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PrefaceWe live in a world where perpetual connectivity has transformed daily life. The consumer is now in control and the convergence of marketing and technology has undermined the effectiveness of traditional marketing approaches.

At the MAA, we believe that the industry is still by-and-large stuck in the Mad Men era, and clients are becoming increasingly frustrated by agencies’ inability to deliver on their evolving requirements. The time has come to re-evaluate the agency model.

Before embarking upon something this transformational, we needed to understand the root causes of these changes, and assess the current client/agency landscape. This report explores both, and has helped us develop four hypotheses that we will be testing over the coming months with a view to helping both our member agencies and clients develop more meaningful relationships moving forwards.

It makes for an interesting read.

Mette Davis, Director SapientNitro

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ABSTRACTThe following document ties together key findings from desk research to tell a story about the past, present and future role of the marketing industry and the players involved.

CONSUMERS

NEW COMPETITORS

AGENCIES

CONSULTING FIRMS

CLIENTS

The key players in the landscape we describe are:

The report examines key trends affecting each of these categories to enable us to hypothesise what the future agency will look like.

A first section looks at the 20th century world that agencies, clients and consulting firms were born from, and why that worked in the past.

A second look at how the impact of digital and mobile is disrupting that balance in the 21st century.

A third section looks at the industry and the challenges that marketing departments and agencies face.

A final section provides the hypothesis on the models of the future agency.

The overarching theme is the impact of digital and mobile technologies on both consumer behaviour and competitive dynamics, and consequently on the need for legacy enterprises (clients) and agencies to adapt – from knowledge and skill set through to organisation design and broader positioning in the industry.

THE IMPACT OF DIGITAL

AND MOBILE TECHNOLOGIES

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The 20th Century agency landscapeModern corporations were born from the TV-industrial complex in the mid 1900s.

These enterprises were, in the words of Aaron Dignan (Undercurrent);

Marketing and communication agencies and consulting firms also flourished around this time. Both relied on a simple premise: that clients couldn’t solve their own problems, and needed outside help to gain competitive advantage. The table below shows how the two roles and solutions differed.

AGENCIES RELIED ON A SIMPLE

PREMISE

AGENCIES CONSULTING FIRMS

ProblemSelling the client’s products or services

Improving efficiency of the client’s organisation

SolutionCreating, planning, and handling advertising

Finding and removing waste in the system

What the solution looked likeTV commercials, magazine advertisements, radio advertisements, billboards

Models, methods, best practices, layoffs, re-orgs

“far-reaching and far flung, with divisions, hierarchy, and a staggering amount of complexity”

For decades, this system worked. These were the years when the likes of Ogilvy and JWT on one hand, and McKinsey and BCG on the other, were king. Two of the reasons for that include:

Industry dynamics remained unchanged for a great part of the 20th century. Media channels were few, allowing TV campaigns to effectively reach millions at a time and generate significant value for clients.

MARKETS

WERE STABLE

Consulting firms and agencies were the “world-wide-web for the enterprise” decades before Google – stitching together organisations through shared information and practices across industries and geographies.

KNOWLEDGE WAS TRAPPED INSIDE

INSTITUTIONS

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What’s changed in the 21st Century?The world has changed since the days of ‘Mad Men’ described above. Large organisations face new challenges which agencies and traditional consulting firms are currently unable to resolve. Some of the key changes are summarised here:

CONSUMER SIDE: DIGITAL AND MOBILE TECHNOLOGIES HAVE FRAGMENTED MEDIA AT ALL

STAGES OF THE CONSUMER PURCHASING PATHWAY, RADICALLY CHANGING THE WAY PEOPLE SHOP FOR

PRODUCTS AND SERVICES.

1Long gone are the days when TV ads could effectively reach millions of people, and convince them to buy the product next time they visited the store. Instead, digital and mobile (the internet, laptops, smartphone ownership etc.) have fragmented the number of channels and turned the purchasing process into a complex web of interactions between the digital and physical worlds. The diagram below, by BCG, illustrates this point well.

70% of Americans now own smartphones and the average person checks their phone every six minutes, about 150 times a day

1 in 3 of all UK online sales is now on mobile or tablet.

