Agencies are undergoing a period of business transformation, facing threats from in-housing, consultancies, new sources of competition and clients aggressively managing costs, especially those that are related to media. Top 100 Report Editor Donna-Marie Bohan looks at industry trends over the last year.
2018 financial data shows that the Top 100 digital agencies have grown
on average 20% year-on-year from £2.3bn in 2017 to over £2.8bn (Figure 1). The Top 5 agencies hold 40% of the entire fee income of the Top 100 whilst over half of the entire fee income is held by the Top 8 agencies alone.
Hitting the top spot in 2018 for the second consecutive year is Accenture Interactive, followed by IBMiX in second place and Atos Digital Services in third place. Cognizant Interactive made a debut appearance coming in at number four. The professional services firm Cognizant announced its place in the ranking with the acquisition of agency Zone in 2017. WPP merged POSSIBLE, Cognifide, Acceleration, Fusepump and Salmon last year to form Wunderman UK, which is ranked at number five.
New entrants include agencies such as EY-Seren, Somo, Mirum, 1000Heads, Feed, Maverick, Poke, Croud, Think, Maginus, Edit, W12, Tryzens and Dare Digital.
Some large agencies were unable to disclose financial information or unwilling to participate this year. This sees the loss of Deloitte Digital and Publicis.Sapient from the Top 10, which are part of large networks that come
with complex financial organisation.
Other notable players missing from the ranking include Havas, PWC Digital Services, AKQA and R/GA (part of the Interpublic Group of Companies and this year’s peer-selected most respected agency).
Though we still believe fee income to be the most accurate way of ranking digital agencies, the difficulties in calculating and disclosing the value results in inevitable omissions throughout the ranking table.
Figure 1: Total fee income of the Top 100 Digital Agencies 2018
Historical data demonstrates that the dominance of the Top 10 agencies in the ranking is a trend that continues to persist. Over a five-year period, the average net fee income of the Top 10 agencies has steadily increased to £159,565,388, whilst the average fee income of the remaining agencies in the ranking has been more or less stagnant (Figure 2).
Figure 2: Average fee income of the top 10 digital agencies vs. average fee income of the rest (2014-2018)
Agencies are asked each year to select a primary function. Figure 3 compares the percentage of agencies under each primary function with each function’s percentage of the total fee income of all agencies in the ranking. Full Service/ Marketing agencies dominate, with 65% of the total fee income, followed by Design & Build (18%), Technical (15%) and Creative (2%).
Figure 3: Percentage of Top 100 agencies by primary function vs. percentage of total fee income by primary function (2018)
The presence of agencies primarily categorised as technical has grown over the last five years. The demand for technical agencies is further evidenced by the fact that technical development, on average, accounts for 24% of fee income from digital work. Figure 4 illustrates that creative work commanded the greater share of fee income five years ago, but technical development has outstripped creative since then.
Figure 4: Average percentage of total fee income across business disciplines (2014 vs. 2018)
An area of work that has grown in recent years is User Experience, which now accounts for an average of 14% of fee income from digital activities. This development goes hand in hand with evolving consumer expectations for personalised experiences.
The proportion of net fee income derived from Social Media, SEO and Ecommerce, on the other hand, has declined. This trend can perhaps be understood within the broader context of increasing consolidation of marketing activity in-house. As more digital work becomes commoditised, the focus is shifting to marketing planning, strategy and consultancy services (15%).
Agencies were also asked to select the top five sectors in which they service clients. As Figure 5 shows, retail (66%), financial services (65%) and travel and leisure (45%) are the top sectors serviced by digital agencies this year.
Figure 5: Main sectors serviced by the Top 100 digital agencies in 2018
Industry highlights and key themes
The following analysis and commentary looks back on some of adland’s defining moments and key themes in 2018.
The disruption of media buying
Transparency issues and changes to programmatic buying practices are radically changing the role of agencies. Based on a 2017 study, the Association of National Advertisers (ANA) reported that 60% of agencies are taking steps to address media transparency within the client-agency relationship.
Concerns about non-transparent practices such as rebates and hidden fees have subsequently fuelled growth in client demand for auditing services. While some clients are taking control of programmatic work, with an ANA report showing that over a third of advertisers are moving programmatic work in-house and away from agencies, this year’s number one agency on the ranking is attempting to capitalise on the market trend by getting into the media buying space itself.
