SEM agency crisis: who's to blame?

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SEM agencies have a hard time keeping clients happy. In fact, a 2006 Jupiter Research survey found that just 21 percent of respondents were completely happy with their SEM agencies. Other surveys show that many companies, having been "burned" by their SEM agency, are increasingly thinking of bringing their SEM efforts in-house.

Some SEM agency executives disagree with me when I tell them that the SEM agency business is in crisis. They seem to think that everything's just fine. But what else can you call it when 80 percent of clients are unhappy with their SEM agency's performance? Do we have to reach 100 percent unhappiness before these people admit that a full-blown crisis exists?

How did we get into this mess? To get to the bottom of the SEM agency crisis you've got to start at the beginning: in the way that clients pick SEM agencies and the negotiations that take place shortly before the deal is signed.

Why SEM agencies charge media management fees
Let's begin with a scenario that I've witnessed often in this business (while the names have been changed to protect the guilty, the facts are accurate). A Big Client, let's say a national retailer, is approached by a SEM agency. After several preliminary meetings, the negotiating process begins. The first serious point of contention is the SEM agency's fee, which is the amount charged by the agency to cover its media management costs.

Smart SEM agencies think very carefully about where they set this fee and whether it's negotiable: if it's set too high, they'll price themselves out of the market. But setting a fee level that's too low will not provide enough income to support the resources required to deliver favorable results for the client. Why? Because running an SEM campaign that actually delivers results is an expensive, labor-intensive endeavor. Sure, campaign automation systems can take care of the grunt work, but software is just a starting point. The real challenge involves "wetware" (brainpower). Without skilled human analysis and judgment, no SEM campaign can be expected to deliver. Agencies must expend time and money to attract the smartest people, and the media management fees cover (or should cover) this expense.

SEM failure begins with fee-haggling
For the purpose of this example, let's say that the fee proposed by the SEM agency is 12 percent. Let's also stipulate that this fee level is sufficient to support the satisfactory execution of the client's campaign.

Unfortunately, the Big Client doesn't view the 12 percent fee as fair compensation for the agency's services. Instead, he sees it as a mere negotiating starting point. So being a habitually cagey bargainer, he makes a counter-offer of 8 percent.

The SEM agency protests that this fee is too low to meet the Big Client's success expectations, but as a concession, lowers its fee requirement to 11 percent. The Big Client, sensing weakness, thunders, he "will pay no more than 9 percent!" Soon the SEM agency caves in and accepts the counter-offer.

Everybody walks away from this meeting feeling fairly good: the Big Client is happy because he has "gotten over on" the SEM agency; the SEM agency feels good because it has beaten out its competitors for a million-dollar-a-month account.

But deep in the back of the SEM agency CEO's mind is a troubling little voice that grows louder and louder with each passing day. That little voice says: "We can't possibly deliver acceptable results at a 9 percent fee level unless we go out of pocket."

Six months later...
Over the next few months, things unravel very quickly. At first, the SEM agency actually does make a good-faith effort to stretch their measly 9 percent management fee to cover the ambitious objectives that the Big Client has tasked them with. But it soon becomes clear that there's no way for the SEM agency to do this without going "out of pocket" by adding staffing, training, software customization, and by poaching scarce resources from other paying projects.

The SEM agency isn't in business to lose money, so it naturally decides to follows the path of least resistance by pocketing the 9 percent fee and expending as few resources as possible on behalf of the Big Client (now known internally as "The Big Cheap Client"). Of course, by the time Month Three rolls around, it's clear to the Big Client that the SEM agency has utterly failed to deliver on its promises, and as soon as the contract period elapses, the SEM agency and the client part ways in a session involving loud curses, legal threats and spectacular phone handset slam-downs.

Over the next few days, there's a lot of bad blood and hurt feelings about what's happened, and plenty of angry muttering that "the SEM agency is a bunch of over-promising, underperforming crooks who did nothing for me" (from the client) and "the client is a big fat, greedy, clueless idiot" (from the SEM agency). But then the phone rings at the Big Client's office: it's another SEM agency that's heard "through the grapevine" that the Big Client has just fired his old agency. After admitting to the Big Client that "of course our fee is negotiable," the SEM agency arranges a sit down with the Big Client and the whole crazy failure cycle begins again.

Who's to blame for this mess?
Who's most to blame for this short, unhappy, dysfunctional relationship: the client or the SEM agency? Well, both of them. Let's start with the Big Client. By failing to understand enough about the highly dynamic, hyper-competitive SEM environment to realize that his objectives could never be met without a more significant expenditure of resources than he was willing to underwrite, the Big Client created an impossible, no-win situation.

If there's any justice to this situation, it lies in the fact that the Big Client is doomed to experience the same failure with the very next SEM agency that comes along. By bargaining down media management fees, he's practically guaranteeing himself poor SEM results and lost market share, and ensuring that one day he'll throw up his hands in defeat by bringing Search in-house, a move which will likely ensure far poorer results, at much greater expense, than he'd get from a competent SEM agency.

But SEM agencies must shoulder a fair share of blame as well. Are they so desperate for business that they're unwilling to walk away from a bad deal? Why won't they simply say, "No," to business that they know (or should know) can never provide enough income to support acceptable service levels? Unfortunately, it seems that this kind of myopic, short-term thinking is endemic in the SEM agency business, and I don't see it changing anytime soon.

Is there any hope?
Fortunately, there are a few Big Clients out there who do understand that bargaining over fees is tantamount to playing Russian roulette with their company's future. They know that the services that their SEM agency performs aren't a commodity; and they realize that being stubbornly hardheaded about fees directly increases the chances of strategic failure.

There are also a few SEM agencies out there that are experienced enough to know that accepting low-balling fee structures is a recipe for disaster. These successful firms are in such high demand that they don't have to go after business that's not good for them. They can walk away from an unworkable deal instead of having their reputations tarnished by failure. But sadly, the failure scenario I've illustrated here happens every day, and it will continue until the day when both clients and agencies find a better way to negotiate.

That day cannot happen soon enough. When clients and SEM agencies are unable to devise win-win strategies for Search, the whole industry suffers - and that is bad news for agencies, clients, the engines and the overall future prospects of SEM.

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