State of the Ad Agency

October 14, 2010 § Leave a comment

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The ‘ad’ agency industry is an estimated $60B industry with more than 38,000 agency related businesses with more than 10 employees and more than 100,000 freelancers[1].  In a word, the ‘ad’ industry is HUGE.  However, over the past 3 years there have been significant changes to the industry landscape.  Consolidation, concentration and termination; consolidation among agencies due to economic conditions, concentration of services and expertise and finally for those that have not been able to adapt – termination.

Traditional advertising agencies face significant difficulties.  Clients are shifting more and more of their business to digital shops as consumers turn away from traditional media channels that built the agency industry and toward more interactive media channels that align with their interests and needs.  The traditional agency has been forced to build new interactive competencies quickly in order to succeed.  But how?  Either they build it from within or they look to partnerships that can quickly and effectively provide them the expertise without the need for added expense.  However, it is not simply a matter of expense; more importantly, it’s a matter of attracting, acquiring and retaining talent, capital and resources in order to compete – the marketplace is becoming increasingly competitive for talent and resources. [2]

Many of today’s traditional agencies fail to help marketers (brands) engage with consumers, who, as a result, are becoming less brand-loyal and more trusting of their peers. To turn the tide, marketers have moved to the ‘Connected Agency’ — one that shifts: from making messages to nurturing consumer connections; from delivering push to creating pull interactions; and from orchestrating campaigns to facilitating conversations and fostering brand engagement. [3]

Innovation in the area of advertising and marketing and the need to develop messaging that is highly targeted and relevant based on the consumer and the experience they seek has become a necessary competency for agencies to succeed.  Traditional advertising is not dead!  It is simply being re-invented as consumer behavior and habits change along with technology that enable them to customize their experience.  The need to merge the offline and online is essential to maximizing reach and impact for the brand.  As a result; it is no longer feasible for agencies not to offer digital capabilities, however, many traditional agencies that are looking to evolve, face the challenge in acquiring talent, capital and resources.  The digital agency is the best positioned to attract and retain top talent, along with securing the capital and resources that are needed to sustain the business.  It is here where they converge and the opportunity becomes apparent for both digital and traditional agencies to develop partnerships and create alliances that serve their client’s needs and achieves their objectives.  These partnerships have become more common practice and has led to the creation of shared opportunities and successes.

With interactive agencies and departments maturing, the agency landscape is starting to solidify. While there is no monolithic model for success, agencies of all type; large and small, traditional and pure-play; face similar challenges. As many of their services become commodities, the challenge facing agencies is finding their optimal structure and proving their differentiation. Agencies must cultivate and sell to clients the features that make them indispensable. Agencies confronting a challenging economic environment and advertiser ambivalence must start to rethink pricing, structure, and, most important, how they market themselves.  Traditional agencies are having a difficult time competing with ‘pure play’ agencies that focus on one or two strengths – they are being forced to either adopt or partner in order to compete and expand on their value proposition.[4]

The DMA in an effort with their Marketing Technology and Agency Councils commissioned and independent study that consisted of extensive interviews and surveys with over 100 senior executives represented across both the marketing services, marketers and technology industries.  The purpose of the study was to uncover the challenges agencies and their technology providers face in an ever-changing consumer driven environment among some of the findings are more compelling reasons for agencies to rethink and reinvent their market positions.

…agencies are in the midst of an unprecedented wave of restructuring initiatives that typically include brand repositioning, service expansion, talent development and experimentation with new pricing models…

 Marketing technology providers—in pursuit of anticipated future revenue—have recently increased their investment in the agency channel, offering education and customized products.

 Panelists say that few “traditional” agencies—basing a multichannel execution platform around a foundation in offline creative work—have been able to rapidly adapt and expand their capabilities to effectively satisfy these needs. The result has been an influx of new players and specialists vying for “a piece of the action.”

84 percent of marketers at least partially rely on their agencies to manage these outsourced vendor relationships.

 It is not, panelists said, particularly essential for strong agencies to “own” all conceivable online execution capabilities, so long as the agency brings a strong understanding of applicable media tactics as well as a network of partners to call upon in order to meet their clients’ campaign needs. This is especially critical as applied to emerging media, where marketers are typically hesitant to invest given uncertainty over channel return-on-investment.

 Agencies are currently meeting marketers’ interactive demands through a mix of in-house systems and partnerships with third-party vendors (Approximately 35% of all interactive/digital/technology work being proposed by agencies as part of an integrated campaign/strategy is out-sourced to vendor partners). 

 More and more, agencies are being challenged to provide measurable performance improvement and technology expertise. However, many lack the deep technology roots, resulting in a market gap that is increasingly being filled by specialist shops (and, in some cases, the actual technology developers) who are adding creative and data capabilities—transitioning to “agency models” in their own right—to fulfill client demand.

The challenges are daunting. But significant opportunities exist for agencies that evolve intelligently and quickly to meet growing marketer demands—providing, of course, that they embrace the critical role that technology will play in both strategic development and creative execution.[5]

In conclusion, the need for agencies to adapt is clear and essential to their success; however, there are many obstacles and constraints that are preventing agencies from internalizing the technology and digital competencies.  As a result the need for technology and digital expertise is indeed an area which agencies are exploring and utilizing partners specializing in the area in an effort to deliver a more cohesive and integrated marketing solution.

[1] U.S. Census data for the industry described in their NAICS industry code 5418, Advertising and Related Services – 2008

[2] Forrester – Agencies Must Build Digital Skills to Survive by Peter Kim with Christine Spivey Overby, Sarah Glass, Emily Bowen – April 2008

 [3] Forrester – The Connected Agency, Marketers: Partner with an Agency That Listens Instead of Shouts by Mary Beth Kemp and Peter Kim with Jaan Favier, Kim Le Quoc, Evadne Cokeh, Alice Bresciani – February 2008

 [4] Forrester – The Essential Agency; Positioning Interactive Agency Offerings As Marketing Needs Evolve by Marissa Gluck With Aram Sinnreich, David Carr, Janis Kim, Rudy Grahn – January 2002

[5] State of the Agency: Digital Marketing and the Technology-Driven Ecosystem – A Sponsored White Paper from the Direct Marketing Association: Marketing Technology and Agency Councils – September 2008


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