45% of all e-retail traffic is from mobile or tablet

Source: BCG, GMA, IRI

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2 SUPPLY SIDE: AN UNPRECEDENTED RATE OF CHANGE AND A NEW WAVE OF COMPETITORS GEARED TO MEET

THE CHANGING CONSUMER EXPECTATIONS.

New entrants have threatened the status quo in record time in almost every industry, meeting the changing consumer behaviour and expectations described above. The result is that the rate of change in today’s market causes unprecedented uncertainty: for example, the average tenure of Standards & Poors 500 has decreased from 60 years in 1960 to just 15 years today. Billion-dollar companies, such as Uber and Airbnb, can be built in a few years (not decades) in a capital-efficient manner, and falter just as quickly.

3 CLIENT SIDE: LEGACY COMPANIES ARE COMPOUNDING THE ABOVE CHALLENGES THROUGH UNRELENTING CORPORATE GROWTH AND EXPANSION, CAUSING

UNFORESEEN LEVELS OF ORGANISATIONAL COMPLEXITY.

New layers of middle management, global divisions lacking horizontal connectivity, and toxic internal and partner politics have contributed to give clients a lack of speed and an inability to process information and adapt when needed. We have become too formulaic in our approach.

All of these changes mean that we live in a highly dynamic world where institutions have to change faster than ever, and at a scale that makes this virtually impossible.

While many agencies now boast new practices (replete with buzzwords such as “digital”, “lean”, “agile” etc.), these firms spent the last century mirroring the complexity of their clients within their own organisations.

Companies need to rediscover their capacity to change and adapt, rather than sustain their addiction to outside help. If the fields of advertising and consulting are to survive, thrive and create value in the 21st century, they will have to reinvent themselves.

Anna Vital, for Founders and Founders, based on reports in the Telegraph, WSJ and The Atlantic

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With the world changing and new challenges arising, it is important to consider our industry in more detail. This will help define the challenges we are facing and build momentum behind the need for this industry, both client and agencies, to transform for the future.

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Key industry statistics

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500 PITCHESA YEAR

AVERAGE AGENCY TENURE3YEARS

Today

7YEARS

30 years ago

- There are, according to Companies House, approx. 20,000 registered agencies in the UK, with an expected growth of 3.9% per year between 2015 and 2020.

- In 2013, 82% of agencies had between 0-4 employees.

- Revenue in 2014 was £18.9bn. This is expected to increase to £22.9bn in 2019/20.

- FMCG is the highest spender and accounts for over 40% of the revenue spend.

- Almost 50% of agencies are based in London and South East of England.

- There are around 500 pitches per year.

- Average agency tenure today is under 3 years; 30 years ago it was over seven years.

- 54% of clients have payment terms exceeding 60 days, with 2% at 120 days.

- 58% of clients have in-house agencies, with over 50% of these delivering digital work.

- 82% of clients are looking to move to a more hybrid model or part retainer, part project assignments.

- Average tenure of CMO is 5.3 years.

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A breakdown of client location in the UK

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88%O F C O M P A N I E S A R E I N U K

- There are 5.2 million private sector businesses in the UK in 2014.

This has increased by 1.8 million since 2000.

- 76% of businesses are non-employers.

- 99.9% are designated SME (250 or less employees).

- 99.3% designated small (0-49 employees).

- The number of large companies fell from 7,200 in 2000 to 6,700 in 2014.

- Number of medium companies is 31,000 (50-249 employees).

88% of companies are in England• 934,000 London

• 837,000 South East

• 550,000 East of England

• 500,000 South West and North West

• 400,000 West Midlands

• 350,000 Yorkshire and the Humber

• 325,000 East Midlands

• 150,000 North East

There are: 325,000 companies in Scotland,

200,000 in Wales,

125,000 in Northern Ireland.

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RELATIONSHIP

CMOʼs

RELATIONSHIPWITH

CMO/CIO

CMO CIO

70%

Today’s CMOs are facing an increasing number of challenges, both within their own organisations and around the environment we now operate in. The era of Mad Men has definitely departed, and the industry is now in a position where CMOs are struggling to show the value they bring to the organisation. The biggest challenges they face over the next five years include:

- Demonstrating the value of marketing (52%).

- Meeting the unrealistic company objectives (38%).

- Maximising the potential of new technology (44%).

- Showing a proven ROI and a greater commercial awareness (69%).

- Integrating new technologies into a unified customer experience (61%).

- Talent/skills gap (34%).

