Digital Consultancy is booming
Our expert's opinion
"Digital agencies have been booming in the past couple of years. More and more 'traditional' companies have found out that they need to adapt to the changing market. There are some benefits of working with consultancies, such as getting a fresh look on your company, having your current structure challenged, fast delivery, ... In this article you will find out what the global ranking looks like. Personally, I still believe size is not the only factor to look at. These days, small and mid-size companies are often more agile and able to play into customer needs."
- Matthias Van den Bempt, Senior Associate
Top 100 Digital Agencies 2017: The state of the industry
(For a full reading experience, please check out the original article.)
The digital consultancy claimed top spot this year with UK fee income of £284 million, a whopping increase of 61% year-on-year. IBM iX, which came top in 2016, dropped to third with SapientRazorfish in second.
In this post I’ll look at which agencies rounded out the top 10, as well as examining the keys trends that emerged from the report. For example, this year's Top 100 Digital Agencies Report notes the evolution of agency structures as brand marketers' sophistication grows and competition heats up in the market.
The top 10
This year sees the total fee income of the Top 100 digital agencies surpass £2.3 billion. 2017 was undoubtedly a period of success, with agencies reporting on average a 20% growth in total fee income.
A large part of this growth, of course, is accounted for by the agencies at the top of the ranking. The top five agencies now account for 39% of the entire fee income of the Top 100. Half of the total fee income is accounted for by nine agencies alone.
Another flurry of mergers and acquisitions occurred in line with previous years as the industry consolidates further and agencies widen capabilities in an endeavour to become full service. Examples include Capita’s acquisition of Orange Bus, Code Computer Love’s merger with MediaCom and Ayima Group’s acquisition of Quick Think Media.
IBM iX slipped this year from the number one spot to make room for Accenture Interactive. 2017 marks a tremendous year of growth for Accenture, with the company further dominating the marketing and advertising sector as it continues its ambitious acquisition trail.
The acquisition of marketing agency Wire Stone in August marks the company’s 15th acquisition since 2013. Accenture announced earlier in the year that it would spend $1.8 billion on acquisitions to strengthen its global outfit. The company now stands as the largest digital network in the industry, with revenues exceeding $4.4 billion, further elucidating the dominance of this new breed of agency.
Three challenges in particular were mentioned by agencies entering this year’s Top 100:
1. Brexit and the US presidential election
The political and economic ramifications of the past year’s events have resulted in companies focusing on healthy growth in each quarter. There are concerns among agencies and brand marketers about the impact of Brexit on retaining a very European workforce as well as its impact on general trade conditions.
Some agencies fear that the reduced appetite for commercial risk, investment and marketing experimentation might pose a threat and that reduced budgets and a drop in the pound will continue to bite in 2018.
2. The General Data Protection Regulation (GDPR)
Understanding the impact of GDPR and upcoming data privacy law changes due to come into effect in May 2018 are a cause for concern this year. While some agencies consider these changes as potentially hampering the targeting and reach of customers, others believe they are an opportunity to improve customer interaction and engagement, enabling their clients to succeed.
3. Transparency and viewability
Agencies referred to the growing scepticism in programmatic and display advertising, noting clients’ viewability, click fraud and ad blocker intervention concerns. Brand safety and ad viewability are top concerns in the industry.
But it’s not all doom and gloom...
Opportunities highlighted by agencies include:
1. Acting as sense maker
As the marketing technology onslaught continues, adding further layers of complexity to the marketing ecosystem, agencies have the opportunity to act as trusted partners in advising on the applications of new waves of tech. Tech utilisation and data analytics are highly valued areas of counsel by brand marketers.
2. The shift to guiding transformations
Many agencies entering the Top 100 this year noted their adoption of a consulting mindset and the changing skillset required of agencies. Agencies are now shifting from being vertical specialists to being high level, broader T-shaped people. Agencies are no longer simply responding to client briefs but are instead focusing on helping clients find problems to solve, offering diagnostic capabilities and solutions.
3. Capabilities development and training
The trend of skills being developed and improved in-house on the client side as well as the continuous supply of new technologies means that agency engagement with clients is shifting to capabilities development and knowledge transfer as well as training in-house teams.
Game of Agencies – battling it out for market penetration
Consultancies and systems integrators have continued to muscle in on agencies' territory in 2016/17 in what has been a Darwinian period for the industry. It’s a tough and competitive environment, with some agencies battling for survival and losing out to consultancies in winning large digital and marketing transformation work.
What complicates things further is that the digital agencies landscape is no longer comprised of consultancies and traditional holding companies. E-tail giants, tech players, media companies, publishers and even mobile carriers are now also competing for the same lines of business. So this begs the question: who will prevail in this Game of Agencies? The winners in the future could very well be something entirely new.
Traditional shops are beginning to fight back and adjust to this new normal by building their own business transformation units to better compete. Take the media arm of French ad holding company Publicis Groupe, for example, which launched its own global business transformation practice in 2016.
While traditional agencies and independents have been making strides in consulting and offer the creativity, agility and cost-effectiveness that consultancies sometimes lack, there is no real threat to the consulting giants just yet. The consultancies’ access to the C-suite, deep vertical industry expertise, global offices and manpower are certainly advantages. Furthermore, the rationalisation of agency relationships where brand preferences are towards fewer and deeper supplier relationships is a trend that favours the big consultancies over agencies.
One thing is certain: with consulting firms acquiring digital, creative and design expertise and traditional agencies developing consulting, data and technology capabilities, agency value propositions are indeed changing. Left brain is meeting right brain in the industry and it is this ‘systems/empathy convergence’ that will shape the future of agency capability.
