It was a simpler time when advertising agencies began to “unbundle” in the 1980’s, separating media planning and placement from creative. This, along with the shift from remuneration systems predicated on commissions to direct labor-based fees, formed the basis for today’s advertising agency model.
While there were certainly variations on the aforementioned theme, this approach served both advertisers and agencies well for the next thirty years. However, as the advertising business became increasingly more nuanced and fragmented, the industry saw a rise in the level of specialization resulting in an increased number of agencies with highly concentrated service offerings. In turn, agency holding companies went on an aggressive acquisition binge gobbling up traditional and specialized agency brands. While there were some efficiencies gained by the holding companies in consolidating back-office functions, the acquired shops were allowed to continue to operate under their individual identities. In so doing, there was little to no cultural acclimation across the holding companies’ agency brand portfolios.
One of the notable consequences of this movement was that marketers saw an expansion in the number of roster agencies, which swelled beyond their ability to effectively manage their now far-flung agency networks. According to Manta Media, in 2020 over 57,000 agencies were operating in the U.S. alone, creating a highly fragmented and competitive marketplace for marketing services providers.
Concurrently, a once stable and manageable business sector was now having to deal with increased levels of complexity stemming from an expansion in the number of media types and outlets, the rapid adoption of changing technologies, the emergence of “Big Data” and an ever-evolving set of consumer media consumption behaviors.
Fast forward to the present and it is easy to understand the position shared by many who feel that the “agency model” is no longer effective and needs to either be fine-tuned or perhaps completely overhauled. These pundits believe that talent constraints, eroding margins, expanding scopes of work, a shift from retained to project-based relationships and the emergence of management consulting firms as viable competitors in the marketing services space have led to the demise of the traditional agency model.
While there have been numerous questions raised, there has been little progress made on client-agency relationship improvements, compensation schema and or agency positioning, let alone ideation around creating a new marketing services delivery model.
There clearly is no “silver bullet” and while we don’t portend to have the answer to remedy all of the challenges facing the industry, we predict that the ultimate solution may involve some of the following actions:
- Advertisers will streamline their marketing services agency networks with a goal toward eliminating redundant resources/competencies, clarifying agency roles and deliverables, establishing a “lead” agency and providing a framework for long-term, collaborative relationships.
- In-housing will continue as advertisers seek to improve their controls, gain line-of-sight into the disposition of their spend at each stage of the marketing investment cycle, better assess their return-on-marketing-investment and to drive working dollars. This will involve managed service models where the client takes ownership of the technology and data and engages the agency to plan and execute select components of their communication programs.
- Compensation programs will blend a balance of direct-labor and or project-based fee methodologies with gainshare and painshare components that link a portion of an agency’s remuneration to the advertiser’s in-market performance.
- Agency holding companies will “right-size” their brand portfolios, combining and or shedding redundant service providers, consolidating agency brands and developing “centers of excellence” to gain scale efficiencies and improve client delivery within key functions (i.e. broadcast production, digital production, programmatic trading, trafficking, etc.).
- Agency service delivery models will evolve to simplify advertiser access to the range of agency holding company resources through dedicated relationship management teams that can tap the entirety of a holding company’s offering.
- Management consulting firms and advertising agency holding companies will co-exist, and in fact, will be called upon to collaborate in providing their clients with integrated end-to-end solutions focused on both building brand and driving in-market performance.
Experience suggests that the best way to solve complex professional services challenges is to focus on the common denominator and craft solutions that ease the burden of the client organization in accessing those services. Thus, consolidation will play a key role for all stakeholders (advertiser, agency, intermediary, publisher) as the advertising industry considers how to evolve its current business models.
“The more you drive positive change, the more enhanced your business model.” ~ Anand Mahindra