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Tuesday, May 01, 2007

Thoughts on Process, Results, Transaction Costs, and Scale... and Realism


Compared to some of my competitors, who tend to specialize, my firm has probably worked for the most eclectic client list in the search marketing business. It's important to see, in my view, potential success stories in all industries. (I've certainly also seen plenty of high-risk or low-potential projects in RFP's that we are shy about handling.)

Like any consulting company we certainly "cherrypick" the projects that seem to have the potential to be workable, but beyond that, we've experienced a wide diversity of expectations and management styles, from the tiniest to the biggest companies.

Preamble: Yesterday somebody forwarded me a saying: "unrealistic expectations are planned resentments." Example: a company with a target ROI or cost-per-order target that is better than anything we've ever seen in the industry. If costs are rising because it's a competitive auction and new players haven't yet stopped entering and driving costs up, we'd be crazy to promise to hit unrealistic ROI targets short term. What we can do is implement better testing protocols or work on fundamental changes to messaging, or a dozen other things, but we can't just draw a tiny speck on a wall and hit it with a dart from 100 paces. One way to guarantee pristine ROI numbers, conversion rates, etc. is to reject growth and to focus only on a few keywords and a few slam-dunk customer relationships. That's why aggregate conversion rates aren't as meaningful as folks think. Volume matters too.

Another example of unrealistic expectations that constantly get built into our (paid search) industry: some folks can't resist touting the lowball bid strategy. We have a few of those accounts working pretty well, but that's sort of because there is demonstrably high quality content or products at the other end of the click. Beyond a few remaining skilled players, the belief in a lowball bid strategy making you rich is like waiting for Christmas on Jupiter while taking LSD. The hallucinations are great while they last, but then you start shivering uncontrollably, and Christmas never makes it to your planet. By all means play around on your own time, on your own time, but if you work for a company, budget realistically for a media buy based on what "high quality" competitors are likely to bid to stay in the top 4-5 ad positions.

Moving on.

Let's start with a broad premise about process: true process is good and leads to efficiency and better communications. Results, the end goal to which we're all oriented, aren't achieved by simply stating goals, although it isn't bad to have targets.

I'll further break process down into two types: technique process and communications process. And hey, I'm not trying to write a textbook - I'm sure there are many better thoughts on this. It's just a blog post.

Broadly paraphrasing theories of the firm, I'll suggest that process has a price and that by and large bigger companies can afford more of it, but no matter what the size of your company, you need to worry about overinvesting in this costly good, just as you need to worry about ignoring it entirely. The decision to outsource comes from inadequate in-house resources in technique process (as well as its higher-order cousin, domain wisdom). That decision now creates slightly higher costs and requirements in the area of communications process. But the key is that results in a competitive, creative field are generally only achieved with a long-term focus combining technique process and domain wisdom. Results orientation is actually assumed. No one in our industry is being paid to watch a clock or to look busy.



Imagine four golf "head coaches," and Tiger Woods. (There is no such thing as a head coach in golf. The golfer himself is the head coach. Work with me.) We all know that "shooting 65" is the goal. That's a given. Coach #1 - we'll call him "Hockey Mom," - nonetheless assumes that constantly reminding Tiger of hitting his "birdie targets" and that he "needs to sink this 30-footer" or that he "shouldn't have missed that four-footer" is the sum total of what his supervisory role entails. Tiger doesn't improve.

Coach #2 - we'll call him Sarge - realizes that improved technique, including fitness fundamentals, will improve Tiger's overall game. He follows Tiger to every fitness session, logging every activity, suggesting very small changes to his situp and treadmill technique. He fires the swing coach and begins changing Tiger's hand positions. He also tells Tiger what clubs to use; not a small point. Tiger benefited from that type of minute help when he was a small boy; Earl Woods' exacting practice regimens helped make him what he was. But now, he's Tiger Woods. His game soon goes south on the over-processed regimen.

Coach #3 - we'll call him Big Company Guy - doesn't meddle in the exact performance of the situps, but does expect an elaborate reporting regime. Instead of asking Tiger if his body was responding well to last week's agreed-upon workouts, he asks Tiger for color bar charts, heart rate and blood pressure readings, and so forth. Unable to process the information Tiger submits at first, he asks for a different kind of presentation, as well as an hour-long recap and explanation of the workout program and explication of the reporting documents. Various colleagues join the conference calls, and suggest additional statistical reports for next time, in case they might shed light on the fitness regimen. Unfortunately a few of these meetings and reporting requirements make Tiger late for a meeting with a sponsor, and in one case, he gets to the course only 30 seconds before tee time.

Coach #4 - we'll call him Goldilocks Excellent - places a heavy degree of weight on technique process in determining outcomes, just as Tiger himself - as a motivated, recognized professional - does. He manages that process and understands the purpose of various elements of the training program. When Tiger's scores are subpar, he doesn't assume Tiger "failed," but wants to know whether it was just an unlucky day (randomness, missed putts) or something specific that might have gone wrong in terms of deviating from sound process. He spends not too much but also not too little of Tiger's and his own time in the necessary communications process. Tiger is held to exacting standards, but is also facilitated in pursuing his own, self-motivated exacting standards. Goldilocks Excellent gets 2% of Tiger's winnings (less than Tiger's caddy, Steve Williams, but still pretty good), and becomes wealthy by bringing out the best in the Tiger.

Now that I've offended just about everyone, let's try to put it back into dry economic terms.

The smallest companies are at a disadvantage if all they look at is short-term results. Larger companies do this too, but very small companies are particularly susceptible to it, because they lack capital. It's pretty hard to intellectuallize getting kicked in the shins (or worse) for weeks on end in the name of some long term goal. (Again, The Dip by Seth Godin seems like it's going to address this and no, I haven't read it just yet.) Results, though, are just a common, assumed goal. The real key is to have enough of a plan and enough resources to devote to technique process and domain wisdom. Often, the smallest companies don't, so they get killed. Make a few extra mistakes -- say, overinvesting in communications process or telling Tiger what golf clubs he should use -- can throw the economics completely off course.

Big companies can afford to make many more mistakes. Where they thrive is in executing long-term plans based on domain wisdom coupled with technique process. Whether these are found in-house or outside the organization is not as important as some may think. This comes down to cost and timing, more or less. Contracting relationships abound, so every day, many calculations are made that point to a more efficient outcome by using a specialist. Otherwise, every company would have its own shipping department, web designer, auto mechanic, and massage therapist. Yep, some have all those things, but those company names tend to be Chrysler or Google. Very big companies with unique all-encompassing cultures.

Big companies generally overinvest in communications process. It's a quirk of corporate culture. Internally, this makes sense because the cost is absorbed into a larger entity. But if the outsourced expertise is a much smaller entity, the cost of communications process too easily crowds out the technique process. But while annoying, most larger companies' overinvestment in communications process is not economically harmful to them.

Either way: in spite of small company romanticism and some major advantages of nimbleness, big companies have many levers in the marketing of products and services. Smaller companies have to get it exactly right. They also have to bite the bullet and invest money they don't have into processes and medium-term planning exercises needed to compete. No wonder successful small businesspeople are considered heroes.

Final point: none of this stuff seems to matter on the days Tiger shoots 65.

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