Topic 3: Game Theory

1
Birth of a Consulting ConsortiumExample of a
multi-lateral bargaining processQuentin
Ducenne
2
The Context
The following bargaining process took place in
summer 2005. The purpose of the contract was to
provide technical assistance over a period of 5
years, in the scope of an aid programme in China.
The total amount available for implementing the
programme was 50 million, and the ceiling for
the provision of technical assistance was
5. The provision of technical expertise is
commonly outsourced to consulting companies.
Usually, these companies compete against each
other. However, given the diversity of expertise
required, consultants were encouraged to form
consortium (alliance). The whole process starts
with a statement from the donor, followed by
expressions of interest emanating from consulting
companies. Over one hundred consulting companies
expressed their interest in participating in the
tender process. For the sake of confidentiality,
names of consulting companies, contract amounts,
fees, and location of intervention are either
hidden or altered.
3
The Pie. How to get it?

• The pie relates to the provision of technical
  assistance, it means a maximum amount of 5
  million (ceiling). In this respect, players knew
  the maximum size of the pie. The minimum size of
  the pie is simply determined by the financial
  offer, that is the bid prepared by the leader of
  the consortium. Although there is ample
  variation, consulting companies usually bid
  between 60 and 90 of the ceiling.
• Consortia must have a consolidated annual
  turnover greater than 1 million to be eligible.
  Tenders submitted by consortia were evaluated as
  follows
• Technical tender the proposal was evaluated
  according to three criteria relevant expertise,
  references in the region/country of interest, and
  selected team of experts. The criteria are
  weighted 20, 20 and 60 respectively. Technical
  evaluation result in assigning each bid to a
  category ? 60 (rejected), 61-70, 71-80, 81-90 and
  gt90.
• Financial offer the cheapest bid in the highest
  technical category is the winning bid.
• Obviously, bids are evaluated by a neutral
  committee. Collusion is strictly prohibited.

4
The Pie. How to get it (Contd)?

• Imagine five bids with the following assessments
  and financial offer (in million)
• Bid A 67 and 3.5
• Bid B 77 and 4.7
• Bid C 81 and 4.4
• Bid D 87 and 4.6
• Bid E 72 and 4.2
• Who wins?
• What is the highest category? Not 90-100 because
  no one reaches this level. 80-90? Yes, two
  bidders, C and D. The winner must be the cheapest
  in the highest category. Thus, C wins.
• The morale is to be the best technically speaking
  and the cheapest financially speaking. Two
  conflicting criteria that have an influence on
  the multi-lateral bargaining process.

5
The Leader and the Consortium

• The leader of a consortium is a consulting
  company which is willing to coordinate the
• bargaining process. Typically, the leader is
  responsible for assembling the consortium
  (multi-lateral bargaining), coordinating the
  preparation of the tender and assisting in
  implementation in case the bid is successful.
• A consortium is a determined group of consulting
  companies. Each consortium is formed with a few
  members chosen among consulting companies having
  expressed their interest. In this case, three
  categories of consulting companies were involved
• Leaders, officially short-listed, denoted A, B,
  C, D and E
• Associates, identified by leaders, denoted
  1,2,3,4,5, etcabout 20 were in the game
• Local associates (Chinese consulting companies),
  ?, ?, ?, ?, ?, ?, ?, ?, and ? nine companies had
  expressed a serious interest.

6
Rules of Engagement

• A consortium must have an official leader, and no
  more than four members, leader included.
• Annual turnover of the consortium must be gt 1
  million.
• In case of award, any change in the proposed team
  of experts will result in contract cancellation
  this rule means experts proposed by the
  consortium in the tender cannot be substituted by
  other equivalent experts (except force majeure).
• Fact finding missions are authorised.
• Each consortium must have at least 50 of each
  technical criterion, i.e. at least 10/20 10/20
  and 30/60.
• The obvious strategy for each leader is to
  attract the best associates make the best
  possible technical proposal submit a competitive
  financial offer. Deadline for submitting an offer
  June 2005.

7
Ten weeks to deadline

• Official invitation to tender forwarded to
  short-listed leaders. The bargaining process
  starts with the following information. The
  contribution of each consulting company is given
  in a vector format (contribution to criterion 1,
  contribution to criterion 2, contribution to
  criterion 3, annual turnover).
• A (12, 10, 26, 7 million)
• B (10, 4, 38, 11 million)
• C (16, 7, 49, 27 million)
• D (15, 6, 41, 14 million)
• E (13, 12, 40, 18 million)
• Obviously each leader qualify in term of turnover
  (gt 1 million). From their vector values,
  leaders have different profiles.