Accenture Interactive launched a programmatic services unit, encompassing media planning, buying and management. Accenture Interactive also offers media auditing and pitch management services in addition to media buying. Issues related to this have not gone unnoticed, with some observers remarking on a conflict of interest at play. Martin Vinter, Head of Media at specialist media consultancy Ebiquity, says:
Whatever firewalls and segregation of media buying and auditing will be in place, it won’t appease anyone. This is clear conflict – operationally and philosophically. In the age of ‘transparency’ – and all that this encompasses – savvy marketers will see this as a significant issue. Impartiality, whether agency side or consultancy/audit side is crucial for the industry to weed out the issues that have existed in the past. This development unfortunately goes against the grain of recent positive developments.
Agency holding groups refine their propositions as their business models come under attack
2018 was certainly a tough year for some agencies, with Top 100 entrants noting the loss of some clients or the end of contracts. The industry is being disrupted by different forces but are the shifts occurring somewhat sensationalised?
It seems that the industry is riddled with a few contradictions. On the one hand, there has never been as much money spent on advertising, yet the rise of ad blocking and the challenge for brand cut-through suggest that advertising is now less effective. Fee income of the Top 100 is growing yet the existential threat of agencies is much talked about and lamented.
Are agencies really struggling for survival?
The threat of consultancy disruptors, of course, has received much attention in the last couple of years. However, there are other competing forces at play, most notably the rise of in-housing, the formation of independent collectives as well as the emergence of new sources of competition (a trend discussed in greater detail by Econsultancy’s Managing Partner Ruth Mortimer in the full version of the report).
Let us take a closer look at some of the main issues impacting existing agency groups.
1. The third phase of strategic development
Michael Farmer, author of Madison Avenue Manslaughter: an inside view of fee-cutting clients, profit-hungry owners and declining ad agencies, contends that holding groups are in their third stage of strategic development. According to Farmer, this third phase refers to centralising and downgrading silos. He puts forward a view that agencies are short of talent and insufficiently integrated or creative, so holding companies are taking over as super-agencies.
This idea mirrors Publicis Groupe’s ‘The Power of One’ strategy or WPP’s concept of ‘horizontality’, a term that represents a model put in place by Sir Martin Sorrell to encourage people in different agency units to work collaboratively in order to offer a broader range of services to specific clients. Most of the agency holding companies have been refining their propositions in some way in recent years.
2018 was marked by the ominous departure of Sorrell from WPP in April. Since the departure of the industry magnate, speculation and prediction has been made about the breaking up of WPP or the consolidation of its agency brands.
Controversy aside, Sorrell’s exit from WPP and the arrival of Mark Read as his successor highlights that the marketing and advertising industries are deep in transition. Luke Smith, Co-Founder and CEO of Croud, says:
The holding companies undoubtedly need to seriously evolve to meet fresh industry demands. And, in the case of WPP especially, this has posed some serious questions over whether an agency of that scale should be restructured to reflect market trends and the current climate.
What does this post-Sorrell world mean for agencies? Perhaps the industry will shift more towards people-based marketing and customer centricity to meet current market demands. For example, agencies have recently been investing in their own proprietary tech, a factor driving further consolidation in the market, and building better audience insight tools to help clients with media and creative work. Clients, after all, are seeking more agile, simplified and flexible arrangements with partners in order to create connected customer experiences in a fragmented media landscape.
Luke Smith also reflects on the cultural implications of these shifts within the industry:
We’re also seeing the somewhat sad demise of the age of the personalities in the agency world, with Sorrell and Vincent Bolloré having departed and surely a couple of the other leaders not far off. This means the holding companies are in danger of becoming incredibly corporate and faceless with grey offices in Zone 2. A far cry from what agencies used to be known for and this isn’t what attracts young talent.
Whether or not this sentiment is widely shared, future agency models, at any rate, will continue to evolve. In order to drive change for clients, the agency groups need to alter how they do business with them.
2. In-housing digital
Growing pressure on the client-agency relationship has been a consistent theme for some time but it has never been more apparent than now. There are a couple of reasons why this is the case, including mounting concerns about brand safety as well as the dominance of Google, Facebook and Amazon, which has meant that advertisers are buying directly from tech platforms.