- The relationship with CTO/CIO (70%).

- 1/3 senior marketers looking for a new role.

- Marketing influence has decreased in areas of innovation (2.5%), new product development (6.7%), pricing (5%), market selection (9.2%), Promotion (5.4%).

- 94% of marketing procurement is on a cost reduction target.

What is really interesting is the need to prove an ROI. If you look at the latest CMO survey, it shows that 20.4% of CMOs don’t actually measure their marketing effectiveness, and what is more worrying is that 19.8% take a measurement based on a manager’s judgment. This is an area in which agencies can really support clients, and help prove their effectiveness because clients are typically spending approximately 1.5% - 3.5% of their marketing budget on measuring ROI.

The cost reduction targets set by the majority of marketing procurement departments also makes it more difficult for marketing to demonstrate their impact, as the value of the idea gets negotiated down. However, if you talk to marketing procurement, they would prefer to see targets around innovation (68%), process improvements (82%), agency performance improvements (84%), improving marketing ROI (64%), marketing stakeholder satisfaction (66%). Cost reduction is still high (81%) of respondents, but we are starting to see a need to move to a more diverse approach to marketing procurement.

Marketing challenges, internal and external

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The increasing impact of Big Data on organisations and their suppliers

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There is an increasing trend, much talked about in the press, about the blurring of lines between the CMO and the CIO/CTO. This trend is set to continue, as Forbes and Gartner both predict that by 2017 the CMO will be spending more on IT than the CTO. This trend is definitely a concern to CMOs as 20% of them, when asked, felt their relationship with the CIO was poor/very poor. While 70% realise the need to build strong, collaborative relationships with their counterpart, just 13% have actually done so.

The reason for the collaboration is mainly down to the role that ‘Big Data’ is playing within organisations. CIOs own the data/ processing of data, whilst marketers can use the data to take real time action.

Big Data is also enabling different companies to enter the traditional agency space. We are seeing the Big Data Companies, Acxiom, Epsilon, Experian and Merkle, and the Management Consultancies, Accenture Interactive ($600m (approx. £397m) revenue), Deloitte Digital ($340m (approx. £225m) revenue), IBM ($717m (approx. £474m) revenue) move into this space. The advantage they have is that their relationships with CEOs is enabling them to open doors with CMOs in a way that traditional agencies can’t.

If you look at the large traditional agencies their billings (revenue) is exponentially lower: Adam&Eve DDB (£218m in billings), Ogilvy and Mather (£124m in billings), BBH (£230m in billings).

This trend is likely to continue, as 37% of client CEOs own the Big Data workstream (only 9% of CMOs are the drivers of big data in organisations). And with 43% of clients setting up the role of Chief Data Officer the position and role of the CMO will blur further and increase the need to build excellent relationships with CIOs and now CDOs.

43% OF CLIENTS SETTING UPTHE ROLE OF CDO

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All of the challenges the CMOs are facing means they expect their agency partners to step up to help support them in meeting these challenges. Yet this does not appear to be happening. More than half of marketers feel that agencies do not fully understand them as a client and the issues impacting their business, yet 90% of agencies feel they do understand clients. At present there appears to be a disconnect in the relationship between clients and agencies, with clients being much harsher in viewing the support their agency partners are delivering for them – in terms of driving sales (56% of clients thought their agencies understood how to drive sales, compared to 84% of agency heads), demonstrating ROI (40% of clients thought their agencies did a good job at demonstrating ROI, compared to 76% of agency heads).

Failing client/agency relationships

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The key areas, and the reason why clients came to agencies in the first place, seems to be under threat, with over 73% of US clients feeling that their agencies cannot come up with genuine consumer insights or media neutral recommendations that are not “TV”. This has led to many clients (68%) questioning whether traditional agencies can transition their business model to meet their needs, especially around the role that digital plays within their business.

Another key area that impacts on the relationship is the agreed definition of the word “creativity”. Two thirds of clients and agencies disagree on a definition impacting on the results of the business. Currently only 26% of clients feel that the best creative work can really move a business.

This is why we are seeing an increasing shift towards both strategic thinking and planning moving in-house to support the in-house digital teams (currently 62% of clients are considering taking digital and creative in house), and, why we are seeing a breakdown in trust between clients and agencies. Increasingly agencies are viewed as suppliers and not partners with 56% of clients thinking that agencies are more interested in “selling their work” rather than “solving our problems”.

