What is the Future of the Digital Agency Business?

With a flurry of activity lately within the digital agency world related to acquisitions, acquihires, and closures, it might be tempting to jump to certain conclusions as to where this business is headed. Is it truly possible to scale a design services business? Is there really a threat of clients taking digital strategy and design in-house? Has the agency business model run its course? These are some of the questions being raised. While some of the discourse is clearly unsubstantiated, it has spurred some worthwhile perspectives.

The agency business is alive and well. It’s incredibly diverse; both in the capabilities agencies focus on and in how agencies operate. To make any broad assumptions on the fate of the industry is challenging, if not misguided. Agency models will continue to evolve as the role of ‘digital’ within our clients’ business continues to expand. Frankly, that’s what makes the digital agency business so intriguing.

The independent agency environment is as healthy as ever. Even while it continues to become more and more complex to service the broad needs of clients, there really has been no better time to be in the digital agency business. As founder & CEO of Engine Digital, a 13+ (now 17) year-old digital agency, the question of whether or not our industry is at risk has a very clear answer.

To get to this answer, I will summarize my general perspective on the current state of the digital agency business, and hopefully this creates some clarity and dialog.

(Note: for the most part when I refer to client organizations, I’m not referring to technology companies and startups.)

The need for agency partners is greater than ever.

As the digital ecosystem continues to expand, the reach of digital strategy continues to gain greater visibility across client organizations. For those businesses that make innovation a priority, digital thinking is starting to gain vertical support from the front lines to the C-Suite. I’ve written before about the emerging need for digital transformation across organizations. Disrupted industries have the data and the real world examples that support having a clearly defined digital roadmap. This is no longer a nice to have, but a must have. This need continues to grow, and the need for a strong digital agency partner continues to increase.

Those organizations with a clear view of the future are starting to invest heavily in digital platforms, products, and services. They’re using digital experiences to add value, create engagement, and reach new audiences. While this always creates a need to staff up internal teams to manage these endeavors, these teams are often operational, relying on agency partners to lead planning, design, and development of a high-level product vision. Agency partners are needed to bring that vision to market. This is high-risk, unfamiliar ground for many organizations, and leaning on agency partners is often the only way forward.

Clearly this is less so for startups and technology firms, but this is the current state for the majority of enterprise organizations. That said, even organizations like Facebook, Twitter, and Google, with well-staffed, in-house strategy, design, and engineering teams, often lean on agency partners to stay on track. This again points to the massive volume of project work these organizations often have on the go. But it also speaks to the need, in some cases, to bring in an outside team with a unique and unfettered perspective; one that can get the work done without the distraction of conflicting insights that sometimes turn small internal projects into huge projects.

From where we sit, there’s no shortage of work — quite the opposite. More businesses making digital a priority means more resources needed to get these projects done. And that’s good news for digital agencies. In many cases, agencies are the conduit for digital innovation within their clients’ business.

This increased need is driving an increase in providers.

The largest digital agencies are growing, evolving, and continuing to provide a constantly expanding range of capabilities.

As digital gains more visibility at the C-level, many of the world’s largest consultancies — IBM, Deloitte, McKinsey, and PwC — have all moved into the space, buying or building design teams to support a broader service offering. It’s safe to assume this is proof of the growing demand for digital strategy to support broader business goals and objectives.

And at the far end of the spectrum, the independent digital agencies continue to grow at a healthy pace — ours included. The number of independent agencies continues to increase, driven by specialization and the ability for smaller teams to deliver huge value by tackling very specific parts of the digital ecosystem. The upside: more partnerships and collaboration across a client’s business and greater transparency across those agencies at the table.

And yes, consolidation is happening everywhere.

It’s true that agencies are being absorbed into larger organizations, some service-based, others startup/product-based.

On the hold-co side, this past year brought a number of large acquisitions, like Publicis’ $125 Million dollar purchase of Nurun, or their more recent and far bigger $3.7 Billion dollar offer for Sapient — possibly the largest digital agency by revenue and headcount. Why? Well, according to its CEO, “Sapient will help (Publicis) reach a target of generating half of its revenue from digital three years ahead of plan. (Publicis has) been investing for many years in digital capabilities for one simple reason: it’s the future. The pace of innovation is accelerating faster than ever. These mean big challenges for (Publicis) clients.”

On the consultancy side, the past several years have also seen a number of acquisitions by Accenture, PwC, and Deloitte. These are sophisticated organizations investing heavily in expanding digital capabilities, clearly based on an increased demand.

On the independent agency side, the M&A activity is constant, with smaller agencies folding into larger ones on a monthly basis. For smaller firms, the rationale for selling could really span a spectrum of reasons: access to bigger clients, tougher problems to solve, or greater geographic reach. Or maybe the founders need a change of pace, a new challenge to tackle. And sure, in some cases, perhaps the decisions are driven by economic factors — a slowdown in business perhaps, or maybe just not enough capital to grow as fast as they’d like to.

Even clients are acquiring agencies.

Brands and startups are making their own digital agency acquisitions. Most notably, Capital One’s acquisition of SF-based User Experience firm, Adaptive Path in late 2014. News of the acquisition by a retail bank was initially somewhat perplexing, but soon began to make a little more sense.

