The Future Of Advertising Agencies [And The Exponential Irrelevance Bomb]

On two recent podcasts, here and here, we discussed the future of the industrial advertising complex and made a prediction that big brands would take their agency competencies in house, which this week came true:

So why is this type of acquisition happening in the market?

Well, here’s my take on it…

A Diminishing Traditional Value Exchange

Big brands have paid creative agencies tons of money for one primary reason – creativity.

It’s an organizing principle that the entire advertising industry has been built on. In the traditional days of “Ad Men“, it was relatively simple to deliver on the creative mandate for clients, because there were only a handful of channels to execute on e.g. TV, radio, print, which in effect meant that the target consumer was easy to reach and tell a great brand story to.

But then digitization came along, which gave birth to a plethora of new digital platforms and channels, and this gave rise to consumer media consumption habits that shifted away from the traditional channels and towards the shiny new digital networks of the Internet.

So today, you have a situation where the expectations of big brands in terms of creative outputs haven’t changed, but the agencies have a much harder job on the table; namely how to tell a creative and impactful brand story to a consumer that is in the throes of fragmented media consumption and almost inevitably, is becoming increasingly harder to reach and engage with.

All of this culminates in a steadily diminishing value exchange between agencies and big brands. Clients still expect great creative work, but agencies are now under increasing pressure to deliver on it in the same fashion and standard that they have achieved in the past.

So, in many instances, you have this situation where client expectations are not being met from a creative performance and communications perspective, which forces brands to question the underlying agency relationship, and with erosion over time – the traditional agency proposition all together.

The Great Agency Cull Has Come and Gone

With the emergence of a digitally enabled economy; traditional agency networks scrambled to acquire the specialist skills of smaller digital agencies.

Not so long ago, if you built a competent digital agency, you had a strong possibility of an exit and acquisition to a global network. Ogilvy’s acquisition of Gloo and Publicis’ acquisition of Machine are just two in a long list of acquisitions that took place, to support the new traditional agency network vision of a ‘full service’ or ‘360 degree’ market proposition – in essence, a promise to their clients that the network could take a brands message and story into a modern day, digitally enabled communications economy.

But it’s a modern-day myth. While big agency networks talk integration, there is, in reality, very little integration. The only companies that can truly promise integration are the ones that started out integrated. Briefs often enter an agencies operational process and several weeks later, clients are still waiting for a strategic or creative response. This is a manifestation of the lack of integration between a subsidiary group companies that form a 360-degree proposition, and clients are waking up to this fact.

Big agency networks are suffering from the same thing as legacy institutions: Organizational Arthritic Inertia (OAI). So, to offset their own organizational pressures, big brands today are almost forced to ask for agility and speed from their agencies, but the lack of true integration (not just bums in seats in the same office) is making this new- found pressure an almost impossible task to successfully deliver against.

A Linear Industry Unprepared For An Exponential Irrelevance Bomb

The advertising industry has been on a linear trajectory since its inception, but there is an exponential irrelevance bomb coming. This is largely being driven by advances in modern technology and a digital ecosystem that is becoming increasingly networked, complex and fragmented.

The reality is that informed executives know that this exponential bomb is coming – a digital world, which will only become increasingly harder to adapt to in a real-time fashion from a brand and communications perspective.

So, if the incumbent agency networks are not in a position to help defuse the bomb for big brands, then one can hardly blame them for wondering whether they should take the entire agency cost centre and bring it in-house.

By doing so, it would open the doors to a more collaborative partnership with the agency, faster turn-around times, and an enhanced creative process and ultimately creative output. The Shiseido acquisition is the first, but probably not the last of this type of big brand move that we will see…

A Broken Agency Business Model

The writing has been on the wall for some time. In October 2015, the President of PepsiCo – Brad Jakeman spoke at length about how the traditional agency business model is becoming increasingly irrelevant. Some key quotes from that talk:

“Yet agency CEOs are sitting there watching retainers disappear … they are looking at clients being way more promiscuous with their agencies than they ever have.”

Continuing the rant, he said:

“The global alignment agency is a dinosaur concept. I am really worried that this model is not going to bend — it’s going to break if we don’t really think about how to innovate.”

Then, earlier this year, P&G’s Chief Brand Officer Mark Pritchard called for agencies to literally ‘grow up and clean up’. Note: P&G spend $72 billion a year on digital media alone which makes them the largest buyer of digital media in the world.

But perhaps the biggest indicator of a business model that’s coming under increasing pressure, is this one where Scott Galloway’s shared an insightful piece of data last year, which revealed that the global advertising market is dominated by the duopoly of Google and Facebook.

When you compare the market capitalization of the industrial advertising networks to that of Google and Facebook, it stands to reason that the traditional agency business model simply cannot compete with the forward-looking business models of disruptive competitors.

An Industry Ripe For Disruption

The freelance market is booming – both globally and in South Africa. In the UK last year, “the freelance market contributed £109 billion to the UK’s GDP last year” – that is greater than the entire automotive industry combined. Freelancing is a very real thing that is more than likely to impact the future of work – especially for agencies.

Interestingly, the big agency networks are all too aware of this. When big agency pitches take place, the work is more often delivered by freelancers. It’s a low risk strategy adopted by agency networks that has the potential to produce massive rewards.

Also, with South Africa’s labor laws, it no longer makes sense to take the risk of employing a senior “bad apple” on a permanent basis, when you can pick and choose from a pool of highly skilled resources and enjoy the same results.

Who Really Owns The Client Relationship

There is a school of thought that suggests that the key client relationships sit with the agency networks but in reality, the relationships sit with the senior people servicing the account. When these senior people leave an agency network to go freelancing, it opens the door for key client relationships to leave with them.

When a big brand appoints a new Chief Marketing Officer (CMO) in some instances, the new CMO has a preferred agency because ‘they have their own people (agency) that they trust and that they know can deliver the kind of results that they want’.

So, if the freelance market is growing and the key client relationships sit with people and not the networks, then the future of agency network capabilities looks very likely to evolve from where it is today, to eventually take the form of a freelance or hybrid business model.

This would significantly reduce the current and exorbitantly high cost structures that exist inside agency networks and afford them the opportunity to adopt a more agile approach to building brands in a modern digital economy. A digital platform that connects freelancers to big brands is all that is required to make this happen… and at scale.

Conclusion

So, are we going to see the death of the industrial advertising complex? Well, we’re seeing big brands do what has never been done before; building an agency inside their own corporate structures to support the ambition of being more responsive – not reactive – to an increasingly complex digitally enabled communications economy.

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