The consensus among search marketers is that a storm is brewing. On 31 December 2008, a large number of search contracts between advertisers and agencies will become null and void owing to the end of Google's Best Practice Funding (BPF) - a scheme that gives agencies a rebate of between 3 per cent and 8 per cent every quarter, depending on their level of spending (see box, page 61). Contracts that feature BPF, whether the payments have been directly passed back to the brand in the form of a rebate or been accounted for in lower agency fees, will have to be renegotiated.
Google claims it never intended BPF to be used as a financial incentive to do business but, without it, advertisers are looking around the market to see if switching agencies can lead to improvements in search technology, best practice, ROI (return on investment) or updated methodology.
Google's joint managing director Mark Howe says: "The investments we've made in BPF should have paid dividends for those on the receiving end. They should have used it wisely, and if they haven't, then more fool them. If they have used it wisely, then their business should be much stronger for it."
Howe also believes that it is inevitable that some marketers will decide to put their search accounts out to tender.
"It's starting to rain but the storm hasn't hit just yet," says Chris Simpson, interim managing director at The Search Works. "Brands are having a lot of conversations with different agencies, with a view to putting search out to pitch towards the end of the year."
According to Robert Horler, managing director of Diffiniti, in the past advertisers that were heavy users of Google PPC (pay per click) became "obsessed with BPF and the growth kickers that rose with volume". This would result in search contracts being switched regularly from agency to agency to try to capitalise on rebates from those that had the most volume.
"Decisions were being made on the wrong basis," agrees Paul Mead, managing director of VCCP Search. "By creating a level playing field, Google is forcing advertisers to look at which agencies provide the best expertise or best practice."
Google removed both the 15 per cent quarterly rebate and its 'new ad format usage' rebate at the start of 2008 in an attempt to wean the industry off BPF before the 31 December deadline.
"We had budgeted assuming the removal of BPF from early 2008, so we were pleasantly surprised to get another year," says Lyndsay Menzies, managing director of Bigmouthmedia UK. "Higher management fees in 2009 will cut the ROI efficiency of existing campaigns, which means agencies will need to maximise efficiency through excellence to counteract this. However, it will result in a more professional and transparent industry overall."
The predicted flurry of pitches will undoubtedly see the cream of paid and natural search agencies rise to the top. But let's focus on the decisions that advertisers now face.
1. Pitch the business
Advertisers that see the end of BPF as a chance to benchmark company practice against existing industry standards will almost certainly return to the pitch process. The majority will be digital marketers that have relied on an incumbent agency for a number of years and have taken their eye off a marketing discipline that has changed rapidly in a short space of time.
Hosting and server provider Rackspace had worked with its agency Summit Media for four years. Earlier this year, Rackspace decided it needed to revisit a search landscape that was now very different. Harriet Fletcher, marketing communications manager at Rackspace, recommends using an agency-matching service such as Bulldozer to expedite the pitch process and find agencies.
"Bulldozer asked all the awkward questions, did all the research and helped us put together criteria for what we now needed from an agency," she says. "We found that a lot was promised from an industry that had grown rapidly, so we produced a list of 12 agencies. From there, a shortlist of six that most suited our criteria were invited to present."
Rackspace's criteria included how a chosen agency would propose to develop the business, developments in search tools, experience in the relevant market and a remuneration structure that would be performance based.
"Some companies look good on paper but may still be naive when it comes to presenting, so I advise that you always hold follow-up meetings, preferably at their offices. We visited their offices to meet the account teams and try to get under the skin of what these agencies were about."
The Search Works won the Rackspace business not only because it fitted all the criteria but, as Fletcher states: "A cultural fit between us and them existed. They were passionate and they were the only agency to demonstrate that they really cared and really wanted our business."
Simpson believes the pitch process has changed in the past few years, and that advertisers looking to re-evaluate how they carry out search will increasingly turn to procurement departments to bring in new agencies.
He says: "Managing pitches is time consuming and needs a dedicated resource. Procurement specialists are more likely to now yield the relationships because it's their job to understand which are the best suppliers. Some agencies feel uncomfortable dealing with procurement, but this industry is growing up fast and we have to accept it. I believe advertisers should look at the chemistry and the stories of the people behind the pitch when deciding which agency is right for their business."
2. Don't pitch, but renegotiate
According to Alan Gilmour, marketing director at Heritable Bank: "Everybody hates organising pitches. I don't believe there will be a flurry of pitches, unless there's a specific problem with the agency-client relationship. Cost is only one element of search, and if you're getting added value from an agency's insight, then renegotiation is a logical step."
Simpson advises marketers to use a period of renegotiation as an opportunity to assess what value they are already getting from the agency relationship, and what value they are prepared to pay extra for.
