Guy Murphy (Left), Founder of London-based boutique consultancy Extreme Strategy, and Fadi Khater (Right), Founder of digital marketing agency Netizency, look at the state of advertising agencies and offer a possible roadmap for a sustainable future.
Before considering the future, let’s look back at the history of the advertising agency business. Ad agencies started off as media space brokerage firms and gradually made their way up to become full-service marketing agencies. They managed most of the marketing value chain offering clients everything from strategy and ideation to branding, creative, PR, and media. Agency account managers were like the private bankers for their clients, managing all their marketing funds, even providing entertainment.
Gradually, the industry began to specialize, cannibalizing itself in the process. Every division wanted to split off and claim its own territory. Branding agencies, PR agencies, and media agencies were born; each had their own account managers who aimed to wine & dine clients and provide them with specialized creative, media, and PR functions.
In parallel, ‘marketing’ became an increasingly professionalized capability inside client organizations. Marketers started leading the show, taking back ownership of the value chain and using their agencies to service their marketing needs as they saw them. Agencies were hired as discreet specialists that needed integrating, or as one-stop-shop offerings from holding companies.
Whilst agencies became somewhat marginalized, advertising itself remained highly influential for the dominant FMCG and automotive client categories of the day, sprinkling the magic image-dust of brands on manufactured products. Agencies clung on to their prestigious place at the table.
An industry in flux
The rise of technology blurred many boundaries, between marketing and sales, between products and platforms, between branding and customer experience.
The dominant categories shifted from FMCG and automotive into platforms and ecosystems. The corporate success stories – FAANG (Face- book, Apple, Amazon, Netflix, and Google/Alpha- bet) – were notable for their lack of traditional advertising. Success was being defined though tangible service benefits rather than perceptual branded advantages. The routes to marketing success, fuelled by data, shifted from advertising to websites, apps, eco-systems, and an omnichannel presence. The power of utility was trumping the power of perception.
Marketing started to get redefined from brand and image to experience and technology. Pressure began to build on the marketing function to deliver a wider agenda than brand health and focus on ‘growth.’ Hence, we saw the rise of new roles – Chief Growth Officers and Chief Experience Officers – that compete with (or complement) the CMO position.
Inevitably, agencies that were yoked to the advertising offering of marketing started losing relevance to newer offerings. Customer experience agencies emerged attempting to bridge the gaps; but it was the non-agency world that began to dominate marketing through:
1. Digital platforms (Google, Facebook, LinkedIn) owning the customer data and more and more of the transactions.
2. Technology players (Oracle, SAP, Adobe, HubSpot, Salesforce) owning the martech/adtech software that integrates and automates marketing activities.
3. Management consultants (Accenture, Deloitte, McKinsey) owning the strategy, having the client’s ear, and accessing all client/sales data.
Agencies tried to re-group and diversify their offering in different ways. The one-stop-shop model persisted in new forms with added ‘digital transformation’ services, such as WPP Teams, Publicis One, and even spin-off client-specific agencies like Omnicom/TBWA’s Nissan United. They consolidated the specialized offerings from all the spectrum of individual agencies through a dedicated client team. Large agency/media groups tried to acquire as many digital players as they could and consolidate them into this offering.
So, where do we stand today?
The role of technology and data has shifted the balance of marketing quite firmly towards science rather than art, more logic than magic. Marketing no longer has to embrace the same risk of creativity, now that we can dynamically A/B test our way to optimized, tightly targeted, programmatically-bought solutions. Neither does it need a leap of faith in knowing which ‘half’ of its advertising budget is working. Ad tech and martech solutions are creating a degree of efficiency and certainty in fully integrated software, with single customer-views. It is a compulsive drug for businesses that seek greater accountability. The logic isn’t going away.
The art of advertising has found itself mostly cornered in a world called ‘Content’ – the creation of social media-friendly videos, GIFs, and images. It has become a descent into generic direct-response work at the expense of the brand equity-friendly creativity.
The creative magic has gone elsewhere and taken on an independent existence in social media. The definition of creative ‘quality’ has changed dramatically with UGC. Ready-made content has become cheap and readily available (i.e Shutterstock, Envato). Content development tools are easier to use than ever (i.e. Canva). Designers are available everywhere from Fiverr, freelance and upwork, all the way to media agencies, management consultancies, publishers, and in client-side marketing departments. ‘Creator communities’ have grown up offering a level of originality that agencies will struggle to match.
The question is where agencies fit into this landscape now. There will be different kinds of solutions and different segments will emerge; but it is worth questioning some fundamentals and exploring where the role of agencies may end up.
