The Soda Academy
"We're hearing a few consistent desires from clients: 1) Elasticity - clients are struggling inside their organizational silos and want agencies that don't suffer from the same rigid structures and instead thrive on fluidity; 2) Chemistry - as the need for collaboration increases clients are increasingly looking at team chemistry as an explicit part of their selection criteria and small to mid-sized agencies are more likely to deliver on that; and 3) Velocity - many report having negative experiences in the past with large agencies not being able to move at the pace of the social consumer."

Agency Ecosystems in 2015

Key Insight:

The percentage of clients taking full responsibility for digital efforts at their companies grew significantly in this year’s study.

Those clients who are working with digital agencies are reducing the size of their rosters. Only 12% of brands had four or more digital shops on their roster this year, down from 21% in 2014.

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Number of Digial Agencies

In SoDA’s 2015-2016 study, there was a significant spike in the number of clients indicating they were not working with outside agencies on their brand’s digital efforts (27% in 2015, up from 13% last year).

In North America, the in-housing trend was essentially on par with the global average. 28% of client respondents in North America indicated they were handling all digital efforts in-house.

While no doubt an alarming trend for agencies, other research studies conducted by SoDA in 2015 underscore that the overall state of the business for top digital shops is strong.

For example, nearly 8 in 10 respondents to SoDA’s Q1 2015 KPI Survey indicated that their revenue grew or was stable during the last quarter of 2014 (vis-à-vis Q3 ’14). Over 73% reported that their profit margin rose or remained stable during the same quarter. And when asked to set their company aside and rank the health of the digital services industry in 2015 on a scale of 1-10, the average response was a robust 7.1.

We continue to see a clear trend of clients maintaining digital initiatives in-house and working with a select group of outside partners on innovation efforts. Many digital agencies are also diversifying their revenue models and bringing their own products and IP directly to market as a growth engine for their companies and as a hedge against the commoditization and in-housing of some digital services.

In fact, for agencies whose innovation labs are 3+ years old, one in four reported that their efforts had resulted in a company spin-off, VC investment or significant funding; four in five said their innovation lab efforts contributed directly to new business wins, and slightly less than one in three indicated increased revenue from their product incubation efforts.

As brands continue to build their own digital capabilities in-house, it’s no longer as common to see crowded rosters of digital agencies servicing a single client. In the 2015-2016 study, only 12% of brands had four or more digital shops on their roster, down from 21% in 2014.


Role of Agencies & Consultancies in Client Innovation Efforts on the Rise

Key Insight:

Nearly two in five clients now work with agencies and consultancies to innovate their company’s product and service offerings.


Innovation Partners

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Innovation Partners

In last year’s DMO study, when clients were asked what they valued most in their primary agency relationships, the second most prevalent response was “product/service innovation.” While approximately 60% of clients handle innovation efforts internally, nearly two in five now work with agencies and consultancies to innovate their company’s product and service offerings.


What Types of Digital Shops are Clients Hiring?

Key Insight:

Two strategic approaches are emerging – one toward higher levels of specialization and another toward agency consolidation.

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Digital Shops

The percentage of client organizations working with a small roster of highly specialized agencies remained high in this year’s study (27.8%), and consistent with our 2014 findings (29%).

There was also a significant increase in the share of clients indicating they worked with one lead agency for digital and traditional assignments. That figure was 30.5% in SoDA’s 2015-2016 study. Clearly, two strategic approaches are emerging – one toward higher levels of specialization and another toward agency consolidation. In its 20 Digital Trends for 2015, Forbes seems to be squarely in the consolidation camp.

Marketing Mediums Merging. Content marketing, SEO, PR, social media are all blending into one skillset. No longer is there a need for numerous boutique agencies, as such disciplines are all inter-dependent upon each other with today’s techniques. Look for agency consolidation here. (Source: Forbes.com, 1/16/2015)

On the other end of the spectrum, there are highly specialized businesses in our industry that many clients are clamoring to work with in areas such as user experience, data and the use of technology platforms for built environments, among others. We’ll continue to track this trend in subsequent studies, but we fully expect the two approaches to co-exist in the short-to-medium term.

