Creative industries are the heartbeat of our economy
The problem with being big is the cash burn that happens just to keep operations running. This is what traditional agencies are confronting. Image Credit: Gulf News

Every traditional ad agency was built using an analogue business model. Although these agencies were designed to ease the process of advertising for their clients, they fell into a tough position.

When using an analogue business model, the only way to increase revenue and accommodate for more clients is to add more employees, or utilize the top talent to create new business pitches. None of these tactics help them align with client expectations.

Overinflated prices, prolonged deadlines, and constant replacement of talent - this is the hallmark of ad agencies and it will be their downfall. Working in this manner is no longer necessary or effective. Approximately 35 per cent of every dollar made by a large company is used to keep the organization active.

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Cash burn

However, it’s likely that this number is much higher for ad agencies nearing 60-70 per cent. There are external factors contributing to the fall of the traditional media agency, but these companies have also been under the heel of media giants such as Google and Facebook. Automation has become increasingly difficult to ignore for industry titans.

Soon, there will not be a choice of traditional campaigns over automated campaigns, which means that agencies will no longer be able to take credit for buying, optimization, or planning in some cases. This has forced conversations around moving traditional agency roles in-house or utilizing resources offered by remote teams.

The demand for services offered by traditional agencies is decreasing rapidly as the market space continues to evolve. Traditional agencies fall short when it comes to talent, integration, financials, product/service innovation, and marketing creativity.

Search in-house

Large companies such as P&G, Bloomberg, and AT&T have realised this and built in-house agencies (in-house agencies) as a result. These “agencies” are in close proximity to the demand side of the business - sales, operations, supply chain, finance, etc. – and allowing them to operate at a lower cost with higher output.

This allows companies to have a flexible model where they can have valuable exchanges with external agencies. Despite the fact this model reduces risk and enhances focus, IHAs do have their limitations. Since they are not attempting to deliver internally against every revenue opportunity, IHAs can choose discreet partners that are best suited for specific solutions.

As the industry goes into disarray, and more and more mid-size, small, specialist agencies realising that they no longer need to be confined to a traditional agency. With these companies that have strayed from traditional agencies realising that their creativity can be better utilized, there is opportunity for growth.

Buy up a missing skill

For traditional ad agencies, when they notice a weakness that is causing loss of revenue, they look to acquire a company that possesses this specific skillset. Since these agencies acquire rather than learn and rarely focus on the skills once integrated, the acquisition yields little value after a three- to four-year period.

In the end, advertising is a function. In today’s society, ads are besmirched by consumers, rarely trustworthy based on the transparency of the brand, and disruptive in nature. Looking forward, specialist companies will excel in the field as the focus will shift to behavioral analytics, content, CX, etc.

While there will be specialists that focus on skills such as programme management and there will be ad agencies, they will not look the same as they have in the past. Scale is no longer a sign of success - In fact, it may hint at the opposite.