The Agency Doom Loop

In the first of a series of guest blogs, Phil Lewis, mentor and advisor to select creative industry businesses explains The Agency Doom Loop…

 

Kondratieff waves are the cycles of expansion and contraction that characterise the global economy. The theory behind them runs that, every 40-60 years, a pattern of growth, stagnation and recession repeats itself. Much has been written about the credibility of this idea, and the time period over which cycles occur.

Until recently, it was easy to believe that the agency marketplace operates in a similar, cyclical pattern of growth, decline and renewal. Broadcast advertising might have risen in the 60s and fallen out of fashion by the millennium, but digital replaced it. For every noteworthy agency failure, another one sprang up and charged ahead. Decade-long phases of service consolidation and fragmentation kept Campaign magazine, that crusty bastion of self-regard, happily chewing up valuable trees, speculating about what would happen next.

These days, the category is in terrible health. Many agency leaders are deeply concerned about their lowly status with clients, the erosion of their margins beyond a point of sustainability, and the fact that their industry is no longer a prime career choice. Examples of desperation are everywhere; Omnicom’s cost-saving consolidation of its UK branches into sterile offices in Bankside is just one obvious attempt to lash together the life-rafts in the hope that they will sink a little less quickly. And let’s not talk about WPP’s share price performance.

So, is this just a natural, if grim, point in a typical cycle? If agencies sit tight, will the good times come back around? The answer, unfortunately, is probably not. Structural changes are taking place within the marketplace that will make industry-wide renewal along previous lines all but impossible.

Let’s start with the rise of the creative micro-business, which offers clients access to top-tier talent at a fraction of the cost that their establishment cousins can afford to charge. Notable examples include Been There Done That, MoFilm, Squad and It’s Nice That. Whilst micro-businesses are nothing new (good creative people have often done their own thing), the revelatory development is that they’re now achieving unprecedented traction with senior clients in global organisations. Over time, technology will give rise to many more such businesses, and clients will structure their rosters accordingly. The market will bifurcate – with the big agencies depressed into factory-like execution and the micro-businesses handling the cream of the briefs on a project basis. The apparent lack of awareness amongst network chiefs that their lunch is already being eaten in this way is staggering.

Hot on the heels of the micro-businesses comes the diversification being attempted by many businesses in adjacent categories. Media agencies have spent the last few years investing heavily in creative output; many production houses are hurriedly developing similar capabilities. What’s more, clients, who are insourcing as much of their creative and strategic needs as possible, are themselves sapping the already shallow talent pool.

While the market is complex, and there will always be exceptions to the rule (most notably the micro-networked likes of Wieden+Kennedy, who have built a reputation for creative excellence), the overall trend is clear. It’s also wholly bad news from an economic perspective. Large agencies still have the balance sheets to negotiate relatively favourable terms with clients but, with little creative firepower to offer, often back themselves into Commodity Corner. Micro-businesses might have stronger creative capabilities, but they lack bargaining power. And the trend towards diversification makes it harder to win the fewer briefs that are being outsourced. This is the definition of a buyer’s market.

Welcome, then, to the Agency Doom Loop. Without decent margins, investment in talent is difficult to make (to be fair, not a new issue for the category, regardless of margin). Without fresh talent, category renewal is impossible. Without a new approach, agency services continue to become less and less valuable. After years of hand-wringing in the industry press about agency leaders failing to read the runes, the problems might be here to stay.

And why should anyone care? Well, in a market such as creative services, strong outsourcing options benefit the economy as a whole, by helping clients to leverage external capabilities to enhance competitive advantage. In simple terms, the very scarcity of top creative talent means that agencies still matter. This point is now largely lost on clients. Tragically, it also seems to be lost on the industry itself (see here).

So what’s the solution? Three ideas spring to mind. First, there is a need for an urgent discussion across the industry about the changes taking place, and how players of all sizes can prosper. Historically, agencies have not been good at looking after each other’s interests, but the slow death of the category benefits no-one. Secondly, and perhaps more realistically, creative micro-businesses should focus on developing networks, formal or otherwise, to enhance their bargaining power and enable best practice to be shared. And thirdly, industry bodies and publications might be advised to turn their focus outward, and start reminding clients of the economic case for outsourcing and supplier profitability.

None of the above involves blithely waiting for the boom times to magically reappear. Nostalgia for the future delivered a rough ride for the music industry; let’s hope it’s not too late to stop the agency world suffering the same fate.

Phil Lewis has spent more than 20 years building radically creative businesses, and is the founder and MD of organisational performance practice Corporate Punk. He also works as a mentor and advisor to select creative industry businesses. For details about his agency mentoring and advisory services, head to philhq.com. To download his manifesto, head to creativityispower.co.uk.

 

Comments

Absolutely on point with this article and its time for the creative industry to sit up and listen if those in it haven’t already.

There’s two ways of looking at this, daunting – keep your head down, crack on and hope for the best or, (this is the ine I would recommend) opportunity – to explore, adapt and focus on a different future.

Very interesting!

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