To change the way this industry is moving, clients and agencies need to be more honest with each other and communication needs to be better. Agency leaders need to have the ability to speak their minds openly to clients, without the threat of upsetting clients – only 36% of agency heads feel they can speak their mind. This is one of the key areas that the future agency needs to be addressing and soon, otherwise we will see even more clients (currently 62%) treating their agencies as suppliers rather than partners.

IN HOUSE

CLIENTS ARECONSIDERING

TAKING DIGITAL ANDCREATIVE IN HOUSE

62%

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Skills / Talent shortage

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In PWC’s report on talent, unveiled at Davos in January 2015, the number of CEOs concerned about the skills gap in the UK has risen from 64% to 84% in the space of a year. Part of the reason for the rise is attributed to the education system in the UK.

Across the industry, both client and agency, there is a talent/skills gap impacting on middle management. This is challenging the effectiveness that CMOs are seeking. 34% of CMOs say they have a skills/talent gap with the majority of this focus being on digital, with 11% of CMOs saying the standards of their team is very poor.

We are also seeing that there is a scarcity of the right resource available to marketers, as they struggle to fill their job openings. We have seen a reduction in permanent places of close to 21% year on year, yet the number of job openings has risen by 2%. This shows that we are not getting the talent we need either entering the industry, or qualified to do the job. This has led to clients increasingly outsourcing roles (3.1% in August 2013 to 4.3% in August 2014) and asking agencies to fill the gap on a temporary short term basis either to fulfill a project or cover a member of staff.

This temporary cover will only increase, as clients focus on meeting their short term needs, rather than addressing the long term skills gap that will occur further down the line. The issue is further exacerbated when you see that only 36% of the industry (both client and agency) has received any training or development in the last 12 months.

Yet it is the same within agencies, which face the issue of finding the right talent that will not disrupt their business models. The decline in talent is due to the rise of the ‘digital world’ and the increasingly finite resource of finding and paying for experienced digital talent. This has in essence led to a ‘war for talent’ scenario where agencies and clients are investing too heavily to secure the top talent.

On top of this concern about finding the right talent, we are seeing both client CMOs and agency heads having big concerns about losing their most talented staff. 1/5 of agency professionals and 43% of marketing clients are worried about this. This is especially concerning for CMOs as they are seeing their direct report headcount falling from 8.6% of headcount in August 2012, to 5.5% of an organisation’s headcount in February 2014.

If you consider this, you would expect marketing teams within clients and agencies to be investing heavily in staff training. Yet this is not the case.84% OF CEOs ARE CONCERNED

ABOUT SKILLS GAP

SKILLS

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Location, Location, Location.

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Linked to the problem of talent / skills shortages is the issue of location. The increasing cost of housing in and around London it is making it harder and harder for talent to live/work in London. 70% of employees aged between 25 and 39 say that the cost of living is making it hard to work in London. If prices continue to rise, as predicted, 46% of London businesses (not just agencies) are concerned about their ability to attract, recruit and retain talent.

House prices in London are increasingly causing the talent that wants to experience living in London to share rooms. The likes of spareroom.co.uk have seen a 71% rise in searches for bedroom shares over the last two years. To share a room (often a room with a bunk bed for two adults) still costs on average £259 per week and at present 10 people are chasing every room that is advertised. The question is, how long will it take before the talent says enough is enough and refuses to live or work in London?

COST OF LIVING

EMPLOYEES AGED BETWEEN 25 AND 39

COST OF LIVINGIS MAKING IT

HARD TO WORKIN LONDON

70%

These are just a few of the challenges the industry is facing at this moment in time, but do highlight why agencies need to transform the way they do business with clients, otherwise facing the risk of extinction.

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How might the agency of the future look?

TEAR UP THE RULE BOOK1• Today’s agencies are stuggling to transition to a new world, this is in part caused by the traditional operating models

they have in place. This is causing increasing strain between clients and agencies.

• The agency of the future will have to adapt structures, processes, operating models and collaboration to enable a chameleon like approach to partnering with their clients.

• Agencies need to adapt their business development (organic and new) approach to include more flexible methods and focus on new ways of making money.

The more the ‘agency of the future’ focuses on entrepreneurialism, culture and structures, the more likely it will be to succeed.

