For the past few years, analysts have been looking carefully at holding companies' migration to digital as an indicator of future growth. Holding companies have raced to increase the percent of revenue derived from digital activities; the thought being that since digital is growing, having more digital would be an indicator of future growth.
But the big problem with agencies today isn't lack of digital capabilities; it’s their business model. Specifically the FTE (Full Time Equivalents) model. If your business is selling hours to procurement agents, then it doesn't matter much if you are making TV spots or web sites with those hours, you're still screwed.
If I were investing in agencies, the only thing I'd look at would be the percentage of revenue from FTE's versus 'scalable' businesses based on technology. That's why the trading desk is so important to agencies. It’s another business model that is (theoretically) based on results rather than what it costs the agency to deliver those results, which is better for everyone. Regardless of what happens to trading desks, agencies have gotten a taste for life in a scalable, FTE-free world. Over time, the big guys will figure out how to duplicate that model across their entire range of services. Perhaps that is the true promise of Publicom.
If holding companies want to know which businesses are scalable, they might hang around the Venture Capitalists for a while. Try to sell them on a 100% digital agency that makes banner ads all day, and they'll laugh in your face. Because there is a big difference between 'digital' and 'technology'. All technology is digital, but all digital is not true technology.
And only technology is scalable, meaning you can get stuff done without people doing it. It’s automated. Making banner ads or even web sites is getting more automated, but are still largely people-driven businesses. Which means hello procurement and FTE's! Digital is a meaningless word today. You won't even read about it in analyst reports 5 years from now.
The measure will be scalable, technology-driven businesses versus FTE-based businesses. Technology will be the word that counts; the word that separates high multiple businesses from low margin companies. And compensation will be results-based because tech is generally more measurable compared to today's formula of salaries + overhead + profit, (with maybe a few nickels and dimes based on 'performance' for optical purposes). Once this change is complete, there will be nothing for procurement to do and they may have to go back to negotiating ball bearings (no tears please).
(PS: Please stay tuned for my next column on the one FTE model that works. )