The on-going evolution of the agency business model

READING TIME: 5 MINUTES

Is the current business model for agencies broken? Well, that depends entirely on who you speak to. Andy Pontin, CEO of creative agency Clemenger BBDO, is a firm believer that it is but he reckons this is nothing new. “It’s been challenged and broken by every new wave of marketing innovation and technology, from old-school direct marketing and sales promotion, to digital, e-commerce, media fragmentation, social, content, MarTech and ad tech,” he says.

Also coming at the question from a creative standpoint is Kimberlee Wells, CEO of Whybin\TBWA Group. She says the model isn’t so much broken, rather it’s experiencing an unstable fracture. “The kind that has the chance of progressing and causing further damage,” says Wells. The reason, according to Wells, is shrinking margins. “Traditional agencies, working in traditional ways are still producing highly creative and effective work. But increasingly, margins are being squeezed making the cost of producing the work in this way highly unprofitable,” she says.

But before you start to think it’s only those on the creative side of the equation feeling the pinch, Jason Dooris from Atomic 212 says the model of today’s media agency is also under threat. “Direct fees have been low-balled to a point of negative return to agencies, forcing them to find backdoor profits,” he says.

Dooris puts this down to the increase of marketing technology which has shifted the importance of accountability, something that hasn’t been matched by agencies increasing their capabilities across departments. From a client perspective, the time of marketers is being dominated by the need to manage resources and multiple partners putting an increased importance on agencies to streamline communications and workflow. Agencies are also expected to be skilled collaborators working with numerous other parties to achieve the desired outcomes which takes time and time invariably costs money.

Combine all this with an increasing number of brands taking their marketing activities in house and you’ve got a recipe for trouble as far as agencies and their business models are concerned.

Of course, it won’t always be this way as the industry continues to adapt to change. Clemenger’s Pontin says: “It’s this constant barrage of change that makes the industry so resilient.” Today’s business models could soon be a thing of the past.

“Models tend to go through cycles,” says Wells. “Not so long ago, everyone wanted specialist agencies for specialist tasks. Now, after collecting more agencies than they can manage, they want greater efficiency. So I think we’ll see a return to the multi-service agency. But only if agencies are keeping themselves current.”   

Last year, Clive Sirkin, then Chief Marketing Officer for Kimberly-Clark, suggested agencies should adopt an Uber-like approach: managing the traffic without owning the ride, or in the case of agencies, owning the relationship with a client, the strategy and data without owning the execution. Pontin points to a similar setup where instead of having all of the required staff in-house to execute potential client work, calling on the necessary talent as and when needed thus reducing overheads. It’s this sort of thinking that’s also guiding Tom O’Keefe, CEO of US agency O’Keefe Reinhard & Paul. O’Keefe, a DraftFCB veteran, used Hollywood and the way production companies call on a collective set-up as the foundation for the business. Professional services firms such as Accenture Interactive that are working in similar spaces to agencies also do this but they don’t beat around the bush when they call it “outsourcing”. It’s what allows them to achieve large-scale projects without blowing their client’s budgets.

The business model of agencies in a world of in-housing

For media agencies, Dooris sees more clients taking buying in-house in the future to ensure transparency, data integration and service levels. As such he sees the role of media agencies shifting to service smaller clients that don’t have the resources to set up an in-house team while providing consulting services at the top end. Wells also sees more embedding of services within client operations. She says: “Our clients are building out very sophisticated digital and data operations. It makes sense that elements of our model stay close to these areas as the engine room to drive insights that ultimately make the work better.”

That’s not to say agencies will disappear altogether and Dooris says there is an opportunity to re-define the offering so that agencies indispensable. He says: “Media agencies, collectively, need to build trust and transparent pricing so that clients can start to understand the true cost of the media service and its components. Clients will become educated that they are receiving certain elements of media buying below the cost they could obtain internally.”

From a creative perspective, Wells also believes the industry needs to work together. She says: “I’d like to hope the industry can band together to change the overall perception of how creativity is viewed. We must broaden the lens on what creativity can solve from ‘advertising’ to ‘business-critical’ challenges.”

And in order to become indispensable, agencies have to take risks. Wells says: “Agencies will need to take some bigger risks with their own thinking and embrace skillsets not traditionally found in agencies. It’s not about having token direct, data and digital monkeys to roll out when the clients ask but rather having these skillsets organically baked into the service offer.”

All of this will have a broader impact on the industry and the people within it. Wells believes a cultural shift is coming driven by the skillsets required by this altered agency model. She says: “The people who used to be hidden in the corner will take centre stage. Revenge of the nerds just got real.”

While today’s agency model might soon fall by the wayside, whatever you do, don’t suggest these businesses are living in the past. Pontin says: “It’s laughable that ad agencies are portrayed as being dinosaurs. We’re amongst the most agile and adaptable industries on the planet because we’ve always had to be.”

The business might change but if you’re picking up what Pontin is putting down, next month’s Agency Leaders Symposium certainly won’t be the last.

Hear O’Keefe, Pontin, Dooris and Wells discuss agency business models at the Agency Leaders Symposium, September 6 & 7 in the Hunter Valley.