If the traditional ad agency is dead, what will take its place?

It was 17 years ago this month that McKinsey & Company published a strategy paper called “A revolution in interaction”. It w...

10 Mar 2014 3591 Views

Celebrating the 17th birthday of McKinsey’s landmark strategy paper as a guide for today’s marketing service firms. 

It was 17 years ago this month that McKinsey & Company published a strategy paper called “A revolution in interaction”. It was a look forward at the likely economic impact of the internet and the mechanisms that would drive it. In 1997 few of us had any idea about the changes that were about to transform marketing or how quickly the business models that defined our industry would become obsolete. Most notable among the casualties was the notion of what has since been coined the “traditional” advertising agency. Once the vanguards of marketing, these institutions struggle to retain their relevance in the information age. As marketers and agencies strive to redefine their relationship today, this prophetic strategy document may hold some important clues. 

Do marketing service firms really have an option today?

The research looked at businesses across the board, but can easily be applied to marketing service firms. It began with an ambitious, if not ominous, preface. “The modern world economy is in the early stages of a profound change in the shape of business activity. Two centuries ago, dramatic shifts in the economics of transformation — of production and transportation — precipitated the Industrial Revolution. An upheaval of equal proportions is about to be triggered by unprecedented changes in the economics of interaction.” 

During the upheaval you may have felt that your traditional ad agency just wasn’t cutting it any more. You wouldn’t be alone. That idea has been reinforced by hundreds of marketing pundits telling us that the traditional advertising agency model is a relic and needs to be reinvented. Considerably fewer have been able to offer a clear picture of what that new model is, a financially viable scenario of how it might work or actionable steps to achieve it.  

This is where the 1997 McKinsey paper offers us some direction. It explores the economic ripple effect that happens when interaction costs between business entities are reduced to negligible amounts, as has been the case with the advent of a ubiquitous internet. From that perspective, the paper predicts a number of trends and adaptation strategies many of which seem, at least in part, to have been borne out during the intervening years. Here are a few highlights:

“Expertise will become an increasingly valuable asset … returns will increasingly accrue to intellectual capital even as physical and financial capital become commoditized. As it becomes easier to leverage knowledge or skills worldwide and seek out the best resources in any given field, individuals who possess critical knowhow will attract disproportionate returns.”

“Vertical integration will become less valuable … In contrast, horizontal integration and cooperation will become more economically attractive.”

It will be far easier for any company, regardless of size, to reach new customers anywhere in the world. … Being global was synonymous with being huge. This is no longer true. Many companies will be born global.” 

“Integrated business systems (i.e. full-service agencies) will give way to more specialized ones, and disaggregation and outsourcing will burgeon.”

“In businesses where distribution or logistics originally made scale essential, falling interaction costs will reduce its importance… As a result, smaller firms will proliferate”

“In general, there will be a shift toward more networked forms of business configuration…Firms in many industries are likely to broaden their network of partners, suppliers, and allies as coordination and monitoring costs plummet.”

So as marketers today sift through the rubble of what once was the traditional ad agency ecosystem, what should they be looking for? Extrapolating from the authors’ reasoning, today’s marketing service firm should look something like this:

  • Starting point: digital acumen
  • Focus: highly specialized service offer focused on a core competence where they have mastered best practices
  • Staffing: small core staff with all non-core functions outsourced to experts, allowing the company to offer more flexible solutions that are highly customizable to client needs
  • Range: agencies should be prepared to serve clients who market internationally
  • Reach: agencies need to be networked globally to provide clients with access to independent expertise world-wide
  • Skills: managing complex projects with outsourced talent will be an essential core competence of any agency
  • Proficiency: beyond being able to code websites, agencies will be fluent in the new business opportunities and challenges presented by global interconnectivity via digital media.

What emerges from this picture is a highly flexible agency that is constantly adapting unique combinations of global resources to best meet each clients specific needs. Instead of having the largest staff of local talent, top agencies will have the largest rolodex of global talent along with the skill to manage them at distance. Instead of offering “full service”, agencies will focus on what they actually do best. Instead of making the client’s problem fit the agency’s staffing and capabilities, those things adapt to the client’s problem. Instead of trying to own the client and compete with all other marketing service firms the new agency owns an area of competence and cooperates. 

“This enhanced interactive capacity will create new ways to configure businesses, organize companies, and serve customers, and have profound effects on the structure, strategy, and competitive dynamics of industries. Yet business leaders will find it difficult to anticipate the opportunities and threats this change will present because our assumptions and thinking about strategy and organization are based much more on the economics of transformation [production and distribution] than on the economics of interaction.” McKinsey & Company, 1997

This is a good start, but we still need to define the specific products and services that marketers would need such an agency to provide, particularly with regard to the new frontier of online marketing. While many marketers can identify pain points with traditional agencies they are not always able to specify the agency model that would suit their needs any better. As McKinsey put it in a 2005 follow-up study, “the direction is clear but the path isn’t.”  In fact, the original paper predicted that business leaders today, blinded by their pre-internet habits, would be slow to see the shift clearly and adapt accordingly. 

Amidst this uncertainty, one thing is clear: For brands to successfully adapt to changing needs in the market the marketing agencies that support them will need to adapt in kind. But over the last decade traditional agencies have floundered in this role leading many to conclude that they may not be the most qualified to define their own path. As part of my agency’s effort to define our path, we’ve concluded that it is something both parties need to do together. To that end, we’ve been surveying current and past clients as well as a number of astute marketers to explore this issue. Working out from the forward-thinking work of McKinsey and others, we have created a hypothesis of what the new agency model might look like with regard to features, focus and services. The survey is serving as a litmus test for these ideas and will be used to shape our service offer. As you might guess, we are eager to receive as much feedback as possible. A link to the survey is below and I’d be delighted to have your input. It will only take 5 minutes to complete and participants can receive a copy of the results if they wish. 

 

There is no predefined formula marketers can use to adapt to the information age, partly because we are entering new territory. But accepting that our past may be limiting our ability to see this new marketing landscape clearly is the first step in gaining the perspective we all need to navigate it. And that is the real value of the McKinsey paper: perspective. Logically written in the calm before the storm it can offer both a framework to understand the changes we are going through and a blueprint to guide our efforts to adapt. 

Sean Duffy | @brandranter
Speaker, consultant & founder of Duffy Agency, the flipped digital agency that provides accelerated growth to aspiring international brands.