In preparation for negotiation, sellers face a choice between negotiating one on one with buyers, holding an auction, or combining elements of both processes. Consider the different paths that Amazon and Apple followed in 2017 when each began scouting locations for a new campus:
- Dangling the prospect of a $5 billion campus and about 50,000 jobs, Amazon announced it was soliciting bids from cities interested in hosting its second headquarters, HQ2. The e-commerce juggernaut attracted proposals from 238 cities and regions across North America. Ultimately, Amazon awarded the prize to two predicable winners, New York City and Washington, D.C., leaving hundreds of cities and regions to believe they’d wasted scarce resources. Amid a firestorm of criticism over the billions in tax incentives it negotiated, the retailer cancelled its agreement with New York.
- In May 2017, the Wall Street Journal reported that Apple CEO Tim Cook had held a secret meeting with North Carolina governor Roy Cooper to discuss the possibility of building a large new customer-service facility in the Raleigh-Durham area. Cook’s public schedule for his visit to North Carolina omitted the meeting. Apple eventually committed to building a new campus in Austin, Texas.
Amazon leaned toward the auction route, while Apple appeared to be negotiating privately with a small number of top contenders. The question of which process to choose—or whether to use a hybrid process known as a negotiauction—should be a critical step in your preparation for negotiation. Drawing on guidance from Program on Negotiation chair Guhan Subramanian, we review factors to consider when deciding how to prepare for negotiation.
Price Competition vs. Value Creation
In a March interview with Recode and MSNBC, Apple CEO Cook was asked whether Apple’s search for a new campus would mirror Amazon’s. He demurred: “We’re not doing a beauty contest kind of thing. That’s not Apple.” He continued, “you have a winner and a lot of losers, unfortunately. I don’t like that. . . . The best thing we can do in business is to find the win-win.”
As Cook suggests, because auctions tend to involve competition on a single issue, price, they can become win-lose contests that crowd out other issues. In negotiation, parties generally have many more opportunities to create value and incorporate fundamental aspects of negotiation by discussing a range of issues and identifying preferences and tradeoffs among them.
When you hope to build a long-term partnership, you may want to try to capitalize on the benefits of negotiation in business rather than holding an auction. But for one-off deals where price is the major issue, you might choose to hold an auction instead.
Secrecy vs. Publicity
In preparation for negotiation, sellers may realize they prefer to negotiate rather than hold an auction when they or their potential buyers put a premium on privacy. Organizations typically negotiate mergers and acquisitions quietly, for example, lest employees start looking for new jobs and bring down the value of the target company.
As compared to Amazon’s well-publicized competition, Apple’s low-key approach is the more common one for companies scouting new locales. More than 90% of companies don’t say where they’re looking, Jay Biggins, the executive managing director of corporate-location strategy firm Biggins Lacy Shapiro & Co., told the Wall Street Journal. A public auction can bring negative publicity to a seller, as Amazon experienced.
When you’re likely to attract multiple enthusiastic bidders, an auction will generate the best price competition. By contrast, if there’s a chance only one or two bidders show up, or none at all, individual negotiations would generally make more sense.
But it’s not necessarily the case that the more bidders, the better. A large auction can require significant resource outlays to manage. In addition, a huge auction could scare away high-value bidders. For these reasons, in many contexts, the sweet spot to aim for is five-to-eight bidders, according to Subramanian.
In addition, if you would have difficulty identifying high-value bidders, it may be wise to hold a public auction that could bring them out of the woodwork. By contrast, if you already know which companies can meet your needs, you could instead negotiate one on one with the obvious contenders.
How About Negotiauctions?
Sellers may be able to avoid having to make making some of these difficult tradeoffs during preparation for negotiation by engaging in a negotiauction. Negotiauctions involves private, one-on-one negotiations between the seller and various buyers, as well as one or more rounds of bidding and other forms of direct competition among potential buyers. Sellers should be open to borrowing from the best of both worlds—negotiations and auctions—to ensure they get a great deal.
In preparation for negotiation, what other process factors do you take time to consider?