I’ve had several conversations with people in the industry about the Adaptive Path acquisition, and I have a theory which may or may not be accurate. It goes like this: Provide a strategy-led agency with the opportunity to lead innovation of an industry that so desperately needs it — financial services — and you’ve basically given them the most engaging opportunity possible. Now, offer them the opportunity to work from within the organization (and not as a ‘vendor’) and give them 5–10 years to really sort it out well, and that’s really the ultimate opportunity. Lets hope it went something like that.

For others, there’s a desire to be the client.

This past week, Toronto-based Teehan+Lax gained a torrent of attention by announcing they would wind down the agency as the leadership team would be taking jobs on the Facebook design team. For several years, T+L had been vocal in redefining the agency business model. Their ideas around value pricing, time tracking, and process were intriguing; some aligned with our own ideas, others not so much. As an agency founder, what will stick with me most is not the work they produced, but their approach to agency management. To me, that’s the true loss to the industry with T+L’s departure.

In their farewell post, they point to the opportunity to join an organization that reaches a billion users as a key factor in their decision to make the jump, though it’s likely that the draw of the Bay Area, the network, and what may come after a stint at Facebook is also at play. Whatever deal was made, their decision also points to a tension that exists between service-based agencies (performing work for clients), and the ability for agency teams to be fully immersed in a client’s project/business, able to affect substantial outcomes.

Many agency teams like ours want deeper engagement, greater control, and partner-level participation in the projects we take on. For those agencies focused on digital platforms, products, and services, there’s often a desire to be far more integrated into a project than budget, time, or the relationship allows. There’s a desire to ‘be the client,’ which is why so many agencies spin up their own labs groups to develop their own internal products and IP. There’s interest in being in complete control of the inputs/outputs of a project and the decision making process. That often doesn’t exist with client-contracted project work. We see that dynamic starting to change somewhat, but there will always be a client/agency relationship that logically splits project responsibilities in a way that’s less than ideal.

Great talent requires meaningful work.

But how do you define meaningful work? Does it need to reach a mass audience? Have some kind of social value? Pose a creative or technical challenge? It’s certainly not easy to pinpoint a definition.

The best agencies recognize that their people are their greatest asset, and keeping their team engaged through meaningful work remains a top priority. Those agencies with a defined vision and set of principles focus on finding the right purpose-driven clients and projects that keep the agency team challenged and fulfilled. And while finding these opportunities is always a challenge, it’s gotten somewhat easier given the volume of digital work across industry verticals.

Some agency models are simply incapable of supporting an environment for digital innovation. While there are certainly exceptions, very few traditional advertising agencies have been able to truly adapt to digital. Their operating models are vastly different than that of their digital agency counterparts. They’re simply unable to provide the right environment, nor the right projects, to attract strong digital talent. These agencies are often a revolving door of talent, process, and intellectual property.

Yet even on the client side, this can be a challenge. Many organizations are simply not in a position to bring top digital talent in-house to drive digital transformation. For some people, it’s just not rewarding to work on a single project, business, or brand — variety and diversity is far more appealing. Building an in-house digital team can be daunting. For example, the number of resources required to support a mobile app initiative from concepting through deployment and sustainment can be staggering, and the associated costs can make in-sourcing nearly impossible. These organizations will continue to rely on agency partners to help bridge that gap.

Growing a service agency is very different from scaling a startup.

It’s true - services firms are not destined to be huge companies. But that’s not a bad thing. The hype of the startup world seems to have created an expectation that reaching massive scale and an IPO is a realistic objective. In reality, this outcome is incredibly rare. The majority of startups will fail. That is the unfortunate reality.

Scale is a funny thing for agencies. With scale you might have greater reach, larger projects, stronger client relationships, and deeper engagement. But you also have the added challenge of supporting a burn rate that’s harder and harder to support with less retained business and more project work. Agencies typically aren’t able to add to headcount if revenue doesn’t support it first. Growth is slower. Risks need to be managed. And massive scale is usually not the end game. Remaining small, nimble, and efficient is still a great way to run a profitable agency business.

Comparing the growth opportunities for agencies to those of startups is a little bit irrational, if not irrelevant, in my opinion.

So, what is the future of the digital agency business?

Of course, we’re incredibly optimistic for the future of the digital agency business. Our agency continues to thrive and we have the strongest team we’ve ever had. We’re in the process of both strengthening and focusing our capabilities. And we’re taking on incredible client projects that are far more sophisticated and complex than what we’ve seen in previous years. Clients continue to invest heavily in digital experiences that simply were not a focus only a few years ago.

As members of SoDA, we talk with agency founders frequently and they share the sentiment. It’s an incredible time to be leading digital strategy efforts for clients who are far more invested in innovation. There has been no better time to be in the digital agency business.

Based on the above thoughts, I’ll leave you with a few predictions about the continuing evolution of the digital agency:

1. Digital agencies will continue to increase the depth of their capabilities while becoming focused on specific areas of the digital ecosystem
2. Clients will continue to adapt digital across the organization, creating increased demand for specialized agency partners
3. The complexity of client-led digital initiatives will continue to increase as organizations place bigger bets on technology
4. Talent will become scarce for agencies and startups equally, as the need for resources continues to grow
5. The line between digital agencies and startups will begin to blur, with more overlap and collaboration in the development of IP

There’s certainly a lot to cover when contemplating the future of an entire industry. While this post is tad long, I hope it generates more thoughtful discussion, and I welcome your comments here or via @StephenBeck.

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