The Soda Academy

Agency Ecosystems in 2016

Key Insights:

Despite widespread reports of agency consolidation in the trade press, the number of clients with three or more digital shops on their rosters grew 42% in 2016 on a year-over-year basis (from one in four in 2015 to almost four in 10 in 2016).

The percentage of clients taking full responsibility for digital efforts at their companies (i.e., working with no agencies) returned to 13% in 2016 (the same level registered in 2014).

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Digital Efforts

In what is no doubt welcome news for agencies, the 2015 spike in the number of clients indicating they were not working with any outside agencies on their brand’s digital efforts (27% in 2015) now appears to be an anomaly. That figure fell to 13% in 2016, the same level registered in 2014.

Still, talk of agency consolidation has continue unabated in industry circles over the past year. A May 2016 AdAge feature recently claimed “clients want one partner to simplify the fragmentation and data.”

In part, the data in the 2016 SoDA/Forrester Digital Outlook Survey supports the core assertion of the AdAge piece that consolidation is on the rise. More than 50% of the client-side respondents work with only one or two digital agencies, up from 47% in 2015.

While it’s true that some agencies are going the way of the dinosaur (and others are being absorbed into holdings companies, consultancies, media companies, and tech firms), a forward-thinking cross-section of independent shops are reporting increased revenues and profits by partnering with clients in new and innovative ways in niche areas.

In fact, there is a parallel and significant counter-trend toward specialization in our 2016 study. The number of clients with three or more digital shops on their rosters grew 42% in 2016 on a year-over-year basis (from about one in four in 2015 to almost four in ten in 2016).

Other research studies conducted by SoDA in 2016 underscore that the overall state of the business for top digital shops is strong. Sixty-two percent of all respondents to SoDA’s latest “Quick Strike” financial health survey indicated that their profit margins grew in the most recent quarter (versus the same quarter in 2015). And of those reporting profit margin growth, nearly half were in the extremely high growth category (25% profit margin growth or higher).


INNOVATION EFFORTS

Key Insight:

When it comes to innovating product and service offerings, the two most important partners for clients are agencies (50%) and consultancies (52%).

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Innovation Efforts

In 2016, agency partners clearly have a seat at the table when it comes to partnering with clients on product and service innovation. Even a cursory review of the Showcase Section of this survey edition underscores that fact. A whopping 50% of clients said they are now partnering with agencies in the product and service innovation realm. In 2015, that figure was 20%, although full disclosure — the question was structured as a single select question versus multiple select as was the case in the 2016 study.

The prominent role of consultancies in the area of innovation was also clear in this year’s results. Combining professional service consultancies like Accenture and Deloitte (33%) with innovation consultancies like IDEO (19%), we find that 52% of clients are working with consultants on their product/service innovation efforts. We expect the number of IDEO-esque innovation consultancies to rise in the coming years, and for more and more digital shops to launch similar service offerings as their innovation lab and product incubator efforts mature.

Agencies, for their part, are also reporting a much more prominent role in product and service innovation. Fifty-one percent now say they are consulting with clients on new product and service offerings. The domain of digital shops has clearly expanded well beyond the campaign realm.

Regional Differences

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Regional Differences

When we dissect the data related by geographic region, some interesting differences emerge. Client organizations in the APAC region, for example, are much more likely to turn to agency partners to spearhead product and service innovation efforts than to other players such as innovation consultancies and digital media partners.

While agencies represent a large share of the innovation partner mix in North America (50%), their participation in innovation efforts in Europe is less prevalent (42%). In Europe, consultancies have a much more prominent role in the innovation partner mix, with more than two in five clients saying they partner with consultancies such as Accenture, Deloitte, McKinsey, and others to drive innovation.


THE VALUE OF INNOVATION LABS

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THE VALUE OF INNOVATION LABS

The SoDA Report theme for this year is Evolution. To put a positive spin on it, we’re specifically exploring how companies in our industry are thriving through intelligent adaptation. Nowhere is that more evident than in the realm of product development. More and more digital shops are transforming 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.

These innovation and product development efforts are reaching a maturation point that we have not seen in previous studies. Almost four in 10 agency respondents (38% to be exact) have had an innovation lab in place for three or more years. In 2015, that figure was only 29%.

For agencies whose innovation labs are three or more years old, nearly one in five reported that their efforts had resulted in a company spin-off, VC investment, or significant funding; three in four said their innovation lab efforts contributed directly to new business wins, and almost two in five indicated increased revenue from their product incubation efforts.

Talent retention and new business development maintained their position in 2016 as the two most salient benefits overall (53% and 55%, respectively), regardless of the age of the innovation lab.

Driving substantial revenue growth, however, takes time. After three years, nearly four in 10 agencies (38%) indicate that their product incubators and innovation labs are driving significant growth for the company. That figure falls to 18% if the lab has only been in existence for one to two years, and into the single digits if it is 12 months old or younger.

