auction knows that five seconds after the euphoria of winning comes the worry of having paid more than was necessary.

 Experienced dealmakers in a sealed-bid situation balance the probability of winning against the profits from winning. How do you do this? A useful starting point is Professor Howard Raiffa’s maximum bid of others (or MBOO, pronounced “maboo”) analysis, which captures the fundamental trade-off in graphical form.

buses

“Deals are like buses: if you miss this one, there’s another one coming around the corner.”

Roe Stamps, a veteran of the private-equity industry: “Deals are like buses: if you miss this one, there’s another one coming around the corner.”

 When there is significant same-side-of-the-table competition, the dominant strategy for parties on that side of the table often becomes a relentless search for value-creating opportunities in order to maximize the likelihood of getting the deal.

 One recent article surveys all of the empirical studies of negotiations published in top-tier, peer-reviewed journals between 1990 and 2005 and finds that two-thirds of these studies use classroom data.

 Your entry in a negotiauction can have value. When it does, don’t give it away for free; instead, extract concessions for it. There is even a practitioner shorthand for this move: “Pay me to play. “

Harvard AMP Books

Click to access more AMP books.

 An effective shut-down move must be timed properly, must influence the process setter’s perceived BATNA, and must be credible.

 Buyers often act as undisclosed principals in situations where sellers would charge higher prices if they knew the buyer’s identity.

 ‘Negotiauctions’ have become the most common mechanism for buying and selling assets in our increasingly competitive global marketplace.

    

See also:

   

Doing irrational things Thinking, Fast and Slow Cover pic
A fun book that show why humans don’t always behave in a rational manner. Nobel Prize winner and one of the best sellers this year. A must read for any business student. An excellent read that challenges managers to think about their own vision of what they and their organisation contribute to society.

   

Other Book Reviews

The New Deal: Negotiauctions – Interview with the author

Forbes India: “The term itself, negotiauction, is just a term—you can take it or leave it. But the phenomenon of across-the-table competition, as exists in a negotiation, and also same-side-of- the-table competition, as exists in an auction, is pretty ubiquitous in our increasingly competitive marketplace.”

Reader’s Review, DEALMAKING: The New Strategy of Negotiauctions

The Negotiator Magazine: “Professor Subramanian argues that the traditional views of asset transfers as relying upon either negotiation or auctions are inadequate to explain the methods required and used to accomplish complex deals. In fact, the author contends, complex deal-making today uses elements of each method and therefore is accomplished through a blending of the two methods into “negotiauctions.”

Negotiauctions book review

Carlo5’s Blog: “Throughout the book, there are very handy charts, which easily let the reader see if she is in fact in a negotiauction, and what steps she can take from both sides of the table to arrive to a safe harbor. The strategies described in the book are not a surefire approach to always winning.”

    

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2 Comments

Filed under Book Review, Business, Entrepreneurship, Negotiation, Strategy

2 responses to “BOOK REVIEW: “Dealmaking: The New Strategy of Negotiauctions” by Guhan Subramanian (2010)

  1. Mark Thomas

    Reblogged this on GlobalEd.

  2. Pingback: BOOK REVIEW: “Network Advantage: How to Unlock Value From Your Alliances and Partnerships” by Heinrich Greve, Tim Rowley & Andrew Shipilov (2014) | GlobalEd

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