How Digital Agencies will change.
Marketing became an interesting and measurable world. Agencies are gearing up for an ad future when clients go to market in new ways and seek radically different support from agency groups. At the same time, those agencies are defending against a never-ending march of marketing services providers and its future is questionable.
Over the last decades, the business was fairly straightforward. Marketing people recruited agencies to create TV, print or e-mail campaigns. But demand has changed into a balancing act between Returns of Investment (RoI) and Customer Experience (CX). Now, CMO’s of large enterprises must manage omnichannel demands and deliver in short timeframes customized ads to specific groups based on real-time analysis of large volumes of constantly changing data. Data that is driving personalization and therefore CX. The key question for agencies is how they will evolve.
HamiltonRoche (Amsterdam) did an in-depth study across global companies with revenues from 30M up to a multi billions agency and wants to share a number of findings.
One-stop-shop? Or not? Clients prefer outsourcing tasks or entire processes to one partner. If they really do, is the question. The aim for one partner is driving the need for Agencies to participate in the ongoing market consolidation. This is the only way to bundle skills and capabilities such as "creative, media, digital (incl. big data and lead generation), digital transformation or change management, production and commerce" for individual brand needs.
The desired long lasting relationships require dedicated Client Teams and Agency owned Shared Services Centers to deliver talent, capability and quality. The Agencies will try to industrialize their offerings by using Shared Services Centers which will be a merger between an Agency and an IT Services Supplier. This may cause future culture clashes since Agencies will become highly RoI driven, where the IT Services Supplier’s focus will be on re-use, maintainability and processes. The Shared Services Centers however, will allow for labor arbitration, industrialization, a large pool of talent and flatter organizations or in other words it will deliver margin. It will be unlikely for Enterprises to put all eggs into one basket. They prefer sharing their budgets over a number of agencies. This requires a lot of coordination and Enterprises have to learn from their IT departments where Program Management Offices (PMO) became the answer to manage multiple outsourcers. In this PMO, Enterprise employees and Agency staff will work together in a hybrid model. This will elevate the Agency to a Partner, but will also result in opportunities for niche players to become a supplier to the Enterprise. The idea is not new, your house is most likely not constructed by just one company; it is the result from multiple smaller specialized companies and crowd sourcing platforms will ensure access to all kinds of specialists.
However, in IT we also learned that where multiple outsourcers are delivering to Enterprises, only one party will be responsible for Quality, Architecture and System integration. Where in IT this role is executed by so called System Integrators, it will be a Lead Agency taking that new marketing role. These Lead Agents will overtime participate in the PMO or will report directly into the same keeping up the idea to build all efforts around clients and consumers, not brands or channels.
Intimacy and Effectiveness Small Client Teams provide clients with effectiveness through unique understanding, competitive expertise, measured results and result driven compensation. Such a team (4-5 staff incl. a marketing technologist and content specialist) is creating a culture and measures the pulse of the same culture by being part of the community. This is essential to be considered by an Enterprise as a Partner.
The Agency compensation will be based on hard metrics (and no soft KPI’s), which means that metrics are only considered to be metrics while directly impacting the bottom line. There is no need for Partners to exclusively deliver ‘homeruns’, but Enterprises are expecting honest back-end evaluations whether the concept or creative was adding to the sales results. That is what counts!
Vague KPI’s like ‘reach’ or ‘number of likes’ will become increasingly obsolete, since they can be influenced and do not convert into consumer engagement. Hard metrics like time spend on web pages do. They convert into engagement and therefore into sales.
New Roles and Approaches This kind of transparency will make Agencies more accountable for clients results, which will result into output driven compensation schemes. This is not as easy as it looks like, since on one hand this require full transparency from the Enterprise while on the other hand this requires in-depth know how from the Agency to understand the Enterprise’s financial models and cost allocations or accruals. Nevertheless this will only be a matter of time before a solution will be found. What will be the future creative output role? Most creative services will be outsourced to specialized companies. For Agencies this will improve utilization of staff, but will intensify the demand for supplier management. For Enterprises it will allow to shop for the best possible fit. Media focused Agencies including e-mail agencies will add content-creation services for brands that buy ads on their own and other platforms. Communication Groups (WPP, Publicis) are in the process of building out capabilities that mirror those of the traditional services shops, while reducing overhead. A good example is Publicis that is now organized in three units: Media, Digital and PR.
The future of Content and Content distribution Content is the backbone for all campaigns. Content (incl. e-mail) and distribution platforms have separated already and time to market has reduced from months to just a few hours. This will make Enterprises to set up in-house content publishing groups where Enterprise employees and Agency staff work together in a hybrid model. There are many benefits for Agencies to be part of these hybrid teams, since it will be difficult to dismantle such a team. As a result from this trend, the increased efficiency and higher utilization we are forecasting double digit redundancy in content orientated Agency staff. This will even further increase taking into account the role of Artificial Intelligence in administrative jobs. While Media and e-Mail agencies will add content creation to their services, they have to overcome problems to keep up Chinese walls between media sales and content creation. Their Clients will demand full confidentiality on when and why it's creating and placing content on a media platform.
We are seeing quite some activity in the market. Almost two years ago the merger between Omnicom and Publicis failed, but nowadays other giants are planning mega mergers or acquisitions. The big five (WPP, Omnicom, Publicis, Interpublic, Dentsu) may reduce to a big three of which 1-2 will be completely new.
Profitable Medium sized agencies ($150M+) are being acquired by either Communication Groups like WPP or Publicis or will be acquired by IT Services Suppliers (Accenture, Deloitte). This trend has started a few years ago and will proceed for the next 3-5 years.
Profitable Smaller agencies ($10-30M) are of only of interest in roll ups by VC’s or as part of a Buy&Build strategy by independent larger Agencies and we are seeing many examples. Single digit EBITDA’s are the blocking many potential transactions.
The biggest impediment however, will be the cultural integration between the acquired company and the Acquirer. This requires firm management, management commitment and a new mutually supported culture. The well known multiple years earn-out strategies as executed by communication groups will not eliminate the hidden agenda’s to increase profitability, which will result in cash transactions (50%-75%) with a relatively small percentage of equity for the shareholders.