What is the agency model of the future?

I’ve had a number of discussions lately with a number of people about what the future of the ad agency business model might look like. With agencies across the world seeing clients demand much more for less, networks being forced to make massive layoffs due to the global economy and slashing departments that don’t bring in revenue like they used too, we are bound for a large change in the near future.

For some agencies, this change has already been occurring through digital. Clients have gradually (5 years or less) shifted their marketing budgets from mass to digital. Traditional agencies who saw this sea change and were able to prepare for it have been well positioned for the future. Digital-specific shops, once viewed as the ‘black-box web experts’, are now seeing huge competition from brands that they never expected. There is no denying that even in this economy, digital-capable agencies continue to see substantial growth opportunities.

Does this mean in 5 years all successful agencies will be rooted in digital? Maybe. Most large Canadian clients still use over 80% of their budgets in mediums that aren’t digital. TV is not going away anytime soon and, I suspect, OOH, retail and direct will continue to play a role in large, integrated campaigns. But even though some traditional areas will remain strong, they are going to experience full-scale changes.

These changes aren’t due to different agency models popping up. They are because of the consumer. If you have a web-connection, PVR and, well, a brain, chances are you get the content the way you want it - without ads. I’m obsessed with advertising but in the last twelve months I’ve become more obsessed with the FFWD button on my remote. When you’re watching something you like, you don’t want to be interrupted.

Smart brands are dealing with this in a few ways - branded content, crowdsoucring new ideas, connecting like-minded consumers with new communities, etc. I do believe that these savvy brands have been guided by their agencies to think differently and try ideas that might scare them and, almost more importantly, might fail.

A colleague of mine frequently says that forward thinking brands need to embrace failure and learn from it. Treat small tests as chances to learn and keep doing things that you haven’t tried. There is nothing worse than seeing the same media plan, campaign after campaign, with nobody questioning it because - well - that’s what we did before.

So what does this all mean for the agencies of tomorrow? For starters, we need people who are willing to scare clients and ‘sell’ them on ideas their not originally comfortable with. But even more than that, we need to think about how the relationship might change in the future.

For example, Coke has recently announced that they have chanced the compensation model with a number of their agencies. Instead of agreeing to an upfront rate, or retainer, they have mapped out clear, business objectives for the agency to work towards. If these objectives are hit, the agency receives up-to 30% more revenue than their fee. If they fail to meet the objective, they are only compensated for the hard-cost incurred for the project. Coke is calling it a ‘value-based’ model and with a huge brand like this embracing it, other companies might be picking up the phone soon to talk about compensation changes.

When I discussed this model with a CD recently, he brought up a good point - how much control does Coke now have in the approval of the work? If they are going to be tying the agency to specific targets than shouldn’t the agency have more of a say in the approval process? Ideally, yes. In practice? Doubtful.

Other agencies, like CP+B, have invested in Venture Capital divisions. They not only represent large brands, they also help to create them. I think this changes the agency-client relationship dramatically. When your group owns a percentage of the business, it helps to align them - 100% - with key business objectives. It also gives the agency an ability to be treated as a partner vs. a vendor. Scary for some clients who crave total control, liberating for others who want a passionate partner.

Whatever the model, things are changing. The question is, what will you do and, more specifically, what model do you think agencies should adopt to succeed in the future?