The winners curse provides a different outlook on winning an auction (in our example, tendering for a project). If you've tendered for a project and have won based on price, you've made the most optimistic estimate of all of the bids. What this means is that you've assumed that there is more value to be had from the project than anybody else. This should send off alarm bells. So before celebrating, you need to check your assumptions. Revisit time estimations and recalculate. Check your charge out rates and ensure they cover costs. Brainstorm all ways the project could overrun and consider if you've built in layers of redundancy to protect against them. Question why your competitors have gone in higher. What information might they have that you don’t that could affect their bid? What is your track record for delivering similar size and scope projects? Are there any case studies of projects of this size that you can refer to? How did they do? Question it all. Especially if the project is large enough to have a serious effect on your cash flow if you don’t pull it off.
Remember, in auction-style environments, more often than not, the seller has the most information. Game Theory tells us that the seller often sells when it is most favourable to him and least favourable to you. So put yourself in the shoes of the seller. Ask, “How would I think if I were them?” Always consider the information that you don’t know. When you are estimating, build in layers to account for this.
When you are bidding in an auction-style environment, one of the key ways to try and create value is to be conservative your bidding, in order to try and mitigate uncertainty. Think of it as a margin of safety (as Warren Buffett would say).
Think about it, if you have a number of bidders competing against you, different variables are at play. Some competitors may have more information than you in respect of the project and so can price better. Some competitors may have worked with the customer before and so know better how they work, where the inefficiencies are and so on. Some competitors may have done more of this type of project than you and so could have a better understanding of what goes wrong. Therefore, you need to build this into your pricing model. Add in layers of redundancy in each project section. Make sure that you are not setting yourself up for a huge loss and drain on resources. If you don’t win the project, don’t lose sleep over it, you may have avoided a catastrophe. If you know you have less information than your competitors, this especially needs applying. Ask, “How can I possibly produce a better estimate than my competitor if he has more information than me?” You can’t. So if your price comes in lower, revisit your assumptions.
Rolex watch, less than one year old, worn only a dozen or so times. In one of the pictures there is a slight scuff on the strap.The retail price of this Rolex watch is £10,000. There is no reserve price and over 30 bidders are interested. 4 of the bidders in their profiles are described as watch experts. You love watches and want to bid on this one, but have no idea about the value.
year? How much will the scuff affect the value? Secondly, there are many other interested parties, 4 of which are experts. The experts will without doubt have a better idea of the value of the watch than you, and so it’s nearly impossible to create value from this transaction. Finally, this being Ebay, the seller will likely never see you. Therefore, he will very much sell to you when it’s most in his favour, again giving you no chance of creating value from the transaction. Of course, you may just want a Rolex really badly and so choose to buy it anyway. Don’t do the business equivalent. People do it for an ego boost – “we’re working with such-and-such”, “I pulled in this deal,” and so on. It’s not cool, its resource draining and it can cripple the business.
So, when tendering for work, beware the Winners Curse.