5 ways for agencies to succeed
Opinion
The market is looking brighter, so it’s the wrong time for agencies to be too cautious. But, as always, the ingredients for success are fast-moving.
There is clear evidence that businesses have realised the vital role advertising plays in maintaining a healthy baseline and in growing both revenue and profit.
Delivering payback both over the immediate and long term, advertising is the equivalent of an intangible capital expenditure 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.
But, as always, the ingredients for success are fast-moving.
In recent weeks, agency groups have shared their results and forecasts. While there is nothing too remarkable in the numbers, generally the trend is upwards — not bad given the tricky macroeconomic environment.
Agency groups need to look at five core areas in determining how to win in the current climate.
1. Positioning
Textbooks will tell you that having a clear vision is a crucial element in the success of any business. What they don’t tell you is that a company’s vision is also generally homogenous to the sector it is in.
This is arguably true for agencies. The vision for each agency group focuses on creativity, transformation or change, connections and growth. It brings clarity to what they do.
But it does not bring clarity to what separates one 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,” as 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. But most data is derived from the same places. So it’s not what you do, it’s the way that you do it.
Retrospective is great for learning and, while learning is important, we can see 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 how they can make tough calls to reach their goals.
2. Structure
The pace of channel fragmentation blew up client rosters. 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 folding of WPP’s agency brands or Publicis Groupe’s power of one. They are geared towards being a one-sourced solution for clients’ marketing challenges.
How to win
Reporting lines and politics can still be in the way. Agencies need to review their revenue structure to remove bias and improve operational efficiencies. This approach also needs to be rebuilt as a discipline for agencies, which 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 and transformation accounts for a third of revenues at Dentsu and Publicis. However, “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 the data is, the greater the likelihood of more durable insights and advertising. Simply, agencies need to show what advertising delivers to their clients, but be more Bayesian in doing so.
Organic growth is a strong performance indicator. There is opportunity for agencies to grow this with 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 agency groups have centred on data, and the current disruption across digital channels, products should be a key means of growing incremental revenue for agencies.
3. Iterations and innovation
AI has been a focal point in the end-of-year results and forecasts from each agency group. Refreshingly, AI is not being oversold as “digital” once was in its early days. This demonstrates an understanding that its advantages should be layered in over time and be open-sourced to work operationally with clients.
Much of the current understanding of generative AI is around its relatively small use of creating content efficiently and rewriting search copy. The reality is that generative AI’s use will stretch to every function, from strategy to account management, to execution, to measurement and tools, to talent management.
There is also space in ecommerce 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 agency groups deliver using AI. Be it through building it or buying it in through acquisition and partnerships, AI, ecommerce and consultancy give agencies an excellent opportunity for expansion.
Future revenue is usually a good signal to investors, meaning the market caps of these groups should increase over the remainder of this decade.
How to win
There is a balance between pragmatism and outpacing the competition. A recent McKinsey & Company global study found that companies that are quicker at and take a broader adoption of innovation grew on average 2.1 times more than companies that are slower to innovate.
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.
Agencies should ensure the opportunities from AI are realised ahead of competitors and the vertical integrations of ecommerce and consultancy are embedded across the agency, not treated as a separate work stream.
4. How to partner with marketing teams
Late last year, Forrester reported on a growing rift between the CEO and the chief marketing officer (CMO), citing that CEOs and their C-suites did not understand what CMOs do.
Actually, more and more in the real world, CEOs are pointing to the power of their brands in driving their businesses forward. The CMO’s role is broadening as businesses tackle uncertainty from the transitions across consumer markets, the macro environment and the media landscape.
How to win
Agencies that are winning offer an objective view to help CMOs and marketing teams manage 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 down or not, is the question: how will this investment pay back to the client’s business? Make sure to always be clear on the answer.
5. Remuneration and SLA management
Less complexity in agency business models and the roll-out of real-time plans should facilitate greater transparency between clients and agencies.
And the wider adoption of the World Federation of Advertisers’ Project Spring initiative will ensure more of the client-agency relationship is based on value rather than cost.
How to win
Contagious recently published a survey that showed 81% of people from agencies felt they were underpaid by clients. This figure was 35% for clients. Similarly, 38% of clients claimed they paid their agencies the right amount, whereas this was 15% for agencies.
This disparity means two things: first, there is a lot of wasted work between agencies and clients; secondly, just like in consumer markets, value is based on perception.
Agencies must ensure their commercial relationships with clients are transparent, objective and outcomes-focused. And pay as much attention to managing the service-level agreement in a contract as they do in negotiating the terms in the first place. This keeps things tangible and focused, and less based on perception.
On the right track
The changing shape of 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, as it is always evolving to match its surroundings.
It is likely that agencies can lean in to the remainder of this decade with a focus on profit growth derived from increased revenue rather than streamlining costs. The demand is there; it’s the wrong time for agency groups to be too cautious.
The destination is bright — brighter than it’s been in a long time. The journey will be better. As George Carlin proclaimed: “Enjoy the ride. There is no return ticket.”
Ian Mc Grath is chief operations officer, media, at Dentsu Ireland