What the advertising agency of the future might look like is anybody’s guess but one thing is crystal clear, it will look a lot different to what it looks like now, writes Ian McGrath.
There is clear evidence that businesses have realised the vital role that advertising plays in maintaining a healthy baseline and in growing both revenue and profit.
Delivering payback both over the immediate-term and the long-term, advertising is the equivalent of an intangible capex in a business. Add to this the advantages of consumer intelligence, operational efficiencies, and a safe and sustainable supply chain, and ad agencies are in a prime position to be growth partners for businesses.
The marketplace is transitioning out of a number of challenging years for businesses and concurrently experiencing rebirth of marketing best practice. Agencies are back in vogue!
Though, as always, the ingredients for success in agency land are fast moving.
Over the last number of weeks, the agency groups have shared their previous year’s results and their forecasts for 2024, outlining their strategies for the years to come. While there appears to be nothing too remarkable in the numbers, generally the trend is upwards, which is not bad given the tricky macro-economic environment in front of businesses over the last few years.
The agency groups need to look at five core areas in determining how to win.
Positioning
Textbooks will tell you that having a clear vision is a crucial element in the success of any business. And they are not wrong. However, what they don’t tell you is that a company’s vision is also generally homogenous to the sector they are in. This is arguably true for ad agencies. The vision for each ad group focuses on creativity, transformation or change, connections, and growth. This is all ok. It brings clarity to what they do.
But does not bring clarity to what separates one agency from another. Therefore, agencies are more distinguishable through their habits. ‘The reason habits matter is that they reinforce the desired identity and provide evidence of the type of agency it is’, loosely taken from “Atomic Habits from James Clear. This is also a good litmus test to see how much of an agency’s vision is true.
How to win. Agencies have gone all in on their data and what that can deliver across the marketing funnel, in change management, in brand equity growth, and as tangible business outcomes. Most data are derived from the same places. So, its not what you do, it’s the way that you do it.
Retrospective is great for learning, and while learning is important, we can currently see a live example that the current market is very different from the market of the past. How agencies win is by having a clear sense of how to create value in the current market and in future markets for clients, how they can remove the complexity of growth, and that they are willing to make tough calls to reach the communication goals. This is best delivered and demonstrated as a discipline or by the habits of an agency.
Structure
The pace of channel fragmentation blew up client rosters. A procurement nightmare and marketing teams spent more time in meetings than doing something. The race for specialisation was client driven and often the result of a lack of integration in marketing departments as their own remit expanded.
A clean-up on the client side has meant a clean-up on the agency side too. All agency groups have adapted their models. Whether it’s an end-to-end approach from Omnicom, Dentsu’s integrated experience, the fold up of WPP’s agency brands, or Publicis Groupe’s power of one. Agency groups are geared to being a one-sourced solution for clients’ marketing challenges, backed by multi-agency brand teams and integrated data sets.
How to win: Success in this new model is dotted. Reporting lines and politics can still be in the way. Agencies need to review their revenue structure to remove bias and improve operational efficiencies under this new approach. This also needs to be rebuilt as a discipline back into agencies, who spent the last decade becoming mini-groups of specialists.
There are some criticisms that agency groups are placing priority of data ahead of creativity. Tech & Transformation accounts for a third of revenue at Dentsu and Publicis Groupe revenues. However, I think that ‘creative is being left out in the cold’ is no more than a headline grab. Agencies are experts at making insights from information. The better, deeper, more business-related, whatever, the data is the better the likelihood of more durable insights and advertising. Simply, agencies need to show what advertising delivers to their clients, but more Bayesian than ad-hoc.
Organic growth is a strong performance indicator for agencies. However, there is opportunity for agencies to grow this between a mixture of products and services, not services alone. Services are time-based and subject to more scope creep than products. Given the focus that the agency groups have centred on data, and the current disruption across digital channels, products should be a key means of growing incremental revenue for ad agencies.
Iterations & Innovation
AI has been a focal point in the end of year results and forecasts released from each of the agency groups over the past number of weeks. Refreshingly, ad agencies are being relatively pragmatic about AI. It is not being oversold as ‘digital’ once was in its early days. This demonstrates an understanding of AI from agencies, recognising that its advantages should be layered in over time and be open-sourced to work operationally with the workflows and datasets of clients.