He says: "Advertisers need to assess what their principal ROI drivers are and tailor agency packages accordingly. Many of the renegotiated deals will be based on performance indicators instead of volume. We have some deals that are based on a percentage of spend, because they're simple and brands prefer it that way. But we've also negotiated other deals, where the client pays a fixed fee plus performance commission. This works well if your search business has seasonal highs and lows."
Chris Speed, head of paid search at I-Spy Search Marketing, agrees: "We'll see a lot more performance-related deals," he says. "Agencies and advertisers will agree key performance indicators, with bonuses awarded when the agencies hit their targets. We've been in situations in the past where we've lost out to the big boys in pitch situations because they had more BPF to offer, so we're looking forward to a level playing field."
BPF's demise will see the cost of search rise across the board, so any advertiser considering going out into the market to try to find a cheaper agency deal should be discouraged.
"It just won't happen," says Horler. "This is an opportunity to move the conversations away from price and into the areas of best practice."
3. Bring search in-house
Some marketers will be contemplating bringing paid search in-house, as outsourcing becomes less attractive given the anticipated increase in operating and service costs.
"I've never met anyone who will stand up and admit that their search is done in-house and it isn't done very well," says Horler. "But the fact is that, whenever we've taken over an account that's been carried out in-house, we've always been able to do it better."
Horler believes that anyone considering bringing search in-house for economic reasons should carefully consider what resources, expertise and technology can be dedicated to it. Simpson agrees. He says: "There are undoubtedly companies that can do it in-house, but really it's only those brands with a huge amount of spend available. To make search work effectively, you need more than one full-time person working on the account and a significant amount of training. Algorithms and methodology change too frequently for search to be handled half-heartedly. If the investment exists and search is a core part of the operation, then it can be done. But it has to be done right and, if not, then outsourcing is still the most effective and value-added way."
Gilmour warns: "It takes a lot of specialist skills to bring search in-house, but if you were seriously considering it, an alternative may be to bring the planning side into the company instead."
For Google's Howe, bringing search in-house is not a viable option for most. "It would be a big mistake for marketers to take their search business in-house unless they're a really big pureplay, with some very intelligent individuals who absolutely get it."
Research by Sempo (Search Engine Marketing Professional Organisation) suggests that more than half of US advertisers handle their search marketing in house. In the UK, however, advertisers turn to agencies more often than not.
In the current economic climate, it appears that bringing search in-house is the least appealing of the three options, especially if it means increasing company headcount. However, one thing is certain - no media owner has ever controlled almost 90 per cent of a market before, and advertisers simply can't leave Google off the media schedule. So more money will need to be invested in search; it's now a question of who to spend it with.
GOOGLE'S BPF: WHEN AND WHY IS IT ENDING?
In 2007, Google warned the search industry that the 2008 Best Practice Funding would be the last of a three-year scheme, originally intended to allow agencies to invest in capabilities, systems and productivity.
Mark Howe, UK sales director at Google, has admitted that loopholes were being exploited, with marketers swapping agencies every quarter to receive a quarterly growth rebate or agencies passing on the rebates to brands as a discount to secure the work.
Google now states: "We will continue to invest in technology solutions, training resources, research, industry insight and sales service to enhance the benefits of our clients and agencies. Now is the time to create a level playing field for all agencies and advertisers."
CASEBOOK - How Sky ran the pitch for its search accounts
Last year, Sky held a pitch for its search account. It had expanded its search marketing function and a change in personnel had led to an injection of in-depth search knowledge. This, together with the fast-developing nature of the market, meant Sky wanted to find out if it was doing everything it could to stay ahead of the game.
For Sky, it meant recruiting a specialist agency to look at improving its paid and natural search capabilities. "We hadn't been focusing on how the search landscape had changed or who the new players were," says Scott Gallacher, then Sky's online and partnership marketing director.
Sky used The Haystack Group as an intermediary. The first-round saw about 20 agencies. Sky had opted for anonymity to see how many would respond to a generic request. Only seven agencies made it through: Latitude, The Search Works, Bigmouthmedia, Unique Digital, Diffiniti, Media.com and i-level were invited to present.
"The younger agencies weren't as polished in their presentations," says Gallacher. "At this stage, Unique hadn't made an impression, but it arrived with the seven-strong team that would be working on the account. All had done their homework on Sky, answered all our questions and made a real impact."
Gallacher says that passing on BPF rebates to Sky was mentioned by two of the agencies during remuneration discussions. Once the shortlist was whittled down, he sent people to the remaining four agencies to meet the people who would be working on the account.
"I strongly advise this, as it backs up first impressions and made a big difference for us," he says.
Sky awarded its natural search account to Diffiniti and its paid search account to Unique.