We would like to perform this exploration across two axes:
The first axis is continuing to be a broad-spectrum agency; the most basic role of an agency is to be the ‘agent’ of the brand owner. This role presupposes a few things that are questionable today. The long-term history of this industry shows a steady clawing-back of responsibilities from agencies to the client company, and clients have become more sophisticated and capable. With the more recent developments in in-housing, the clawback for some services is complete.
A brand owner only needs an agent for those things that the brand owner cannot do themselves (for reasons of expertise or bandwidth). So, unless agencies seek to be the place where their work comes as overspill from busy clients, they need to do what clients cannot. This suggests an opportunity to make a structural change in the role of agencies. Instead of being singularly yoked to a client, there is a more connected role to play. Other key players can form part of a wider system: the platforms obviously play a hugely influential role; the technology companies equally so: the broader ‘creative communities’ are high-value. The ability for agencies to play a role as a flexible ‘membrane’ between all those value-adding players is considerable. Can they become agents for them all?
The second axis would be to become a platform, or potentially some form of ‘a client’ (vs an agent). Perhaps it is worth challenging the assumption that agencies must create something, or at least be the author, and credit-taker, of their creations. The nature of what gets made for clients is already becoming a collaboration of capabilities. It will not be the sole responsibility of an individual entity to make anything in the future. But by definition, there is the space where all the players intersect and interact. So, whilst agencies might contribute, along with others, the chance is there to redefine their role beyond singular creative outputs and towards creating a platform that offers new blends and new combinations of what’s possible with others.
Agencies are currently under a lot of pressure to deliver and have eroding margins; so, they are in desperate need for a cost relief. Cost relief usually comes from economies of scale and being able to make money off a specific solution by selling it to many customers. Advertising (as we know it) does not allow for this; the industry is based on creating a ‘new’ idea for every client, which somewhat requires re-inventing the wheel every time. This reinvention is a high-pressure and high-cost activity; and the best way to reduce these pressure and cost is automation.
Automation as a solution
Agencies can achieve automation by becoming a platform; one that is focused on building a product that requires a high initial Capital expenditure (CAPEX) investment in something that is likely to grow (i.e. Netflix, Facebook, Amazon) as opposed to services whereby the CAPEX is low and Operating expenses (OPEX) is high. Agencies are currently the latter: they pay high salaries to service-oriented individuals that work on what is required to meet a client’s needs, whereas clients invest in a product that they scale through the use of an agency.
A significant issue that agencies face in service provisioning is talent retention, especially with eroding margins. We are currently in a fast-paced service industry whereby new innovations and developments are spurring up at light speed. The minute a resource becomes highly specialized and very good in a specific service niche (i.e. developing social media activations), s/he will automatically have an extremely high value with a likelihood to be poached by more lucrative players in the marketing industry. The only way this resource will stay at an agency is if s/ he gets a revenue share, which is unconceivable in our existing agency structures; so, from their perspective, they either become a freelancer, start their own business, or move to the highest bidder (most likely a client, a management consultancy, or a social network).
How can agencies productize and automate their offering? We understand that this is a huge leap and would therefore recommend starting to look at it in small steps by automating parts of their offering. A specific part that comes to mind can be the project management offering of client servicing. If the kitchen is difficult to automate, what can they do to start automating the front of the house in their organizations?
Let’s look at this as a matrix (see below) where the X-axis maps “specialization” as in how much of a client’s marketing requirements an agency offers; and the Y-axis maps out “automation” as in how productized or how much of a platform the agency offering is.
Current agencies sit in the bottom right quadrant whereby they try to provide services to help all the marketing needs of a client. Judging by the state of agencies today, this does not currently look like a sustainable model.
The ultimate agency of the future (a fully digitally-transformed agency) would fit in the top right quadrant; this agency would represent to marketing what salesforce is to sales. It would be excellent, and we wish we could build it. However, based on both our experience across agencies and industries, it is a bit of a mirage due to numerous obstacles that no one has been able to crack (to-date).
A moderately successful agency would be in the bottom left quadrant. This is a highly specialized agency that offers bespoke services, somewhat like Google Zoo or its Facebook equivalent; one that is attached to or affiliated with a specific offering or platform. It is easy for such an agency to acquire enormous skills across the different facets of the niche that it operates in; however, it has a high risk due to its low diversification.
The most interesting example we see would be the top left quadrant. Can an agency become so specialized in its offering and so client-independent to the extent that it can package its offering into a product or even a platform? Can agencies provide an offering that its clients can purchase digitally with minimal human interaction? Can we create an agency that sells its services on Amazon or perhaps on an app store?
This article was published in Communicate’s Q1 edition. You can access the full magazine here.