Agencies are taking the right steps in building their expertise in the application of technology and AI to communications. Generative AI will impact every role in agencies. Much of the understanding of Gen AI currently is around it’s relatively small use of creating more content efficiently and rewriting search copy. The reality is that Gen AI’s use will be broad based in agencies stretching end-to-end across teams and contributing to every function from strategy to account management, to execution, to measurement and tools, to talent management.
There is also space in e-commerce and consultancy that agencies are breaking further ground in.
As important as organic growth is as a performance indicator, investors will also want to see what the agency groups deliver using AI. Be it through building it or buying it in through acquisition and partnerships, AI, e-commerce, and consultancy gives agencies an excellent opportunity for expansion. And, future revenue is usually a good signal to investors, meaning the market caps of the groups should increase across the remainder of this decade.
How to win: There is a balance between pragmatism and outpacing the competition. A recent McKinsey global study found that companies that are quicker and take a broader adoption of innovation grew on average 2.1 times more than companies that are slower to innovate (tracked over a 10 year period).
The biggest lag to innovation is a cultural fear of failure. The scale and pace of what’s coming to the scene can be daunting for many people across agencies. Agencies should adopt a Trojan Horse approach to ensure the opportunities from AI are realised ahead of competitors and the vertical integrations of e-commerce and consultancy are embedded across the agency and not treated as a separate workstream.
How to Partner with Marketing Teams
The role of the CMO is in the spotlight again. Late last year, Forrester reported on a growing rift between the CEO and the CMO, citing that CEOs and their C-suites did not understand what CMOs do. My view is that these surveys must be missing something. More and more, in the real world, CEOs are pointing to the power of their brands in driving their businesses forward. Again, this seems like more headline grabbing. However, the CMOs role is broadening as businesses tackle uncertainty from transitions in consumer markets, the macro-environment, and the media market.
How to win: The agencies that are winning offer an objective view to help CMOs and marketing teams manage through this rapid transition. As well as many talent solutions, a better understanding of consumers, and a safer supply chain. Agencies will need to be a little more open-sourced to deliver this and that starts with knowing the client’s business from their side.
Most critically, agencies should know that at the top of every brief, whether written in the brief or not, is the question ‘how will this investment payback to the client’s business?’ Make sure to always be clear on the answer to this question.
Remuneration & SLA Management
Less complexity in the agency business models and the rollout of real-time plans should facilitate greater transparency between clients and agencies. And the wider adoption of WFA’s Project Spring initiative will ensure more of the client-agency relationship is based on value rather than cost.
How to win: Last month Contagious published a survey that showed that 81% of people from agencies felt that they were underpaid by clients. This number was 35% for client responses. Similarly, 38% of clients claimed they paid their agencies the right amount. Whereas this was 15% for agency responses. This disparity means two things: 1.) there is a lot of wasted work between agencies and clients, and 2.) just like in consumer markets, value is based on perception.
Agencies must ensure that their commercial relationships with clients are transparent, objective, and outcomes focused. And pay as much attention to managing the SLA in a contract, as they do to negotiate the terms in the first place. This keeps things tangible and focused, and less based on perception.
Agencies are on the right track.
The changing shape of ad agencies is nothing new. At their core, they are about creativity and connections. While this remains constant, the truth is that they are very different businesses today to where they were 20 years ago. As highly consumer focused businesses, the job will always be in the current market and the future market. This brings change with it, as it is always evolving to match its surroundings.
It is likely that ad agencies can lean into the remainder of this decade with a focus on profit growth derived from increased revenues rather than streamlining costs. The demand is in the market, it’s the wrong time for the ad groups to be too cautious.
The destination is bright, brighter than it’s been in a long time. The journey will be better.
To quote the American comedian and actor, “enjoy the ride. There is no return ticket.”
Ian McGrath is a marketing consultant and former media director with the Flutter-owned Poker Stars. He is also a former managing director and director of strategy of the GroupM-owned Mediacom. In addition, he was a former board director and EMEA business director with the denstu-owned Carat.
