Rather than a clickbait headline and unfounded predictions, I'm going to make some educated suggestions based on wider market insight about how the digital/advertising industry is likely to change. 

So, clichés aside, I’ll cover some of the key trends and market forces behind the changes, and crucially what it will mean for businesses in this industry.

The value of current agency services is decreasing mainly thanks to technology 

As time goes on some of the key services that agencies offer will lessen in value as they become commoditised or automated.

For example, will developer skills become commoditised when remote developers drive down the cost but work to the same standard? Will media buying still be valued when automated media buying can do the job? Will UX designers still be as valued when websites are generated by algorithms based on consumer preferences?

While we are still some way off this coming fully to fruition, switched-on agencies have seen this coming and adapted their offering. We’ve seen the growth of “customer experience” services (and yes, I know we’ve all been selling “multichannel strategy” and “holistic marketing” for years, but they're not quite sold in the same way). 

It’s here that agencies have managed to start building a bigger footprint inside clients' businesses, gaining more revenue from accounts and driving more (attributed) revenue for clients. 

So, what’s next, where will the value be for agencies? You can see below the changes in interest (in terms of web searches) in three key trends within the UK over the last five years, with “digital transformation” starting to pull closer to "customer experience" and "marketing services". 

 

The reality is lots of businesses still aren’t using digital to their advantage. 

Yet digital transformation is nothing other than a business strategy, and as with other business strategies, the decision usually comes from the top. Such a decision paves the way for high value agency engagements and agency influence across the whole client business.

With CMOs predominately being given the remit for digital transformation (not CTOs) this means agencies have an opportunity to offer digital transformation services to clients they may already work with. This is where the future value is for most agencies.  

New sources of competition – the threat from consultancies 

Consultancies (the likes of Accenture, Deloitte, PwC at a global level) are poised ready to contend on the digital transformation front against agencies. And they have an upper hand. 

Consultancies have been working with the top management for some time, meaning they already have an in at the highest level, whereas most agencies will rely on their marketing contacts to climb within the business to be able to sell in these services. But consultancies are tackling this issue by building partnerships or buying agencies to fulfil their proposition.

In turn, agencies will need to strengthen their proposition with partnerships with smaller consultancies and technology providers to provide them with a strategic advantage. 

Agencies need to get better at positioning themselves

With the changes discussed above, it’s likely that many big agencies will be partnered or acquired by leading consultancies. Meanwhile, the super niche small agencies will still be able to provide specific services. But those in the middle are those most in danger.

The irony still gets me. Look around even now. How many agencies do you know who offer “full service marketing” aimed at “any business with a website” who have an “open and collaborative approach”. These are the agencies who are going to feel the squeeze as the above trends develop, and who really need to start thinking about their place and offering in the changing market. 

Insourcing and agency efficiency 

Digital transformation by its very nature impacts most business functions across a business and takes time. More skills are likely to be brought in and developed by clients in-house. And when the transformation is finished, what then is the role of the agency?

Agencies are likely to develop more in-sourcing offerings to help train and offer high level guidance to inhouse teams. This of course means that the skill sets required within agencies will change with higher level, broader “T” shaped people becoming more valuable than vertical specialists. 

Before that point, however, agencies today need to really take a long hard look at their efficiency in delivering services. Recent research from accounting business Kingston Smith into the UK’s top 50 advertising agencies revealed that operating profit margins are at their lowest level in seven years. This fall is mainly attributed to rising staff costs and operational costs (technology, office space etc). But to be as competitive in this changing marketplace it’s likely that agencies who get ahead will consider new working arrangements – from co-working or remote workers to more freelance contracts instead of full-time employees.

So, to sum up, the only thing constant is change.

How is your agency getting a head start in planning, defining and changing its offering to stay ahead? And what changes have you noticed in the marketplace? 

Further reading:

Katie Kelly

Published 16 June, 2017 by Katie Kelly

Katie Kelly is a B2B marketing consultant at Subject Consulting and a contributor to Econsultancy. You can follow her on Twitter or connect via LinkedIn.

