Mark Ralphs, partner at Worth, considers how digital agencies, should evolve their models to include the development of product and intellectual property.
Digital agencies are being squeezed. By increased competition, and as social media and open source technologies eat away at the design and build work that sits at the heart of many agency models.
But despite these pressures, together with the fundamental changes in the way we use technology, and a growing understanding of what this means for brands, the agency model remains relatively static. Both ad and digital agencies share, in the main, a consultancy model; payment is based on time, skills and experience, but rarely results or shared intellectual property (IP).
This, according to Måns Tesch, founding partner at Tesch Ltd., and formerly digital strategy director at Fallon London, is counterproductive:
“It doesn’t always make sense to pay the agency by the hour since it doesn’t matter how much time was required to create a specific activity, what’s crucial is the results it will generate. Regardless of the starting point, agencies should be open to promote any initiative that is the most efficient and relevant for the brand and its objectives.
“Since we might generate better results from a social media application that was developed for a fraction of a big budget TV ad, it makes sense both for the client and the agency to start involving performance measures in the fee model. If both stand to gain from spending as little as possible in order to generate as good results as possible, we might see agencies and clients starting to form true partnerships.”
So how are agencies responding to these challenges? Some, like Anomaly and Tesch Ltd. actively look for opportunities to develop products and retain IP together with delivering fee based work, but examples are few and far between. Now is the time for digital agencies in particular to start applying their expertise to the development of brand and product. Why? Because the potential rewards for agencies developing their own IP are only going to increase.
“The push factor is pure economics – the market is ever more fragmented with smaller agencies being able to get to bigger briefs, which has further increased opportunities for clients to drive down fees and mark-ups.” says Jim Houghton partner at Results International.
“On the pull side of the equation, there’s always been an appeal to own the output and teams find it very liberating. There are also economics here; no client payment by results scheme is going to match the financial reward of (co) ownership of a product that establishes itself in the market and can earn money while the agency ’sleeps’.”
Digital agencies, particularly independents, are well placed to broaden their approach and move away from purely fee based models. They live with change and are expert at assimilating new skills. They understand the value of innovation, agile prototyping and consumer data, know-how vital to supporting new product development. In addition, many digital agencies already have experience of developing IP, in the applications and systems they use to support their clients.
As companies open up their APIs, there are increasing opportunities for digital agencies to collaborate with suppliers, distributors and brands on the development of product and new ways of engaging consumers. Furthermore, independents tend to be run by entrepreneurs, more open to taking risks than agencies responsible to group management and shareholders.
However, it’s important to remember that developing IP has clear implications for how agency structures should evolve, back to Jim:
“Agencies have to get that the idea is where the value really lies. Push for (shared) ownership, but recognise that this won’t be conceded unless something else gives – if you want to work as a principal then you have to operate as one.
“As a principal your cost structure has to be incredibly tight and well controlled; sharing in the rewards with staff but keeping the ongoing running costs to a minimum. Putting new ventures into separate subsidiaries where the team working on that idea also have an equity stake is something I’m seeing quite regularly now.”
Finally, it is important to take the lead. Developing shared IP means taking a risk and being prepared to proactively approach partners with your ideas. Where should agencies begin?
“If your agency is serious regarding shared IP, the best place to start is to show that you can do it on your own, to develop your own branded application or service.” says Måns.
“That way you practice what you preach and will have the experience and competence that could make the client believe in the notion of sharing both risks and rewards with you.”
Henry Ford once said, “A business that makes nothing but money is a poor kind of business”. Now is the time for agencies to move away from purely fee based models and to build reputations for being makers of product. In the long run, it may be the only way many survive.