Should agencies worry when clients build in-house digital capabilities?

A new study by Econsultancy is highlighting the challenges digital agencies are facing in 2015.

Increasingly, clients have been building more comprehensive digital capabilities in-house. Examples of these are the likes of Lenovo, who earlier built a social media centre of excellence; Philips, which built its own content marketing facility or OCBC, which built its own analytics function in-house. The examples go beyond this, but show the trend of brands looking to take ownership of their own digital efforts.

According to the study, the trend also means a threat to digital agencies, along with rise in the use programmatic platforms and commoditization of digital.

The study was released by SoDA for its Digital Outlook Study as part of The SoDA Report Vol 1 2015. SoDa is an international association of digital marketing leaders and entrepreneurs, including 86 digital agencies and production forms across six continents.

Conducted in partnership with Econsultancy, the Digital Outlook Study is based on a global sample of 680, evenly split between advertisers and agencies with a large majority of senior company decision-makers.

The study said in-housing of digital efforts is a major challenge with 27% of companies claiming to work with no agencies, more than double the figure from 2014.

Clients that continue to work with agencies are also cutting back on their rosters - just 12% of brands had four or more digital agencies this year, down from 21% in 2014.

Also, over 38% of respondents said rapid commoditisation of digital work such as website development, app development and digital campaign production is proving to be a serious problem for their companies.

Are digital agencies being side-lined?

However, Rod Strother, director, digital & social centre of excellence for Lenovo said that the trend did not apply to his company’s case. Talking about the centre of excellence Lenovo built, Strother said the company still actively works with its agency We Are Social on it.

While there are many things the centre allows the firm to do, there are limits, he said.

“We will always need an external perspective from an agency, who would have worked across many brands,” he said. Also, moving these capabilities inhouse only means it changes the way it has worked with the agency. Strother sees the brand doing more strategy work, while the agency still works on its creatives and offers scale.

“To be honest, I can’t imagine any business being able to work without some sort of agency partner,” said Strother.

Keith Timimi, chairman, VML Qais argues the need for digital agencies as well. "I remember the Dot Com Bust that hit Singapore in the later part of 2000. Lots of my colleagues become client-side marketers, and people said then that digital agencies were toast. Quite the contrary, digital agencies grew and proliferated. I know I am biased, but I have no doubt that the growth of digital agencies will continue, for one very simple reason: talent.

There is a disparity between the amount of work being done, and the skilled people capable of doing that work.

The agency structure allows brands to scale up and manage ‘time-slicing’. Say you want to create a video. No problem right? Call round some friends, go on eLance, put a brief up on 99designs, there are plenty of ways to get work done.

But what about when you need to do a series of videos? Or you need to create a whole series of branded assets? Or get these assets to be shared on social media, which involves both organic and paid skills? And then put it on the website, do SEO, send out the emails, track lead generation and calculate ROI?

The skillsets involved are getting more and more specialised, while the overhead of managing all these moving parts is getting more and more complex.

Some brands will manage to successfully bring this in house, and more power to them. They will remain a minority however. The bigger trend we see, which eConsultancy also finds, is that increasingly digital agencies are becoming lead agency, because increasingly digital is the brand," said Timimi.

More key digital findings:

Chris Buettner, SoDA executive director and managing editor of The SoDA Report, said: “Clients in 2015 feel tremendous pressure to understand and leverage emerging technology trends in order to innovate their operations as well as the products and services they offer to their customers. In fact, expertise in emerging trends is now the number one skill clients most value in their agency partners, up from a distant third in 2014.

“Agencies and production companies – particularly those that invested early in innovation labs and product incubators – are reaping the benefit of clients’ acute need for emerging tech expertise. They’re also increasingly bringing their own IP directly to market.”

  • The study also revealed that agencies remain bullish about prospects, with 80% saying the industry has moved in a positive direction and 76% say digital agencies are now more likely to become “lead” partner agency, an increase of 10% on 2014.
  • Clients are investing heavily in digital, but beyond campaign budgets.
  • 65% of brands are allocating increased spend to digital platforms, applications, tools and services that are non-marketing related.
  • 62% are investing more in customer insights and analytics.
  • 52% are boosting user experience testing and research.
  • Campaign spending will grow, with 47% of respondents globally saying they were either reallocating more budget to digital from their marketing spend or increasing digital spend as part of an overall rise in total marketing spend.
  • Agencies still struggle to estimate project costs, a core business function that has huge impacts on both profitability and their relationship with clients. Agencies and production company respondents scored themselves at 6.32 out of 10 (where 10 is the best) compared to 6.09 in 2014.  The issue has become an even bigger challenge in 2015, as cost overruns are now cited as the second most common reason for the end of a relationship by clients – moving up from a distant fourth in 2014.
  • Clients and agencies are much more aligned in 2015 on the areas of expertise they believe to be most valuable for client organizations. Respondents picked the same top three areas: expertise in emerging trends, marketing creativity and customer centered marketing. Five out of the top seven areas matched in 2015 compared to just one in 2014.
  • Clients and agencies are increasingly working well together. Just under 70% of respondents said they felt the dynamic of brands and agencies was improving overall. Positive responses were higher at independent agencies – 72.3% – than they were at holding company-owned agencies, where it was 62.5%.
  • Organisational structures on the client side continue to be seen as a barrier to innovation by more than four out of 10 agency respondents. Just under 44% of agency respondents made this point but only 16.7% of clients agreed.
  • Innovation labs and product incubators take around three years to pay off. The learning curve means that there is little clear ROI in the early years, although benefits do flow from talent retention and new business development. After three years however, one in four of those tracked had benefited from a company spin-off, VC investment or significant funding.
  • Product innovation has become a key area of opportunity for agencies with a whopping 50% of all agency respondents saying they were consulting with clients on new product and service offerings. This trend was predicted in SoDA’s 2014 study in which product/service innovation ranked as the second most valued area of agency expertise among client-side respondents.
  • Clients tend to hire smaller agencies for design, development and strategy tasks – commonly selecting partners with under 200 full-time employees. Media and analytics services tend to go to larger companies.
  • The number one reason for clients walking away was outgrowing their agency’s ability to deliver against their needs(19%) while agencies overwhelmingly pointed to new client management as the number one reason (33%).  Both sides listed cost overruns as their second concern at 17% among clients and 11% among agencies.
  • Agencies still struggle to handle data, scoring themselves at 5.86 out of 10 on their ability to drive actionable insights from data and 5.69 on the capability to use data to drive deeper personalization. Perhaps as a result this is a key area of client in-housing with just under 35% of clients indicating that measurement and analytics was a internal function.[Image by Shutterstock]