In this series of articles we’ll look at two challenges in turn starting with revenue growth and margins, both key to agency health but increasingly difficult to find.

Top 5 challenges to agency growth

1. Budget stagnation

After more than two decades of headline growth in digital budgets there are strong indications that this might be changing. Whether it’s last years high profile move by P&G who removed more than $140m of digital spend or the move by brands to more transparent charging for digital production, agency growth has to become more focused on winning new business, rather than growing existing accounts, which is much tougher to predict and manage.

2. New competitors everywhere

The fight for the digital dollar is tough. The clear water between the consulting firms and traditional agencies has disappeared. From the FA choosing Cognizant to lead its digital strategy or new emerging specialists the digital dollar is being carved up in more directions than ever before. This is not just the large transformation/infrastructure projects but website builds and advertising budgets are also moving.

3. C-suite priorities

There are a lot of things on the mind of business leaders in 2018 and digital is certainly still one of them. However we are seeing a distinct change in where that effort is focused. A digital shop window is no longer the main priority, which is effectively what most websites and online marketing have been for most businesses thus far. The focus is now on being a digital business from end-to-end and delivering customer experiences that drive long term growth. Whether you label it service design, digital transformation or business innovation it matters not. What matters is that the boardroom agenda has gone and grown up and agencies are struggling to keep up.

4. Capacity and productivity

Even if you have the work coming in, delivering it to the standards required is increasingly difficult as legacy processes means there is usually increased headcount to deliver increased volume. This is especially acute when combined with talent shortages in key areas such as senior developers. Outsourcing has been the traditional answer but those costs continue to rise and the long running problems around quality control and project management largely remain. 

There also needs to be a careful look at the difference between efficiency vs productivity. As this HBR article articulates, they are not the same but are often confused to the significant harm of the business.  Agencies need to find ways to disrupt the status quo and find ways to reduce the direct link between revenue and headcount.

5. In-housing

Brands are taking more and more of the day-to-day delivery of digital in-house, a trend likely to accelerate in 2018. Costs, the availability of enabling technologies, lack of agency transparency, the need to be closer to the customer and legislation/risk (GDPR etc.) are all cited as reasons. It matters not, only that as more budgets move in-house the agency pie gets ever smaller.

Top 5 challenges to agency margins

1. The Complexity conundrum

The agency ecosystem keeps getting more complex. More complexity usually means more agency costs. Whether that’s to pay for specialist talent, more technology investments or simply for more time to spend on the “jobs to be done”, its a never ending task for agencies to stay relevant and stay profitable. The rub is that clients are often unwilling to pay for this added complexity, often falsely assuming there is plenty of room for the agency to absorb the costs from existing fees. 

One example is designing and building websites to be truly responsive and multiscreen. To deliver a great experience across 5 or 6 breakpoints, while staying both relevant and easy to use for the user, is a complex and expensive task, especially when current agency workflows mean each change touches multiple people within the agency. We love this article “everything easy is hard again” which perfectly sums up where we find ourselves today. 

The current answer in many cases is to ship “good enough” and hope that users don’t care. 

2. Great talent costs, average talent costs more

It’s a well known expression but one that resonates more now than ever. Great talent doesn’t just produce a little more value than average talent it creates an order of magnitude more. Making great people more productive rather than average people more efficient will drive much more value for your agency but it's rarely articulated in the real world.

3. Perceived value and playing in a commoditized market

We quoted Dries Buytaert in our recent article on Total cost of Ownership but it’s worth repeating as its sums up the client perspective as well as any other we have seen.

“Time-to-value and low maintenance costs are emerging as two of the most important differentiators in the market. This is consistent with a post I wrote eleven years ago, in regards to The Ockham's Razor Principle of Content Management Systems. The principle states that given two functionally equivalent content management systems, the simplest one should be selected. Across both the low and the high ends of the market, time-to-value and total cost of ownership matter a great deal. Simplicity wins.”

The agencies we spoke to were even more specific when it came to website builds. Clients still valued great design and still valued feature/application development but the actual build process was very much undervalued and there was an expectation that any platform they used would allow for quick easy changes. Essentially the digital plumbing has become commoditized. No amount of incremental efficiency gains will fundamentally change this dynamic so agencies need to look at how they can transform their ways of working if they are to realign with client expectations.

4. Outsourcing

Every agency is aware of both the advantages and disadvantages of outsourcing and any agency worth its salt has systems in place to track the value outsourcing achieves. However outsourcing is by and large a result of necessity rather than being a first choice solution. As costs continue to rise in outsourcing markets the “value exchange” for agencies gets smaller. Moving to new cheaper markets is one solution that many agencies are looking at but it's ultimately a game of run rabbit run and surely unsustainable in the long run. 

Larger agencies can acquire outsourcing outfits or even set up their own factories but these options are not without their own challenges and probably out of reach of most agencies. An alternative is to reduce the reliance on outsourcing by changing working practices. In App development, and now with Cohesion DX8 in web development, adopting a low code platform offers a viable alternative for some projects. This is bound to increase as the platforms mature and grow to offer even more flexibility and functionality.

5. Innovation costs

It really costs. Like proper money. It can also take years to recoup as most clients lag between wanting to talk about innovation and wanting to buy innovation is considerable. Don’t invest in innovation and your clients go to a trendy new shop that does. Rock and a hard place, especially if you’re a smaller agency. However you cut it it's a margin killer for agencies.

So we know the main issues facing agencies but what are the answers? That debate is complex and already happening in agency boardrooms across the country. There will be traditional responses such as continued acquisitions and consolidation from the big 6 or more additions to the ever expanding services repertoire that agencies claim to specialize in. These solutions can only ever go so far.

We believe that a different approach is needed and that current ways of working need to be revisited. Why does it take so many people at so many levels to run an account in a typical agency. This is where the consultancies have been eating the traditional agencies lunch by offering less, but more senior people to manage the business. As brands continue to in-house they don’t want more low level operational help for the easy problems, they want senior resource that can help them solve the difficult ones.

It may be that it's time to disrupt the disruptors. Why are agency workflows so convoluted when technologies such as low code and artificial intelligence could be the catalyst for a fundamental shift in how we work? Why are agencies racing to the bottom by spraying programmatic fluff around the web rather than working out how to help their clients solve the UX/conversion/brand/service design challenges that actually matter. The debate will go on but the one thing we can be certain of is that running an agency will continue to get more and more challenging.

Drupal 8 and Cohesion DX8 disrupts traditional agency workflows by offering a step change in website build efficiency, by empowering designers to take the lead on digital projects and by enabling clients to do more with their internal teams.