When we further segment the data, the 2015 survey shows a direct link between level of digital sophistication on the client side and the use of specialized / niche digital agency partners.

  • Those clients who characterized themselves as “Very or Somewhat Innovative” with respect to digital initiatives were five times more likely to be working with highly specialized digital agencies or a mix of full-service and highly specialized shops.
  • Only 1 in 8 clients who characterized themselves as “Not Very or Not At All Innovative” with respect to digital initiatives were working with highly specialized digital shops.


Independents in the Majority on Client Agency Rosters

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Client Agency Roster

More than 60% of client-side survey respondents indicated that they work primarily with independent shops on their digital initiatives. An additional 27% said they work with a mix of independents and holding company agencies. While M&A activity was strong in 2014 (and thus far in 2015), it’s clear that independent digital shops still have a bright future and a commanding position on clients’ agency rosters.


Size Matters... Somewhat

In this year’s survey, we also asked clients about the size of the agencies they work with and the types of assignments awarded. Here were the top three most common areas of engagement with clients by size of agency.

Q. Based on discipline, what size(s) of companies do you currently work with on digital initiatives?

Client Engagement with Agencies

For smaller agencies (0-50 FTEs and 51-200 FTEs), Design & Development are the most common areas of engagement with clients. The findings also suggest that clients are opting for small and mid-sized agencies to handle strategy engagements.

Client engagements in the area of User Experience cut across multiple agency size categories. As SoDA member Ari Weissman from EffectiveUI points out, the agency’s (and client’s) ability to collaborate is arguably the most important selection criterion for agency-client collaboration on the UX front. “Working with a UX design agency is transformative for many client organizations and requires collaboration not just with the agency but across the entire client organizational structure, involving stakeholders who oftentimes have not worked together before,” says Weissman. “Your customers don’t care if organizations are siloed. They expect a cohesive and integrated experience,” he added.

Analytics and Media rounded out the Top 3 for client engagement with agencies in the 200+ FTE category. Larger companies – including consultancies such as IBM interactive and Accenture Interactive – have developed extremely robust analytics offerings that are clearly resonating with clients who are under intense pressure to apply more science to the art of marketing.

On the media front, a sophisticated ecosystem has coalesced around programmatic buying. While specialized providers have enjoyed a certain first-mover advantage in this space, some larger agencies are coming on strong, building complex programmatic platforms in house.

Key Insight:

Half of all agency respondents report consulting with clients on new product and service offerings.


The Changing Nature of Client Engagements

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The Changing Nature of Client Engagements

In last year’s DMO study, clients ranked “product/service innovation” as the second most valued area of expertise for their primary agency relationships. In that same study, agencies, however, ranked product/service innovation a distant fourth in their evaluation of what clients valued most.

Fast forward to today (12 months later) and it is clear that agencies have begun to capitalize in a major way on their clients’ interest in partnering on innovation efforts. In fact, 50% of all agency respondents indicated they were consulting with clients this year on new product and service offerings. Given the increasingly blurred lines between the agency and consultancy space, we will continue to monitor this trend closely in the coming months and years.


Estimation is Still a Sore Spot for Digital Shops

Estimation is Still a Sore Sport for Digital Shopst

When asked to rank their organization from 0 to 10 on their ability to accurately estimate project costs, agencies left themselves quite a bit of room for improvement in 2015.

The average for all agency and prodco respondents was just 6.32 (up slightly from 6.09 in 2014), indicating that most digital shops continue to struggle with estimation – a core business requirement that wields a tremendous impact on their overall financial and organizational success.

This mediocre self-assessment underscores that some of the underlying causes of poor scoping and estimating still need to be addressed head on. Far too often (as SoDA partner AgencyAgile has highlighted in numerous SoDA roundtables on scoping), estimates are completed too late, with insufficient detail, by the wrong people, with too much acceptance of uncertainty and are poorly communicated to key stakeholders.


Campaign Spending on Digital Projected to Grow

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Campaign Spending on Digital Projected to Grow

In last year’s DMO study, the growth trajectory for digital marketing budgets was slowing considerably. While only 9% of respondents said they actually planned to decrease digital marketing budgets last year, there was a double-digit increase in the number of client respondents who indicated they would be maintaining the status quo. A wait and see approach was the name of the game.