2 more posts from this author

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Peter Haarmark, CEO at Ydigital Asia

Hey Katie. Great points. Likewise you can say that consultancies are facing competition from agencies that manage to build a hybrid consulting / agency / tech model. We meet clients every week that refer to the big consultancies as "power point factories" and turn to partners that can execute. Will for sure be interesting to see if the rumours are true and Accenture or similar acquire one of the big agency groups in 2017 . Peter / CEO / Ydigital Asia

2 months ago

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Daniel Alb, UX Design Lead at Monsoon Consulting

Great post, Katie. Interesting tension there between agencies having to specialise to survive while employing more "T" shaped people. Owning a space and providing end-to-end service on it is a great insight for agencies.

about 1 month ago

Craig Hanna

Craig Hanna, Digital Business Consultant at the-gma.com

Interesting article. I think what we are seeing is the "digital disruption" of the very sector pushing the disruption agenda. Technology has productised key activities (programatic media buying for example) and allowed/enabled clients to take more services in-house. Technology is not the only reason for this trend but a significant one.

Margins at most levels are being hit. Clients are expecting more complex solutions but are not prepared to release the budgets needed. This leads in turn to more automation. Take website build. The lower end has become commoditised by WordPress etc and the mid enterprise is following suit. Why pay over and over for features that can be built once, used often. Why pay agencies for changes (outside of the standard WYSIWYG editor) when low code solutions and other productivity solutions like ours (www.cohesion.co.uk) make these changes faster, simpler and without the reliance of expensive, hard to find developers.

As you rightly point out future margins will be based on what can't (yet) be replaced by tech. Hard thinking, creative excellence, business and service design. For the rest its the age of the machines in a marketing ecosystem based around internal client teams rather than large agency operational teams.

about 1 month ago

Katie Kelly

Katie Kelly, Marketing Consultant at Subject Consulting

Hi all. Thanks for the comments.

Peter - Oh yes, that will be interesting. True - One of my connections on Linkedin also raised a good point I failed to acknowledge - "It's definitely coming, Katie, but we also need to consider the types of agencies and (client) businesses this relates to. The UK's private SME's turn over an estimated £1.8 Trillion and in that market insourcing and threat from larger consultancies is pretty nominal in the short-to-mid term. Staying competitive with larger businesses is definitely going to need evolved commercial relationships, though."

Thanks Daniel for your feedback.

@Craig - agreed ;)

about 1 month ago

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Dennis de Zwaan, Digital Strategy Consultant at Conversive

Great article Katie, in all of western Europe we see the same trend, however the market is far from tight. The market really just opened up as more and more SMB and challenger corporates are struggling and investing in their transformation. Those agencies and/or consultancies that arrive just at the right tipping point with the right knowledge will be the ones who enjoy the advantage (and the business of the client) the longest.

As Peter mentioned up above the big consultancies have a bad reputation among those in executing or digital specialist positions in larger companies. The fact remains that these specialists are exactly the people many C-suite members rely on for advice, because of the average age of a C-suite member they often have little or none real experience with Digital. The same opinion is often held by Owner-directors who are still involved in the daily grind of their own business.

An agency has the data, the hands-on experience, and often the internal leverage to make things happen. The agency owners with vision and ambition that grow beyond selling their company will become new competitors in the market. Because as you mentioned Digital Transformation is business strategy, and these digital agencies will become the new business strategists to compete with the large Consultancy firms.

about 1 month ago

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Jonny Stark, Partner at Brunswick

Never undervalue / estimate the level of relationship within an org that needs to be your entry point in these conversations. CMOs are being given marketing transformation to work through, but wider operational and business strategy setting are definitely not going to CMOs. CEO access is the preserve of advisory businesses and consultancies who are looking to inform the very top of the organisation with a focus on the metrics that matter to them e.g. multiples. Most agencies are nowhere near that level of conversation in my experience. What impacts share price, investment decisions etc. Obviously commercial orgs need to build the right products and services, but there's a whole piece of the pie, that in over a decade in ad agencies and digital shops I've never seen anyone genuinely address. I think, rather like the battle over who 'owns' social media, the whole consultancy vs. agency discussion is a red herring. Rather than getting drawn into the debate, the answer is who truly offers something that can add value to the most senior stakeholders in a business. And can demonstrate that. Applied creative thinking / problem solving / bringing the outside in are all valid. But you need people who have deep industry vertical understanding, business nous and an ability to frame the discussion in a way that cuts through at a board level.

about 1 month ago

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Duncan Barraclough, Digital Consultant at Milton Green Consulting

I agree that the SME market is less prone to the likes of the big 4. However the SME market is also where agencies have been able to charge higher margins and perform more averagely. It's this sector where I see agencies will feel the squeeze, there are a lot of SME sized agencies with very little to differentiate between them and it's here where automation and also strategic experience will begin to put pressure on the traditional agency vertical approach.

about 1 month ago

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