Do Non-Digital Agencies Need To Evolve?

Posted by Ray Kieser, Agency Practice Director on August 3, 2015

Do Non-Digital Agencies Need to Evolve?

Digital is no longer an exception evangelised by Silicon Valley and Roundabout types with designer beards, it’s increasingly at the centre of the customer experience and data agenda. Most companies at minimum are now communicating with customers through interactive platforms, social networks and apps. As digital requirements rise, global marketing trends show traditional media such as television advertising, print and direct mail declining. Print circulations of newspapers and magazines have dropped and TV is now on demand. Your potential customers can now choose how, and where, they digest your content. The result? Clients are looking for agencies with the expertise and skillset to deliver integrated campaigns. But in the same breath demanding that these agencies get with the programme. Unsurprising if you look at the levels of investment in technology by Marketers.

To meet this global need, the marketing services industry is steadily increasing its focus on digital. But this comes at a cost. Setting up the processes and systems required are increasing traditional agencies’ expenditure, and impacting on short- and medium-term profit. Ramping up also means attracting and retaining people with digital skills. Is it any surprise that agencies are struggling to up their digital offering, whilst maintaining their existing clients and controlling their staff and IT costs?

So, if you’re a traditional brand and design agency, do you need to ‘go digital’ just to compete? The Kingston Smith W1 (KSW1) 2014 Marketing Monitor review of the financial performance of the Top 50 marketing agencies in the UK, suggests the answer is a qualified yes.

Since 2013 digital agencies’ gross income rose by 6% whilst operating profit margins recovered to 9.6%. But to achieve this they also had to recruit more people at higher salaries. However, despite these increased costs, the outlook is more positive compared to brand and design agencies. They saw their gross income rise by just 5% over the same period and their operating margin fall 0.5% from 11.2% to 10.7%. This is the lowest average margin seen across the Top 50 advertising agencies since 2005.

The report also backs up the assertion that the rise in staff numbers is partially to blame for decreasing margins. Digital creatives are not only in high demand, but they command high salaries. This not only affects traditional agencies; digital specialists are also seeing an increase in staff costs as they are forced to attract top talent. This is such an important and timely conversation in the industry at the moment, that we will be exploring it more in the coming weeks.

Agencies that are looking to move into digital, also need to make investments in IT infrastructure and improve their tools. This initial outlay eats into profit margins by increasing operating costs. If an agency does not have the business to break even on this investment, it could prove fatal. Added to this different business models and new pricing structures, make it easy to see why some agencies are struggling to realise the benefits of going digital.

The Rebirth Of Full Service Agencies

Digital specialists do appear to be winning out against traditional agencies and this is driving a resurgence of the concept of the full service agency albeit in a slightly different guise.

Agencies adopting this business model are motivated by clients requiring digital components to their campaigns¬ and their desire to consolidate marketing spend. The benefits are obvious : campaign delivery is easier to manage, whilst economies of scale means clients and agency can approach fee management differently with new pricing models. But at the risk of being all things to all people and meaningful to no one, agencies need to be careful in how they approach these investments. We’ll be discussing the future of agency remuneration in the coming weeks, so make sure you follow the conversation on our twitter account.

What If You Had Some Answers?

Whether it’s adding digital to their existing offering or transitioning into a digital specialist, the message from the last few years of the KSW1 Marketing Monitor is clear. Traditional agencies need to embrace digital or risk being left behind. But if it were that easy, everyone would be doing it. So how can traditional agencies successfully manage this transition in the short term? And do they need to move away from their existing business to win at digital?

At Deltek we understand change is daunting, but as one market declines another will grow. If you can’t afford to be part of that downward spiral, then change is inevitable. Over the coming weeks we will be sharing articles, insights, eGuides and opinions on how to address the challenges faced by the agency sector.

Join me and other professionals from the agency industry as we ask the question What if?