Clearly, moving from a service-based model to product development leaves agencies and production companies with a steep learning curve, which takes time to flatten.

Key Insight:

While fewer than one in 10 agencies cite revenue growth as a benefit of newly formed (under one year old) innovation labs, that percentage quadruples for shops that have three or more years of product incubation experience under their belts.

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

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Labs - Growth Labs - Spin Off Labs - Talent Retention

Key Insight:

Agency leaders say the impact of product incubators and innovation labs on business development more than triples after year 1.

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

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Labs - New Business Labs - Too Early To Tell

Key Insight:

Despite all the talk about nearshoring and offshoring, only a small percentage of clients are forging offshore production partnerships directly. However, more than one in five agencies are leveraging such relationships.


What Types of Digital Shops Are Clients Hiring?

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WHAT TYPES OF DIGITAL SHOPS ARE CLIENTS HIRING?

* Survey question posed for first time in 2016-2017 Digital Outlook Study

While there is a lot of talk about the rise of nearshoring and offshoring as a potential threat to agencies in developed markets, only a minuscule percentage of clients (1%) are opting to offshore production to other markets while keeping digital strategy with a lead agency.

Many agencies, however, are finding (and contracting with) strong and sophisticated digital production partners in developing economies, allowing them to maintain healthy margins despite the demand for rapid-fire innovation and the growing complexities of client work across an ever-expanding array of screens and consumer touchpoints. In our study, over one in five agencies (22%) were leveraging nearshoring and offshoring services for digital production.


Independents Still a Slight Majority on Clients’ Rosters, but Losing Ground

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Digital Initiatives

In last year’s study, independent shops accounted for more than three out of five agencies on client rosters. While still holding on to a slim majority (51% in the 2016-17 study), the share of independent shops that were part of clients’ agency ecosystems fell nearly 10% in absolute terms.

This trend was generally consistent regardless of the region considered. Independent shops accounted for 53% of the agencies on client rosters in North America, 50% in Europe and 47% in the APAC region.

The share of clients reporting that they worked with agencies from holding companies (or a mix of holding companies, consultancies and independents) rose sharply this year, from 35% in 2015 to 46% this year.

This is not surprising given that 2015 saw record M&A activity around the world in the marketing services sector. Nearly 3,400 transactions were reported in 2015 in related sectors such as marketing services, media, technology, and information.

The universe of buyers has continued to diversify beyond the major holdings. The growing presence of consultancies in the agency space persisted, with EY, Accenture, McKinsey, Perficient, and Deloitte Digital all finalizing acquisitions during the year.

New types of holdings have also emerged. Tokyo-based Hakuhodo DY Holdings, for example, has acquired an extremely prestigious lineup of digitally savvy companies in the past 12 months, including IDEO, Sid Lee, and Digital Kitchen.

Independent shops still hold a slim majority on client rosters, and we continue to believe that the most forward-thinking and innovative shops have a very bright future. In fact, the independents themselves are more bullish than their holding company counterparts about their prospects for 2016. When asked how confident they were that 2016 would be better than 2015 in terms of profitable growth (on a scale of 1 to 10), the average response for independents was a healthy 7.1, 16% higher than the holding company average of 6.1.


CH..CH..CHANGES IN CLIENT ENGAGEMENT MODELS

Key Insight:

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

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CHANGES IN CLIENT ENGAGEMENT MODELS

* Survey question posed for first time in 2016-2017 Digital Outlook Study

What is particularly revealing about the statistics above is the linear decline in the number of respondents indicating there were “no changes” in their engagement models with clients. The status quo is clearly not reigning supreme.

Those respondents indicating “no change” has declined steadily from 22% in 2013 to 12% in 2016. In other words, almost nine in 10 agency respondents are seeing (and sometimes pursuing) a transformation in how they work with clients. If we flip the data (visualizing the number of agencies who are seeing changes), the trend becomes even more salient.

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CHANGES IN CLIENT ENGAGEMENT MODELS

More agencies are providing education and training services to clients (over one in three) as well as embedding specialized resources at client sites (almost one in four). Clients are moving full steam ahead developing in-house digital capabilities, a fact that has bolstered the training and staff augmentation trend in agency-client relationships.

Over the past few years, in-house digital teams on the client side have focused on areas such as community management or maintaining digital platforms developed by external partners, but these internal teams are now becoming much more sophisticated and innovation-focused.

Agencies are also beginning to realize they can’t do it all, particularly given the pace of technological advancements and the rising demand for highly specialized skill sets, including advanced data science capabilities. In fact, over one in four respondents indicated they were going to market with external third parties to round out their offerings.

As previously mentioned, there is also a growing number of agencies that are turning to nearshoring and offshoring for digital production work as a hedge against shrinking margins and the growing complexities of digital work. Twenty-one percent of agency respondents indicated they were now working with nearshore and offshore partners for digital production, while maintaining strategy and UX work in-house.