Digital Requires the Remodeling of the Relic Agency Model

It is well known that big agencies have been struggling mightily, recently. From the multimillion-dollar accounts being switched without reviews to public laments that clients expect big ideas for free to procurement departments squashing out every last ounce of margin. Is this a temporary headache or is it a tide that cannot be turned back?

In this part one of two series, I will talk about the trends that are causing such disruption of the business model and processes that traditional agencies are built on. In part two, I will talk about the metamorphosis that traditional agencies need to undergo to survive and thrive in this new world.

The AOR (Agency of Record) Model Is Broken

In decades past, as both clients and their agencies got larger and larger, there were economies of scale to be had. And it made sense to consolidate work from dozens of small agencies to a single larger one, not only for consistency but also for cost savings. For example, larger agency groups wielded better negotiating power to secure clients better advertising rates with media companies; they could provide a global footprint for clients expanding into other markets; and they had the sheer manpower needed to execute all the moving parts. The upfront commitments of the AOR model enabled big agency groups to staff up to do the work.

But, times have changed. From a world where a single “big idea” creative would be used across a handful of channels like TV, print, or radio, we now live in a world where “digital” has introduced dozens of new channels, tactics, and disciplines – for example, SEO (organic optimization), SEM (paid search), social media marketing, mobile, etc. – each of which require very different skills and experiences to execute well. Clients are increasingly turning to smaller agencies that actually have track records and hands-on experience in these digital disciplines, and turning away from big agencies who claim they can “do that too.” Size and heft are no longer an advantage, especially when the depth chart shows few to no players skilled in the new disciplines.

Also, globalization is leading to further commoditization of the things agencies used to get paid for – the making of the TV ads and print ads, the buying of the media, production, etc. As procurement departments get more involved, they triple bid everything and there is usually a smaller agency with “offshore” resources and less overhead that claims it can do it for less. Even if the incumbent big agency does keep the client for the short term, the downward pressure on margins is unyielding and irreversible. Clients are also getting more savvy and unwilling to commit the “entire wad” upfront, so that they have more flexibility later to re-assess performance, make adjustments or reallocations, or spend their money elsewhere entirely. In this way, what used to be longer term commitments are now more project-like – with shorter timeframes, more tightly defined deliverables, and performance clauses. Without a long enough, large enough, or consistent enough commitment on the part of the advertising clients, agencies can no longer afford to maintain huge staff and overhead.

Finally, the massive attempts by holding companies to assemble leading agencies from within the family, each with different skillsets and disciplines to service the entirety of a global advertiser’s needs have met with limited or short-lived success. The oft-promised efficiencies and cost savings due to scale are more likely to be offset by the inefficiencies of communication and coordination among agencies that have not worked with each other before or are fighting for the same chunks of a smaller pie. Also, digital disciplines and channels don’t fit neatly into any of their respective functional silos, further muddying the relationships.

The new world is demanding a new kind of agency model.

The Pitch Process Is Broken

To this day, the vast majority of agency review processes remain euphemistically “five ring circuses.” An advertiser publicly declares it will put its business in to review; a short list of agencies is selected to participate; and pitch teams of the chosen ones scramble insanely to draft PowerPoints and rehearse in the all-too-short timeframe before the client presentation. In some cases, the competing agencies spare no expense in their attempts to put together the winning “big idea.”

But, times have changed. The big creative idea may not matter if the client is looking for an agency with more search and social media marketing track record, if one size (message) does not fit all, and if clients have already used crowdsourcing to generate dozens of good creative ideas for their consideration. Furthermore, in the “mad men age of TV advertising,” agencies could afford to go to great expense to create and then give away the big idea because clients are unlikely to go off and make the TV ads themselves. But today, clients can indeed execute many of the tactics themselves or find lower cost resources to do so; and most of them think they can do just that once they’ve collected good ideas from the various pitching agencies. The value that agencies provide should no longer be centered around just the creative idea or the scale and efficiency of production. Clients’ procurement departments are likely to have already vetted dozens of vendors and selected multiple approved vendors with lower costs and cost structures than big agencies.

Further, the pitch consultants who get paid millions of dollars to help advertisers manage the pitch process and vet the agency candidates face similar “depth of bench” problems. While they were perfectly fluent in all things “traditional,” they are usually far from savvy in all things “digital.” So when hotshot new agencies come in spewing jargon like Moby Dick, both the clients and the pitch consultants are ill-equipped to pierce through the billowing bull—-.

What advertising clients need is the right idea and right team with the right experience to execute it right. Because the digital disciplines are so new and evolving so fast, few big agencies have the expertise or track record to make a credible claim in the eyes of the clients. Smaller digital agencies may not have the global footprints or the heft to take on large global clients. And agencies who sell certain things – e.g., the making of websites, the buying of media, the doing of PR, etc. – are technically conflicted when making recommendations to clients on what tactics to go do; they are naturally biased to recommend the things they get paid for. Finally, clients need the right blend of strategy (setting the course for the ship) and experienced and efficient execution (having actually sailed a seven-sail super catamaran).

Clients in the new world are demanding new relationships with agencies.

If It’s Broke, Change It

So what can agencies from the “old world” do to not only survive but also thrive in the “new world,” considering the above? In the new world, the line between “traditional” and “digital” is also disappearing – clients are in need of a single agency that actually knows each of the disciplines well and does those disciplines well too. They need to also show a track record of integrating the campaigns across channels, not just claim they can do that too. My next column will delve into specific strategies agencies can deploy to start the process of organizational transformation.