It’s no secret that agencies won't see the revenue growth they've seen in the past. The industry is changing and nimble partners, coined as "media militias", are emerging to drive control, transparency and savings quickly. Over the next two years more brands and publishers will continue to shift dollars in house as they reinvent their working models. This is because the agency fee hasn’t evolved in decades. With brands suppressing fees, asking for longer payment windows and seeking more project work, rather than long-term relationships, agencies must reimagine their business model in order to survive.
The typical agency model is based on a client paying a fee for its services. The fee is based on the number of full-time employees working on that business as well as the scope. The scope is based on the number of campaigns as well as the number of assets and deliverables for those campaigns. An agency will figure out the hourly fee to charge a client based on the number of full-time employees needed to fulfill the assignment. That number will factor in the cost of the employee plus the profit margins which can vary depending on agency, channel or technology.
Most agree that the ad industry is going through radical change, which is hitting the big agencies the hardest. This is because brands are starting to understand the hidden fees that agencies are charging to manage their failing models. As the trust diminishes brands are using in-housing to further reduce agency fees and drive stronger ROI.
Agencies are now considering a consultative approach that promotes client in-housing. Hesitancy remains since the natural progression means moving all of their once prosperous revenue outside the castle walls. In-housing is not going away so the only option is to extend the life of their relationship or fear losing them entirely. Bullish agencies must understand that they need to move quickly or continue to lose business. Gone are the days of defensive rhetoric relying on scare tactics in order to delay the inevitable, this will only continue to allow "media militias" to pick up the pieces. In order for agencies to succeed they need to understand that future revenue may have a current impact on stock price until new models start to pay dividends.
The ad industry is undergoing huge transformation. No one argues that advertising remains crucial for brands but processes need adapting. Agencies have reinvented themselves in the past so there's no reason to think they can't do that now. But in an on demand world brands are looking for project based offerings that the agencies need products for. If they remain defensive the empire will continue to crumble when what's required to win is a proactive offense!