Furthermore, in-house teams are under more pressure to prove marketing effectiveness and drive growth. Econsultancy’s Future of Marketing research backs up this theme, with 60% of advertisers surveyed agreeing that proving marketing effectiveness is more important now compared to 2 years ago. Added to this, ‘maximising the ROI on campaigns’ is considered the top objective for 49% of advertisers over the next five years.
With driving growth in a high-volume world of always-on content at the top of the marketer’s agenda, work is migrating in-house or to lower cost countries – another force competing with agency groups.
3. Seeking solutions – a hybrid model in a complex ecosystem
While in-housing is a notable trend, the demand for solutions is high. Clients are seeking partners to help them navigate the mire of technological change. A lot of work can be done at scale in-house but the extent of in-housing depends on a brand’s budget and what it is prepared to organise.
Speaking at DMEXCO in Cologne this year, Blake Cahill, SVP Global Head of Digital Marketing and Media at Royal Phillips, suggested that a hybrid model of working with partners, depending on a brand’s business maturity, is the way forward.
Cahill spoke about how Royal Phillips manages a lot of processes, testing and ongoing production internally and how it has flipped its model of partnering with agencies by working with them on strategy first and then creative execution. The brand has also changed its remuneration practices by awarding higher remuneration to strategy and consultancy services.
Not all marketing activity will occur in-house at every brand. Clients may also choose different partners for ideas and execution. While it may be an operational challenge to bring the briefing process and flexible teams together, Cahill argues that a blended approach to partnership ensures that brands develop the best of breed partners for each engagement.
Consequently, we see a very mixed landscape, with agencies, consultancies, big tech platforms, adtech and martech companies as well as newer innovative players all trying to reinvent and compete for the same lines of work.
Notwithstanding the competition, BIMA Co-President and Think Managing Partner Natalie Gross argues that the mix of business types is a positive development for the digital community in an article where she discusses the broader transformation facing the industry (Download the full report to read this article). This mixed ecosystem, she argues, ensures creativity, new perspectives and a willingness to drive change.
Indies form their own collectives to compete with industry incumbents
While networked agencies are undergoing a period of transformation, independent agencies are not standing still either. Independent agencies account for 48% of the Top 100, whilst agency groups represent 52% of the agencies in the ranking. Despite the fairly even split in representation, agency groups hold 76% of the total fee income of the Top 100, whilst independents hold just 24% (Figure 6).
Figure 6: A comparison of agency groups vs. independents in the Top 100 (2018)
One independent agency spokesperson comments on this disparity:
The industry is polarising, with one end being driven by the need to automate and drive down costs. On the other, the drive upwards – taking marketing into the boardroom via digital and operational transformation.
We, like many mid-sized agencies, are pinioned between these two forces – undercut by AI and cheap Asian resource, on the one hand, and outgunned by the mega global consultancies on the other.
Clients, too, are conflicted. Is marketing a commodity to be bought on a cost basis as procurement believe, or is it a strategic growth driver worthy of significant investment? The challenge for a mid-sized independent is to persuade clients that our prices are worth paying and our talents up to muster.
Sadly, smaller agencies still suffer from the perceptions that, as they are smaller, they should be cheaper, when in fact the value they create is significant.
This independent agency spokesperson suggests an opportunity in this middle ground position:
As the holding company behemoths increasingly flounder to respond to clients’ needs for more agile and responsive vendors, and the biggest consultancies struggle to produce breakthrough insight and creativity, the independent agency offers a flexible (and affordable) alternative, and one capable of forming enjoyable and lasting relationships.
Another trend developing is independents combining in owner-led groups to offer an alternative proposition. For example, ten independent agencies joined forces this year to form an owner-driven collective network called Together Group and combine their capabilities on client briefs. Whilst agency groups are restructuring their businesses to respond to various challenges, indies are seeking collaborative models to scale their own capabilities to meet client demands and compete with industry incumbents.
