Agencies are increasingly under pressure to understand and leverage emerging technology trends in order to innovate both within their operations and for the purpose of improving products and services they offer to their customers, according to Econsultancy's Digital Outlook Study, part of The SoDA Report.
Indeed, expertise in emerging trends — tech and otherwise -- is now the number one skill clients most value in their agency partners, up from a distant third in 2014.
Overall, key issues facing digital agencies in 2015 include their revenues being hit by the rapid move toward in-house, programmatic and commoditization; the struggle to estimate project costs; and the inability to drive actionable insights from data.
Meanwhile, key growth areas include user-centric design, emerging tech and trends as well as product incubation -- all of which were on the priority lists of both clients and agencies.
“We were pleasantly surprised by the somewhat dramatic convergence of expectations between clients and agencies about what matters most to clients," says Chris Buettner, managing editor of the study. "In last year’s study there was almost zero alignment. Conversely, in our 2015-16 study, clients and agencies were aligned in 5 of 7 categories. Not surprisingly, expertise in emerging trends rose to the top of client expectations of their agency partners given the pressure they feel from a marketing and technology landscape that is relentlessly shifting beneath their feet. ”
The failure to estimate project costs is having a huge impact on both profitability and their relationships with clients. Agencies and production company respondents scored themselves at 6.32 out of 10 (where 10 is the best) compared to 6.09 in 2014. Moreover, this issue has become an even greater challenge in 2015, as cost overruns are now cited as the second most common reason for the end of a relationship by clients, up from fourth in 2014.
More than one in three respondents (38%) say that rapid commoditization of digital work such as Web site development, app development and digital campaign production is proving to be a serious problem for their companies.
In-housing of digital efforts is another major problem with 27% of companies claiming to work with no agencies, more than double the figure from 2014. Clients that continue to work with agencies are also cutting back on their rosters; just 12% of brands had four or more digital agencies this year, down from 21% in 2014.
Organizational structures on the client side also continue to be seen as a barrier to innovation cited by 44% of agency respondents, though only 16.7% of clients agreed.
And although innovation is considered a priority, many hold short-term views that inhibit opportunities. Innovation labs and product incubators take around three years to pay off, though many expect them to start producing immediately. And a learning curve means that there is little clear ROI in the early years, although benefits do flow from talent retention and new business development, says the report. After three years however, one in four of those tracked had benefited from a company spin-off, VC investment or significant funding.
“Agencies and production companies – particularly those that invested early in innovation labs and product incubators – are reaping the benefit of clients’ acute need for emerging tech expertise. They’re also increasingly bringing their own IP directly to market," says Buettner.
That said, agencies remain bullish about their prospects. 80% say the industry has moved in a positive direction and 76% say digital agencies are now more likely to become “lead” partner agency, an increase of 10% from 2014. This positivity is driven by creativity. Product innovation has become a key area of opportunity for agencies with 50% of all agency respondents saying they were consulting with clients on new product and service offerings.
Plus, clients and agencies are increasingly working well together. Just under 70% of respondents said they felt the dynamic of brands and agencies was improving overall. But independent agencies were more likely to be positive than holding company-owned agencies (72.3% vs. 62.5%).
Nearly half of brands worldwide (47%) say they are either reallocating more budget to digital from their marketing spend or increasing digital spend as part of an overall rise in total marketing spend, with North American companies (56%) more likely to boost their budgets than European respondents (28%).
Two in three brands (65%) are allocating increased spend to digital platforms, applications, tools and services that are non-marketing related, says the report. To that end, 62% are investing more in customer insights and analytics and 52% are boosting user experience testing and research.
Conducted in partnership with Econsultancy, the Digital Outlook Study is based on a global sample of 680 respondents, evenly split between advertisers and agencies with a large majority of senior company decision-makers. The report also features original articles by industry innovators, exclusive interviews with thought leaders, as well as case studies of several digital marketing campaigns.