Over the last 12 months we have executed some projects for international agencies. The focus in most projects was to define a strategy to transform these companies from web agencies into digital agencies or in some cases Enterprise Digital Agencies. The size of these companies varied from hundreds to multiple thousands of employees. This gave us a detailed view on the strategic problems the industry is struggling with. In this blog we handle just 4 key areas.
Strategy and Culture are inseparable
Execution of a sound strategy very much depends upon the culture of a company. Not any strategy stands not on its own, but requires a solid execution. One cannot do without the other. A company’s capacity to effectively execute business strategy is a competitive differentiator, one that is highly correlated with strong market performance. Many strategies fail because they are not successfully implemented. In most of these cases it was not the strategy that was wrong, but the execution of the strategy was not supported by the culture of the organization. Enterprises which create and maintain the right cultural fit for the strategy, will have a much higher success rate. Strategy and culture are inseparable. The importance of culture and strategy can be best explained by some past research notes. Over 60% over the Mergers and Acquisitions failed even although strategies seemed to be congruent. It was the culture between the companies that did not fit, causing costly failures.
Dare to look into the mirror.
Only very few agencies know who they are and why they are perceived as experts in their area. These agencies have looked into the mirror and their perception of the company is aligned with the client’s perception. Others who didn’t, show a tendency of opportunism and overestimate their capabilities or underestimate the competition. These companies will be ramble for a while and will therefore lose time and market share. A good view on strengths and weaknesses allows the management to navigate the organization towards new areas of expertise. In most cases this will differ per agency which is due to the fragmentation of specializations. One might be an expert in tools with very little expertise on strategy, campaigns or big data. While other agencies are experts in marketing strategy and campaigns, but do not have any creative skills or are more traditional advertising agencies.
Lacking a strategy Knowing where to go, will give agencies the knowledge to adapt their organization towards present and future market demands. Let’s try to define some strategies on headlines. $5-10M Digital Agencies Any smaller Digital Marketing Agency is facing problems in defining focus areas from the fragmented landscape. Unfortunately, due to the size of these companies and their profitability, they will not be able to become an independent one-stop-shop. Their profitability is not sufficient to execute any Buy&Build strategy. These agencies are deemed to focus on limited areas and become a niche player. Whatever they prefer to be, these companies have to go after alliances and have an ongoing threat of being acquired for nominal amounts by larger agencies in their journey to become a global Enterprise Digital Agency (EDA: revenue 100M, focus on global enterprises, ability to execute digital marketing processes, performance driven compensation.) $30-$100M Digital Agencies These Digital Agencies have different kind of problems. In most cases they have significant presence in just one geography, but have limited presence elsewhere. They are aiming to become an EDA but are (like the smaller agencies) suffering from profitability problems and therefore not able to execute a successful Buy&Build strategy which will get them sufficient local substance to become a dominant player outside their home turf. Alternatively these agencies may create new overseas subsidiaries, which in the end works out to be even more capital intensive than acquiring a small agency. But if so, these companies run into business development problems and are facing considerable cost to successfully duplicate all skills and capabilities. One needs deep pockets to convert this into a successful strategy. Instead these agencies have to create foreign Sales offices with small Centers of Expertise (CoE). Each CoE will be differentiating and complimentary to the other. Doing so, i.e. an e-commerce CoE or a Mobile CoE will enable the agency to execute specialized international pre-sales and post-sales services, while the actual development will be done elsewhere. Actually this can be seen as a rudimentary global delivery model. In our practice we advise clients to staff these CoE’s with temporarily non utilized employees, but to document their plans, learnings and findings well for their successors. This will create an integrated CoE, but will also broaden skills while in most cases you will create better employees. Communication Groups Large communication groups have entirely different problems to overcome. They are conglomerates with multiple specialized entities acting under one holding structure. Although financially strong entities, they have lost momentum and have to accelerate now to regain their positions. Here there are a few problems to encounter. Their largest competitors are the IT Services Suppliers. All major suppliers have developed powerful SMAC strategies (Social, Mobile, Analytics and Cloud) and have separated their digital marketing activities from the more traditional IT activities. They have learned from the past where they unsuccessfully tried to merge multiple cultures (IT developers and business consultants). These IT Services suppliers are seriously threatening the large communications groups. They have the know how, the project management skills, the methodologies and the global delivery models or even the clients, but what they don’t have is the digital marketing strategists and the CMO network. Large communication groups are facing problems of account ownership and program management. Each entity has its own P&L and its own agenda and for a client it looks like dealing with multiple companies. These companies have to learn from global IT clients dealing with multiple vendors. They are using program management offices, where major global client programs are managed and (financially) controlled. This will only solve the problem in case the PMO is granted the rights to overrule each entities decision and to ensure that the client gets delivered on time and within budget. The pay back will be imminent. Probably the biggest opportunity to resolve is the ambition of each individual entity to set up and maintain its own in-house digital marketing expertise. Allowing this will be a waste of energy and talent, will not result a satisfied clients and will spoil huge amounts of company dollars. These communication groups have to consider the foundation of a centralized digital marketing center with all necessary skills in an offshore or nearshore location. After a period of time this can be optimized by decentralizing these centers to multiple locations closer to main markets (nearshore). This will prevent these groups from huge capital expenditures during the build phase and costly correctional measures. Although forced sourcing policies could be considered, incentives will give the same results. After some time these groups can split these digital marketing centers and bring it closer to the clients. Embedded processes, tools, and infrastructure can be copied, while key staff employees can be redirected to new centers giving them the opportunity for further personal development. We are very much in favor for communication groups to make a quick start by acquiring a 200-300 staff technology driven digital marketing agency in Europe, USA or Asia. Such a company will become the foundation for a set of planned decentralized digital marketing centers. Such a target company will have well proven processes in place as well as knowledge on world class development tools. This prevents the acquirer from hobby horse behavior or local tools. IT services companies like Cognizant, Capgemini or HP have used similar tactics while bringing software development to offshore locations. This is why companies like LBi and Digitas have been acquired and merged together by Publicis or Acquity Group and Fjord have been acquired.This trend will remain for the next years and will drive the valuation of EDA’s.
The new direction: Business Process Outsourcing. In three previous blogs we wrote about the next steps for digital agencies. First make a choice who you want to be: A niche player of a generalist (EDA). Secondly prepare for the next big thing: Business Process Outsourcing (BPO). Although CIO’s and CMO’s have improved their cooperation significantly over the last few years, they are still facing some problems/opportunities. An significantly and increasing number of CxO’s have problems to increase the affectivity of marketing. There are several reasons for it, but the main reasons is the silo orientated availability of technology and the complexity. This is preventing them from building multi channel customer experiences. What has to be done is the creation of a digital vision and an even closer cooperation between the CIO and CMO to bring this alive. In such a digital vision customer experiences have to be the central focus point, but to do so CxO’s have to restructure the entire organization and have to build new marketing models and allocate higher budgets. Some CxO’s will go this route, but others will outsource important parts of the marketing process. Agencies, Communication Groups and EDA’s have to get prepared for these innovations including performance based compensation and upfront payments to clients or buying assets to swing deals in their favor.