The Facebook/Cambridge Analytica debacle
The arrival of the General Data Protection Regulation (GDPR) in May and the Facebook/Cambridge Analytica (CA) data breach scandal marks a turning point for the industry. The implications of these events for marketing and advertising are heightened scrutiny over privacy and data security issues and a shift in power from advertisers to consumers. Croud Co-Founder and CEO Luke Smith says:
Back in the day, no one talked about data privacy at dinner parties. However, this chain of events has got people talking about it in homes across the globe, cementing the issue in mainstream conversation.
The marketing and advertising community had already been taking a more cautious approach towards social media platforms even before news of the Cambridge Analytica scandal emerged. Concerns around brand protection, along with the added complications surrounding GDPR implementation, were already making brands think more carefully about their relationship with data-driven ad platforms.
Michael Hewitt, Content Manager at Stickyeyes, thinks that the Cambridge Analytica scandal will probably go down as a mere footnote in the context of marketing and advertising:
Facebook is clearly going on the charm offensive to win back the trust of both users and advertisers. Whilst Cambridge Analytica demonstrated that the gateway between advertisers and users was woefully unguarded, in many respects, at its base level, Facebook did and will continue to operate very much in the way that it was intended to – to provide advertisers with a means to reach micro-targeted audience segments with highly personalised messaging. The adage of “if you aren’t paying for the product, you are the
product” is very much what Facebook relies on.
Hewitt believes that Facebook will more than likely come out of this as a more mature advertising and marketing platform. He says that the company will tighten its policies, it will look to raise the standards it holds advertisers and developers to over time and it will more than likely remove or replace targeting options, but the core business will remain the same. He says that whilst many will point to Facebook’s slowing user growth and slump on Wall Street as a sign that this scandal has hit Facebook hard, he believes that those problems are rooted in issues far bigger than Cambridge Analytica.
It remains to be seen whether the CA incident will result in an appreciable migration away from Facebook. If this scenario unfolds, agencies might capitalise on the opportunity to reach audiences with other media types. If government regulation becomes a likely scenario in the future, this could impact the effectiveness of advertising on the platform and brands may shift their media buying strategies.
Yet heightened interest and concern about privacy can only be a good thing for advertising and data-driven marketing. Luke Smith says:
In the long run, I have no doubt that this will help the industry to move on positively. Increasingly, brands will have to make far more effort to forge
valuable, two-way relationships with customers that will make for better engagement for all parties.
Talent pipeline concerns remain
Now a somewhat clichéd theme, talent and skills are, once again, major concerns for the industry.
How can the marketing and advertising industries ensure that the talent pipeline meets new digital demands?
Julian Ward, Group Head of Talent Acquisition at Stickyeyes, believes that the industry needs to consider how it is raising awareness and educating the next generations of talent about the opportunities that digital can offer, and to think more laterally about the skills and qualifications that are relevant to what the industry does. He says:
We come across many undergraduates and school leavers who are largely unaware that there is a rewarding career waiting for them in the digital industry. We come across mathematics undergraduates who have relatively little understanding of the opportunities available to them in fields such as paid search and programmatic advertising, or school leavers unaware that a digital apprenticeship could offer them more than a marketing-orientated degree.
Given that the demand for digital talent greatly outweighs the supply, Ward believes that it is incumbent on industry professionals to engage with educational establishments and spark passion in the next generation of digital marketers:
Once we secure talent, it is then up to us as forward-thinking organisations to nurture that talent through training and development, to leverage relationships with technology partners to make sure that their talent continues to keep abreast of the ever evolving digital landscape, and to keep innovating with new ideas that keep people engaged.
The growth of diversity initiatives
Conversations about diversity came to the fore this year, culminating with developments such as the #MeToo and Time’s Up movements against sexual harassment and the #WomenCannes campaign.
Long listed for the Financial Times and McKinsey Business Book of the Year Award, publications such as Emily Chang’s Brotopia have appeared, highlighting inequalities within the tech industry and how women and minorities are speaking out to address the inequalities that exist.
There is evidence that change is occurring within the media and advertising industries. Download the full version of this report to read about the growth in diversity initiatives and gradual progress regarding diversity and inclusion issues.
It has certainly been another interesting year for the industry. For further commentary and analysis on other themes such as the role of AI and the future of agencies, the convergence of martech and adtech and the power of data humanisation, please read the full report, which is brought to you by the Econsultancy team.