By common consent, the media agency business model is not in the best of health.
In recent times, agencies have supplemented their traditional media planning and buying services with digital, data, research, effectiveness and branded content resources. Core remuneration, however, is often still based on commission.
Agencies continue to make the bulk of their money from the established trading model and "other media income" (OMI), in the form of outdoor rebates, unbilled media, ad-serving mark-ups and spin-offs such as interest on client money and deferred payments.
These subsidise newer services, especially digital, which make little or no money.
In 2010, this model is broken. The recession of 2009 saw budgets tumble and income fall, while $20bn worth of new business pitches and private renegotiations forced agencies to accept reduced margins. Client procurement specialists have also trimmed back OMI in the name of transparency.
The media agency business model desperately needs a radical rethink. At issue is the ability to charge a realistically profitable rate for the new generation of services now required at a time when the traditional income has begun to dwindle.
Must learn new skills
The agency of the future must add to its traditional skills by developing three key areas: consumer insight, data analytics and the development and use of technology platforms.
Clients need to track consumer behaviour in a world where share of attention is more important than share of voice. Segmentation of customer groups will overtake the traditional audience definitions and customer databases will become a common source of targeting data.
There is an emerging requirement for new insight into consumer behaviour, attitudes and paths-to-purchase, using data derived from a variety of sources, many of them real-time.
The growing range of media options, many of them ad-free, creates a real headache and the media process needs to encompass not just new "touchpoints" that can be controlled, but positive advocacy and sentiment in user-generated channels.
The primacy of digital channels also means that the interface between content and media distribution will erode. Media agencies will both create and place content-led programmes in a range of digital channels, across a variety of platforms.
Knowing how and when to connect with a brand's audience across a variety of channels will become even more vital, and data analytics will have a big part to play; new techniques will be needed to capture, measure and analyse the growing volume of actionable data.
The media industry also needs to focus on effectiveness and data produced by digital media will form the basis of a new generation of measurement tools.
Agencies will need to dedicate significant resources and put data analytics at the heart of the planning process, building predictive modelling to improve ROI based on data harvested in real-time.
Finally, agencies must also address their biggest area of weakness: technology, both for creating brand communications platforms but also in their own businesses. They will have to dramatically improve productivity by focussing on process improvement.
Clients will back this transformation for three reasons. Firstly, it means that plans will be optimised to meet their objectives and not to serve agency deals or historic precedent.
Secondly, media investment could be assessed on the basis of business growth and not simply efficient delivery of audiences and cost. Finally, improved transparency would foster stronger agency relationships.
For the new blueprint to work, however, there has to be massive change in agency payment. Until now, agencies have been paid for the money they save, not the money they make.
The first change will be a shift towards a time and materials approach. Charging for the time spent creating and delivering a client's brand communication activity will provide one source of income.
However, this will not be enough to fund the business transformation required and maintain the 20% plus margins demanded by their holding companies.
Agencies need to link their fortunes to the positive contribution they make to client success. The interactive nature of digital channels will allow the media agencies to measure the impact of activity, allowing them to base income on new metrics, such as click-through rates, cost per customer acquired, incremental revenue per customer, as well as more generalised profit or margin uplifts.
The real upside in agency income must come from the virtuous circle of great agency performance helping to deliver outstanding business success, with agencies negotiating additional margin for stellar business results.
The industry is crying out for leadership. The big communications groups need to pioneer new approaches. They have the strength to be able to force through change and can also afford to take some risks.
For the enterprising agency group prepared to grasp the nettle of delivering a smarter range of new-age, integrated, comprehensive media agency services with a sustainable profit model based on business success; first-mover advantage is still available.
Nick Manning is chief operating officer of Ebiquity Plc
A longer version of this article is available at www.billetts.com/response
This article was first published on brandrepublic.com