With most of the agency holding companies’ third quarter 2019 results in and the outlook for the remainder of the year relatively set in the minds of investors, it’s a good time to reassess the big picture for the agency industry.
In my prior role as an analyst, whether bullish or bearish on the near-term for the sector, I wrote about the long-term resilience of agencies.
I even argued that over extended time horizons the sector retained the potential to out-perform many of the companies in adjacent sectors within the media industry.
In the worst-case scenarios I could envision, I believed that agencies could retain the bulk of their revenues because what they did was fundamentally unique and essential.
Whether a media agency, a creative agency or any other type of agency, one of the most important – if under-appreciated – functions they perform is their day-to-day creation and socializing of ideas with clients and scores of internal constituents.
These ideas go well beyond creative branding concepts: they can include identifying new workflows across marketing functions, finding new ways to work with media owners to maximize the value of a buy, or establishing concepts for new mobile application interfaces, for examples.
Such ideas are necessary for companies to evolve their marketing capabilities and drive growth.
External parties are often better positioned to help their clients build an internal consensus related to why and how a client should do something new within their organization, especially if it involves meaningful changes to the way things have been done in the past.
The process of implementing those ideas will also benefit from external partners who have a depth of experience in applying them across multiple organizations.
Doing all of this within global enterprises is challenging work in the best of times, and as they become more complex with increasingly matrixed reporting lines across business units and geographies, agencies and related services will become even more essential.
In the best-case scenarios I imagined, the commercial creativity that is endemic to the culture of agencies would help agencies find new services to offer their clients and help them balance their growth objectives in new areas while containing costs in older ones.
Upside potential
As an illustration of the upside potential we could point to the relatively small share of marketing services spending that agencies generate at present: the entire industry’s annual global revenue is under $150bn (£117bn), or well under 10% of global spending on marketing (we can estimate there is $1.5-2tn in total activity).
This means there was – and still is – significant room to find opportunities for expansion.
Certainly, we can see these opportunities emerging within agency holding companies today. For example, most agency groups have developed people-based marketing platforms which help marketers work to manage the otherwise highly fragmented world of digital media.
Most agency groups have invested in IT services capabilities which help clients pursue business transformation initiatives.
Agency holding companies have established dedicated units that help clients produce high volumes of low-cost creative content.
And essentially, all agencies even have offerings to provide various services for clients who decide that in-sourcing work is right for them.
The important question for investors is whether the mix of revenue streams becomes more favorably disposed towards these activities over time.
In early 2014, when investors were particularly negative, and I felt it important to make the resiliency argument, the industry had just come off a year of around +3% organic growth in 2013, following +4% organic growth in 2012.
Better growth to come
Fast-forward five years and if we (appropriately) include IT services firms’ marketing-related work in what we consider comprising the agency sector, we saw 2018 growth of around +4% and are trending toward +3% growth this year.
IT services were not much of a factor five years ago, but by now, they likely represent 20% of the industry and are probably growing around +10% annually, and should be included in our industry’s definition of itself.
There is no denying that the sector is relatively soft at present.
But if we agree that the definition of the industry is broader now than it was five or more years ago, then arguably its growth is not unusually soft.
Agencies have a history of resilience because of the core service they provide. And as owners of traditional agencies have improved their alignment of resources to better serve their clients’ needs in deployment of marketing-related resources, they are positioned to benefit from better growth rates in years to come.
Brian Wieser is global president of business intelligence at Group M