The agency of the past was based on the now ancient 15% commission model. That worked very well for both sides for decades.
The agency of the present is based on the Full-Time Equivalent model. I think everybody agrees that this model doesn't work for either side. But the agency of the future will be based on a 100% performance model, and that will usher in a Golden Age for agencies and clients that could be even better than the halcyon days of 15%. The big catch however, is that you have to be very proficient at the performance/accountability game, or get left behind. And that is the biggest threat to today's agencies.
The people who are winning the ROI game are the programmatic buyers, and secondly the data companies. Some of the RTB companies are already starting to function as agencies by now offering creative. Forget the agency, they can offer clients the whole package. The proposition is simple: give me $1, here's $3 back. There's a name for that, it’s called 'client nirvana'.
But it gets worse for agencies. As more and more media are purchased programmatically, the ad tech people will slowly expand their scope, until one day, they will in effect usurp the role that agencies play as the go-to source for clients. What's more, these performance-based companies enjoy high margins unfettered by the 'salary cap' the FTE model places on agency talent. This means they will have the ammunition to recruit and pay top talent who deliver ROI to clients...a win/win/win domino effect versus the lose/lose/lose dynamic afflicting the traditional client/agency/agency staff eco-system.
One day, a client will be able to buy all of their advertising directly (360 programmatic) from a source that delivers real ROI. By the way, that's also (not coincidentally) the day that CMO tenure expands from 22 months back to 4-5 years. Oh, and one more thing. 360 programmatic also means a lot less people. Media planning will be the first to go because a) it costs money, and b) it represses performance. Media plans will write themselves based on a feedback loop.
So, how can agencies transition to this model? It’s not so easy.
Today's agencies have several obstacles that will impede their transition. First, they don't own the technology, and therefore have to use one of these data/tech companies as their executional arm, which means adding another layer of cost (and hassle) to the clients' business.
If agencies do create their own proprietary technology, what happens if it’s not as good, or if something better comes along? They are forced to keep selling the old stuff that they own, which puts them at greater risk than just marking up someone else's technology and data.
But what about the brand you say? Won't that save agencies? Surely programmatic buyers, even ones with creative capabilities are never going to have the big idea. Probably true, but alas, the big money in advertising has always been in the execution, not the ideas. Ceding all that day-to-day work would convert today's huge agencies into nothing more than small boutique shops. That's the catch-22 agencies will have to resolve in order to remain in the driver's seat. Let's watch carefully to see how Sir Martin, Maurice and John fix that one. If they do, they will have more than earned those enormous compensation deals they respectively enjoy.