This debate is to focus on how agencies need to operate in the future to be able to be commercially successful and deliver to clients’ needs.

THINKING CREATIVELY IN THE AGE OF PROCUREMENT2

• The industry today seems to have lost sight of solving strategic marketing solutions for clients and has moved to a tactical delivery approach.

• Creative problem solving through specialists has lost its way, as agencies deliver integrated solutions for clients.

• The rise of the in house agency is a result of the current situation.

• Remuneration models need to change to enable proper effective creative problem solving to thrive.

• Business Development will be able to show impact on businesses rather than tactical solutions.

The more the ‘agency of the future’ goes back to its core competencies with marketing and creative problem-solving as its central focus, the more marketing will shine thoughout client organisations and become a central necessity for any organisation.

This debate is about changing the current relationships with clients to enable the core expertise of agencies to deliver to clients’ needs.

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3 PROVE IT AND SHOUT ABOUT IT

• Clients need agencies to step up and showcase greater ability to deliver marketing effectiveness against business KPIs. To do this effectively, clients need to trust their agency and be willing to share greater data to enable success with the agency.

• Data is key to delivering the right measurement and results, and marketers and businesses need to share with agencies to ensure an approach focused on business results.

• Remuneration models need to fundamentally change to ensure agencies can invest in the right talent, entrepreneurialism, culture, and structures to help their clients solve their business problems with effective marketing solutions.

Proposed trials/ project’s:

• Client shares more data with collaboration of agencies to showcase marketing effectiveness

• Client gives one agency control of marketing effectiveness and shares the appropriate data

• Client controls marketing effectiveness in totality.

The more the ‘agency of the future’ owns marketing effectiveness on behalf of the client, the greater the value it will deliver back to the business.

This debate will focus on the need to change the way agencies can prove their worth to client businesses. It will consider what needs to change in the way we work in order to help marketers prove the value of marketing within their business.

This debate will also focus on whether the current measurement models meet the current needs of clients. A ‘like’ is not enough anymore.

BUILDING THE PATH TO COLLABORATION4

• Creative problem solving is core with the increasing proliferation of routes to market and the need for media neutral solutions is also vital. Clients do not feel they are getting this, so agencies need to change their approach to succeed.

• All creative work needs to focus on meeting the commercial challenges of the business.

• Agencies will need to demonstrate they can work with partners outside their traditional model to solve the commercial challenges of the clients business. This means working with start ups, bloggers, vloggers, and YouTubers to creatively meet these demands.

• Clients will not change their approach to dealing with agencies if agencies do not change the way they approach their clients’ business. For a more open and honest relationship, trust needs to be earned, to enable greater opportunities for success.

The more the ‘agency of the future’ can demonstrate honesty, neutrality and true expertise across a wide range of skills and sectors, the greater the trust and the more successful the work.

This debate will focus on the need to change the way agencies work with clients to build trust into relationships. What do agencies need to do, in order to turn around the current trend of being treated as a supplier and not a partner?

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MAA – tFutures transforming the future

1. Turner and Townsend, Moving Out: How London’s housing shortage is threatening the capital’s competitiveness, September 2014

2. AAR, Pitching in 2014, AAR

3. Hays, DNA of a Marketing Leader, 2014

4. Hays, UK Salary& Recruiting trends 2015, 2015

5. Kingston Smith, Financial Performance of Marketing Services Companies, 2014

6. Forbes, What CMOs are saying about the future of their relationships with Agencies, September 2014

7. RPA, The Naked Truth, June 2014

8. The Bedford Group, Agency Relationship Sustainability, 2014

9. ANA, The rise of the inhouse agency, 2013

10. UK Commission for Employment and Skills, UK Commission’s Employer Skills Survey 2013: UK Results January 2014

11. CMO Survey, CMO Survey Report, August 2014

12. ANA, Elevating the role of Marketing Procurement, June 2013

13. Gartner, The Battle for your Business: Magic Quadrant for Global Digital Marketing Agencies, 2014

14. Gov.uk, Business Population estimate for the UK and regions: 2014 Statistical release, 2014

15. WFA, WFA survey results on payment terms, October 2013

16. Reed, Salary guide and market insight 2015, Overview: Marketing and Creative Industry, 2015

17. PWC, PWC 18th Annual Global CEO Survey 2015, 2015.

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