While there is still a great deal of economic uncertainty in regions like Europe, the strength of the North American market is translating into larger marketing budgets overall – and for digital initiatives. Globally, in our 2015-2016 study, there was a surge in the number of respondents increasing their digital marketing budgets and increasing overall marketing spends. That figure grew 27% this year, with nearly one in four client-side respondents indicating they were increasing marketing budgets overall and allocating a higher percentage of that budget to digital.

Areas such as programmatic media buying are seeing the largest budget increases. In fact, almost one in three client respondents (31.5%) indicated they were increasing budgets for programmatic media buys in 2015.

Globally, 46.9% of respondents indicated they were either a) reallocating more budget into digital from their existing marketing spend or b) increasing digital budgets while also increasing their overall marketing spend.

In North America, the digital budget expansion trend was even more pronounced, with 55.9% of respondents falling into one of the two categories mentioned above.

In Europe, however, the story was decidedly less rosy. Approximately one in four respondents (28.2% to be exact) indicated they were increasing digital spends either through the reallocation of existing budget or by augmenting their overall budget. Meanwhile, 13% of European respondents said they planned on decreasing digital budgets (vs. 9% globally).


Increased Digital Spending Not Limited to Campaigns

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Increased Digital Spending Not Limited to Campaigns

Increased spending on digital is not limited to campaign buys. In fact, budgets are growing most dramatically for digital products outside of the marketing realm (including platforms, applications, tools and services). Agencies and software development companies who have expertise in digital product creation (both bringing their own IP to market as well as developing digital products on behalf of clients) clearly stand to benefit from the growing budget priority among clients organizations.


The Value of Innovation Labs

Key Insight:

The financial value of innovation labs & product incubators increases geometrically after Year 3. Those agencies that have powered through the initial challenges and steep learning curve associated with product creation are reaping strong rewards.

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The Value of Innovation Labs

For the past three years, SoDA’s DMO Study has analyzed the proliferation of innovation labs and product incubators within full-service agencies and digital shops. We’ve focused specifically on the value generated by these efforts. While “Too Early to Tell” predominated in past studies, there were some clear benefits, namely…

  • Happier, more engaged staff
  • New business wins

This year, we took the analysis a step further, analyzing the benefits engendered by innovation labs based on the amount of time the labs have been in existence. As the pie chart above highlights, the average “age” of innovation labs within our agency and prodco respondent base was fairly evenly divided this year (34% < 1 year, 37% 1-2 years and 29% 3+ years).

When the age of the innovation lab is not considered, talent retention and new business development tied as the two most salient benefits (both at 70%). When the age of the product incubator is factored in, some significant differences begin to emerge.

Clearly, moving from a service-based model to product development involves a steep learning curve for agencies and production companies. After 2-3 years, that learning curve begins to flatten and more financial benefits such as significant funding, revenue growth and new business wins begin to take root.

It could also be that after 2-3 years, agencies who do not see clear financial ROI on their innovation labs / product incubators choose to disband efforts and focus on their service-based offerings. When we compare the overall findings to 2014, talent retention and new business both showed strong gains, rising 19.0% and 9.8% respectively.

Q. What benefits has your innovation lab/product incubator produced? (select all that apply)

Key Insight:

For companies whose innovation labs were 3+ years old, one in four reported that their efforts had resulted in a company spin-off, VC investment or significant funding.


Funding/Company Spin-off

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Funding

Key Insight:

While only 1 in 10 agencies cite revenue growth as a benefit of newly formed innovation labs (<1 year), that percentage nearly doubles for shops who have at least one year of product incubation experience under their belt.


Revenue Growth

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Revenue Growth

Key Insight:

Happier, more engaged staff (seeking a respite from client work) remains one of the top benefits of innovation labs and product incubators, regardless of how long they’ve been in place.


Talent Retention

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Talent Retention

Key Insight:

After just 12 months, innovation labs and product incubators are having a significant positive impact on new business development wins. The effect accelerates after Year 3.


New Business

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New Business


Too Early to Tell

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Too Early to Tell