The traditional ad agency model is fading. Overstretched by the pace of technological change and sluggish to respond in any meaningful way, agency conglomerates have begun to invalidate their own model. And they cannot acquire their way out of this conundrum. Instead, they must attempt to duplicate the specialized, lean model of the independent agencies they have swallowed up.
In 2016 and beyond, winning agencies will need to organize like military Special Operations teams—small, nimble groups that operate under a single banner—and integrate brand strategy, demand generation, and marketing technology into one cohesive unit.
Until ad conglomerates adopt this model, independent agencies will have a strategic advantage, especially in digital marketing.
The Dying Old Model
The agency of record model, preferred by conglomerates, is based on a false promise: "we can do it all."
Advertisers, such as Bradley Jakeman, president of PepsiCo's global beverage group, have called the bluff. No longer able to rely on a single agency, PepsiCo now uses a combination of agencies and new media content shops.
At the Association of National Advertisers' Masters of Marketing conference in Orlando, Jakeman told the crowd that "the agency model is not going to bend, it's going to break.
"Agencies will continue to see more and more projects leaving them…They will get a smaller and smaller share of the pie," he added.
We can already see hairline fractures in the agency model. An unprecedented amount of business—$26 billion as of July—went up for review this year, and so-called "Reviewaggedon" continues.
In some cases, like Kraft Food Group, cost seems to be the primary reason. Following Kraft's merger with Heinz, Adweek noted that Kraft spends $500 million annually on US media compared to Heinz's $42 million.
Reviewaggedon is fueled, in part, by data and technology. Some 20 years ago, advertisers didn't necessarily know when their ROI on TV, radio, or billboards was subpar. In sharp contrast, digital marketing provides advertisers with enough transparency to analyze performance and question the efficiency of traditional analog spending.
Technology and Silos
Transparency undermines the traditional agency model. So do the new revenue models of digital marketing. David Jones, founder of You & Mr Jones and former CEO of Havas, asserts that the big agencies are tech-shy because "most existing technologies undermine their hours-based legacy model... even the most advanced of the big holding companies has more than 65% or 70% of their revenue coming from the traditional industries."
Unsurprisingly, many advertisers feel that agencies have failed to keep with the times. That feeling is well-documented in From Mad Men to Sad Men, a report commissioned by the UK's Institute of Practitioners in Advertisers (IPA). The researchers found a "relationship breakdown" between agencies and clients, who feel that agencies no longer understand their business, their Millennial customers, and the nuances of digital engagement. As one interviewee put it, "It is now all about creating engaging experiences, most agencies seem to have missed this shift, still thinking it is about communications."
Though advertisers like PepsiCo seek out independent agencies to create these "engaging experiences," the conglomerates have been gobbling up the independents. WPP, Omnicon, and Publicis Groupe collectively acquired 84 companies in 2014. Yet the big agencies still struggle to create "engaging experiences" because conglomeration creates silos. Subsidiaries can't integrate their specialties across the daunting bureaucracy.
The big three agencies are cognizant of this problem.
To eliminate silos, Publicis announced plans to reorganize into four subdivisions: Publicis Communications, Publicis Media, Publicis.Sapient, and Publicis Healthcare. It seems like an answer to WPP's painfully named "horizontality," also an effort at integration. These decisions may be better publicity than practice. Avi Dan, an agency search consultant and Forbes contributor, argues that the Publicis reorganization actually creates new bigger silos by barricading creative, media, and digital into separate castles. He suggests that such "agencies may simply be too big to be good."
So let's review the situation... Marketers want lower costs and tech-savvy agencies that specialize rather than pretend to do it all. To find this solution, marketers are putting more business up for review, sometimes ditching the agency of record and farming out work to multiple independent agencies. However, the conglomerates are acquiring tons of these independent agencies and trying to integrate them, with limited success. If this continues, I agree with Jakeman: the agency model will break.
To stay relevant, I believe agencies will adopt what I call the "Special Ops" model.
The Special Ops Model of Marketing
Independent agencies seem to have an edge over conglomerates because they weave small, collaborative teams into one cohesive whole. It's not unlike the U.S. Joint Special Operations Command (JSOC), which groups the Army, Navy, and Air Force's most elite units under one general. Each group has a distinct skillset, and the JSOC integrates them to handle just about any situation.
For marketing Special Ops, three distinct areas are needed to create a cohesive unit:
- Brand strategy
- Demand generation
- Marketing technology
That trio simply mirrors the new organization of marketing departments. Surely you've heard all about the rise of the chief marketing technology officer (CMTs), chief digital officer (CDO), chief strategy officer (CSO), chief experience officer (CXO), and their VP-level equivalents, all of whom report to the CMO. Those roles all fit into brand strategy, demand generation, and marketing technology. They are sub-commanders of these Special Ops group, to run with our metaphor. They need agency counterparts that want to adopt new strategies, techniques, and technologies.
Could the conglomerates use this Special Ops model? Could they organize their subsidiaries to have brand, demand, and tech specialists work in concert on every account like independent agencies do? If so, perhaps they can go from mad men to sad men to whatever is next (rad men?). Until then, independent agencies will have a competitive edge.
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Technology is the anvil on which the marketing industry will be hammered into something new. Conglomerates must absorb the lessons of the independent agencies and the Special Ops model.
Like dozens of industries disrupted before it, the $272 billion dollar advertising world can either choose the terms of its transformation—or wait to be blindsided.