Who gains most from the agency shift to strategic partnerships with clients?
Opinion
There will be winners and losers in this new world. The time is now for indies, which can price their services in a better way and be transparent in their use of data and money.
“The reality is that AI is eating the agency business.”
These words from S4 Capital accompanied another recent profit warning. The company was worth £4.5bn in September 2021 and is now valued at £124m.
It is increasingly clear that “faster, better, cheaper” is not the panacea that Sir Martin Sorrell thought it would be.
And it is obvious that there is not a lot of money in execution. It may be cheaper for the client, but it doesn’t make much money for the agency.
The future of agencies of many kinds will increasingly be determined by the business value they add, the relationships they build and innovation in services, products and platforms.
These will be charged in different ways to provide new and recurrent revenue streams, all attached to some form of incremental business result.
The winners will be agencies that provide high-level experience, expertise and customised technology that deliver true business growth, properly measured in the long and short term.
Successful agencies of the future will be able to advise clients impartially on the best permutations of content and channel across paid and organic options, taking all other factors into account, and then execute with maximum effectiveness and minimal cost.
This means understanding what works, specifically why and how in the client’s vertical, drawing on experience from a wider client and channel base.
The importance of being a reliable business partner will grow as data security, intellectual property rights and business risk gain in importance, resulting from the effect of AI in many aspects of business, not just advertising.
Agencies will need to be technologically expert, impartially advising their clients on which AI engines to use, not just their own, and cybersecurity will become a much bigger deal in requests for proposal.
There will be a renewed emphasis on a reduction in technology tools deployed and a minimisation of adtech in the supply chain — and agencies will be expected to actively participate in this.
Currently, the opposite is true.
Shift in network shops
The new agency business models will rely a lot less heavily on media trading and much more on a top-down ability to advise and execute flexibly and impartially.
Media execution will be AI-led and of low value to clients and the agencies themselves.
This transformation will be especially tricky for network media agencies, which have made media trading their main source of revenue for the last two decades.
Holding companies have long relied on their media agency networks to subsidise their creative units. This will be increasingly difficult when creative fees tumble further as AI replaces old practices and when the big platforms take a larger slice of both the creative and media cake.
Amazon is especially active, offering integrated creative and activation options, partnering Netflix on ad sales and expanding the reach of its DSP into other channels. Meanwhile, its own ad revenue hits new peaks.
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Network media agencies are going to have to increase principal-based media to compensate for losses in both creative and media, but among a smaller number of advertisers that opt into it. This will exacerbate the many problems this causes.
There is a lot of good work and thinking coming from within network media agencies, as amply evidenced by three recent articles in The Media Leader by Caroline Manning (no relation) and particularly the strategic role that agencies can play.
But it’s hard to be a strategic partner to clients if you can’t tell them which media vendors you have group deals with, what those deals are and how much you make from them, especially if you need more of them at higher extraction rates to offset losses in other companies.
Independents get into position
Independent media agencies are arguably better able to position themselves as strategic partners to clients, as they don’t have to adopt non-transparent trading practices to compensate for the loss of revenues in sister companies.
They also don’t have to trade in ways that drive those non-transparent revenues, leaving them free to plan independently of trading considerations.
This is important in a fast-moving market where client needs change daily and being “always on” means constant adjustment to plans based on myriad factors.
Independent agencies can also price their services in a way that more closely matches their costs and charge the right rate for their planning skills.
And they will be transparent in their use of data and money, and open to inspection. Compliance with contracts should cease to be a game of cat and mouse at last.
The7stars has proven that a strong agency can be built while trading media transparently and it isn’t the only one.
The7stars turns 20: ‘We’ve tried to create a business that we’re all really proud of’
Yes, this means such agencies will be lower-margin than network agencies, but the network agencies have been running too hot for years.
The independents will also not have the high-octane data and technology tools of the big groups — but these are not deal-breakers for the domestic clients they serve and there are off-the-shelf solutions.
Independent agencies will win fewer pitches where procurement is heavily involved, but they will be well-positioned with clients as trusted partners as strategy becomes a key denominator.
Big, international pitches will continue to be won by the AI-powered holding companies, where media and data are the “popcorn” and strategy is subservient to a set of numbers. But these will become increasingly zero-sum games where nobody wins except for shareholders.
The growth in importance of high-level business partnerships is a long-overdue, welcome trend. But there will be winners and losers, even among the independents, according to their ability to attract, retain and reward senior talent.
It’s a lot harder work than extracting more “value” from existing clients, but it’s a lot more interesting and, well, enjoyable.
For more on this (and much else), join us on 16 October at the Advertising: Who Cares? fundraising summit.
Nick Manning is the co-founder of Manning Gottlieb Media (now MG OMD) and was chief strategy officer at Ebiquity for over a decade. He now owns a mentoring business, Encyclomedia, offering strategic advice to companies in the media and advertising industry, and is non-executive chair of Media Marketing Compliance. He writes for The Media Leader each month.
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