To survive in this competitive environment, skills need to be smart and deep and teams of specialists are required.
Attracting and retaining the right talent, however, is one area that agencies continue to struggle with. The talent problem was the most cited challenge among agencies in entry submissions this year and is, without doubt, one of the main barriers to digital progress.
As one agency noted:
"Retaining and attracting talent in a market where demand for digital capabilities is ever-increasing will be paramount to agencies’ success. Clients are also now expecting analytics to prove success and challenging agencies to tell a complete story across multiple touchpoints."
Diverse teams of people with the right skills is important for agencies seeking to differentiate themselves through strategy, specialisation and digital expertise but this very often requires staff who are expensive and nomadic. A large part of the challenge is due to the pressures of short-termism; in developing talent and resourcing to keep up with client demand for services as well as international expansion.
The skills shortage is manifesting itself in areas such as data science but also in digital design. One agency highlighted the opportunity that this brings for people with in-demand skillsets:
"The market is exploding for digital design again, and technology is available to everyone and every agency in a way that has never been seen before. The choices for young designers who are comfortable and experienced in bringing tech and design together are exponential. Allowing people to flex their creative muscle whilst constantly working in beta and black and white is sometimes difficult."
Agencies also noted the challenges in attracting diverse talent. The media furore surrounding the controversial anti-diversity memo written by ex-Google employee James Damore, in which he presented contentious views about women being less skilled than men in tech, is perhaps an illustrative example of the wider concerns about gender diversity in the industry.
So what are agencies doing to tackle the skills gap? Some noted the establishment of collaborative and agile working practices, organising graduate and apprenticeship training schemes as well as nurturing talent through continuous learning. One agency said:
"We believe in a company culture that encourages continuous learning, and so strengthening the learning and development opportunities we provide will be key to attracting the best talent."
Agencies on the latter half of the Top 100 ranking, as they continue to grow and surpass teams of 50+ and 100+ people, have highlighted their need to balance expansion and growth with maintaining their unique culture and attracting talented employees. These agencies are finding that organisational purpose and culture are just as important as remuneration and location in the search to recruit and retain the best talent.
In-house agency vs. on-site agency
The client-agency relationship is changing. One factor contributing to these changing dynamics is clients increasingly moving more agency functions in-house. More brands are bringing their digital strategy and production in-house, creating digital centres of excellence at client office locations.
Transparency issues and a tighter rein on spending are at play here but other reasons for moving in-house and consolidating agency rosters relate to efficiency, agility and speed. Brand marketers often have a better understanding of their brand and audience than external agencies and so the move in-house is increasingly resulting in better work, particularly in the creative space, as well as better bottom-line results.
The most obvious benefits of in-house agencies are that talent is owned and not rented and total integration is possible, with brands having the opportunity to align the capabilities of the agency to its needs in a way that is not possible with an external agency.
However, there are some downsides. While the decision to create in-house agencies is often taken with the aim to improve efficiency, in-house teams can sometimes lack perspective and a wider sense of context. This year’s Pepsi Kendall Jenner ad, which was heavily criticised for appearing to trivialise the Black Lives Matter movement, exemplified some of the pitfalls of the in-house agency. The insularity of the in-house agency model can sometimes result in losing touch with the realities of customers.
The Jenner ad therefore reignited the in-house agency vs. on-site agency discussion. An alternative to the in-house model is the on-site agency in which agency employees work on site at a client’s office but are integrated into the culture and operations of the brand. This rise in shared workplaces and co-location has many advantages including greater flexibility, higher productivity and the ability to quickly scale up or scale down depending on client needs. On-site agencies offer a middle ground between an external agency and an in-house agency and can therefore be seen to offer the best of both worlds.
Nevertheless, the model is not perfect and may not always be considered as the superior option. For example, an on-site agency is rented and not owned and external vendor risk still exists in the sense that a client is dependent on the agency’s financial health and ability to recruit talented staff. The model that brands should choose if they forgo the traditional external agency model will largely depend on its capabilities and its ability to work well with each type of agency, whether that means investing in the right talent for an in-house agency or working towards true integration if taking the on-site approach.
The rise of modular agency structures
The move in-house and the rise in co-location reflects shifting agency models more generally. Disintermediation is another shift that continues to impact traditional agency structures with more brands going direct to influencers, tech vendors and media companies, essentially cutting out the middleman.
Furthermore, as integrating marketing efforts continues to be a challenge, brands are seeking a more simplified agency model, one where there are fewer agencies or one lead agency to guide multiple agencies in an integrated fashion.
This type of solution has already manifested itself in something like Omnicom Group’s multidisciplinary on-site offering for McDonalds. This model is an example of a holding group solution for the future where one core agency has several partners such as media companies or tech platforms, for instance.
Related to this is the growing trend of modular agency networks such as the agency structure of Publicis Groupe, for example. In this type of model, there are fewer of the same types of agencies, resulting in a reduction in overhead but allowing agencies to rebundle capabilities to serve a client’s specific needs and making cross-functionality and integration more effective.
Agencies are therefore becoming smaller, less siloed and more specialised. In the coming years, we may also see a rise in revenue-based compensation models to meet the demands for more accountability and tracking agency work to sales.
Heading into the future, it is likely that agencies will also be more distributed, working with talent all over the world via virtual collaboration, utilising remote working practices and rented office spaces as well as taking full advantage of what the gig economy has to offer.