8
Ten weeks to deadline

• but not all leaders qualify regarding technical
  criteria.
• A (10, 10, 26, 7 million)
• B (10, 4, 38, 11 million)
• C (14, 7, 53, 27 million)
• D (15, 6, 41, 14 million)
• E (10, 12, 48, 18 million)
• Only E could actually bid on its own. All others
  need to form a consortium described by (? 10, ?
  10, ?30, ? 1 million). In this respect, they
  need a coalition.

9
Eight weeks to deadline

An intense exchange of communication took place.
The focus will be on leader D. D (15, 6, 41,
14 million). The management of this company
wanted to form a consortium such as (? 10, ? 10,
?30, ? 1 million) regarding its technical
offer and preferably (20, 20, 60, ? 1
million), the perfect technical bid. Actually,
, (20-x, 20-y, 60-z, ? 1 million) where xyz
? 5, best bid. The rationale behind this best
bid is simple. The ranking is made using
categories. So a technical bid score 91 is in
fact regarded as equivalent to a technical bid
score of 100. In fact, if consortium leaders
could accurately estimate the bid evaluation
skills of the committee, they would aim at 91 and
secure their bid in the highest category. Leaders
prepare bids under uncertainty, and aimed at 95at
least. It is assumed that the perfect technical
bid is less competitive than the best bid. Bid
scores like 86, 87, 88, 89 and 90 are effective
in their category but less efficient than 81,
82, 83, 84 and 85.
10
Four weeks to deadline

• The intense exchange of communication continued.
  The leader D try to convince other players among
  a, b, c, d, etc and also among ?, ?, ?, ?, ?, ?
  to join the consortium D. Obviously, other
  leaders played the same tactics.
• The basis for negotiation is twofold
• what do a, b, c, etc. and ?, ?, ?, ?, etc. bring
  to consortium D vector?
• What share of the pie do they want for their
  contribution?
• BATNAS of a, b, c, and ?, ?, ?, ?, lied in
  joining another consortium (A, B, C or E) as well
  in other market opportunities.
• It appeared that consulting companies a, b and d,
  as well as ?, and ? were interested in joining D.
  Other companies committed to other consortia.

11
Three weeks to deadline

• What do you bring? What do you want?
• D (15, 6, 41, 14 million) aims at winning
  the bid. Technical offer in the top category,
  financial offer below 4.2 million. Neither
  technical nor financial information was disclosed
  to potential associates.
• a (1, 2, 6, 0.3 million)
• b (3, 3, 6, 0.7 million)
• d (5, 2, 11, 2 million)
• And local consulting ?, and ? companies in China,
  potential partners in the consortium
• ? (3, 15, 8, 3 million)
• ? (4, 11, 5, 0.6 million)
• Obviously, more members mean smaller slices of
  the pie

12
Two weeks to Deadline
What do you bring? What do you want? In or out?
13
One Week to Deadline
The bargaining process result in leader D,
company b and local consultant ?. Explanations
are summarized in the following tables.
It is noteworthy that a two-party consortium was
not a good option. Indeed, in the best case, i.e.
D and ? (beta), a total technical score of 88 was
not enough to secure the bid in the top category.
14
Lessons Learned

• The leader proposals (slices) were actually
  proportional to the contribtion of potential
  associate to the technical bid. Thats the value
  value brought by each individual member. The
  monetary value of it can be expressed by n/100
  funancial bid, where n sum of points of a
  particular company.
• a refused the leaders proposal, although it was
  well above its BATNA however, a felt it was to
  far away its demand. Note that an amazing 97
  score could have been achieved with the
  consortium Da?. a was just too demanding.
• d was offered less than its BATNA ( 1 million)
  they refused to join. d had a better deal
  somewhere else (actually, its BATNA was an offer
  from a competing leader, C)
• ? was left out because they assumed the leader
  was taking the lions share. Although the
  leaders proposal was above their BATNA, it
  remained under their want. They were hoping to
  force the leader to accept their offer.

15
Lessons Learned (Contd)
Da? was the most profitable consortium (slices
of associates added up to 1.5 million only), ut
the total technical score was 91. Although in the
top category, it was too close to the second
category and the leader was risk adverse in this
situation. Da? with a score of 97 and a cost
of 1.7 million was as interesting as Db? with
a score of 94 and a cost of 1.7 million (same
category, same cost). It did not happen because a
and ? were too demanding.