written by Alain Veuve MD, Switzerland
Here it is, the consolidation in the digital agency market
Here it is, the consolidation in the digital agency market
February 11, 2016 | Categories: Digital Business & Marketing , Digital Transformation , E-Commerce
About author Alain Veuve Alain Veuve MD, Switzerland

When I warned five years ago about a consolidation trend in the agency market and encouraged people to consider appropriate strategies I was ridiculed by most. Since last week, this consolidation has now probably penetrated into the collective consciousness of the industry – even though the process has been underway for a long time.

Numerous examples

Reply

There are numerous examples. Reply, for instance, has acquired many smaller agencies in Germany and England during the past few years. On occasion I have questioned the quality of the transactions. Sometimes it seemed as if a purchase decision was made whenever there were any doubts. If, however, one examines Reply’s numbers, then one can conclude that they were able to thoroughly integrate these acquisitions and benefit from them.

Thus, 15.5 percent of total sales in the first half of 2015 were generated in Germany and an additional 12.2 percent in England. The list of subsidiaries in the annual report covers three pages (page 63). In my opinion Reply is handling its business quite adeptly. However, whether this strategy can be successful in the long run will depend on whether the synergies can actually be used.

Pluswerk

When various smaller agencies got together and created Pluswerk, many people were skeptical. At the outset this seemed the perfect recipe for resentment and dispute among small firms. The fears have not been confirmed, however. Quite the contrary.

Viewed from the outside, one is left with the impression that the agencies are growing closer together more and more. In the beginning, for instance, each individual agency was depicted in communications; now one now finds only one single entity on the website. If one wouldn’t know how Pluswerk came into being, one would think that company originated from a single mold. I actually think that this is happening now and consider this to be quite a remarkable process.

Diva-e

With Diva-e we have another consolidation that is in its infancy. What Pluswerk is doing on the communications side of the equation, diva-e is attempting in the E-Commerce sector. Under the guidance of Emeram Capital Partners six agencies have united into a new player with 360 employees in Germany. One can question the somewhat unfortunate acronym (Digital Value Enterprise) for what is in itself a good name, as well as the obviously erroneous understanding of the term “diva” – reflected in the stage claims on the website. But, the merger isn’t really that far off the mark from a strategic perspective. There is definitely room for such a player in the market.

Traditional consulting companies

Traditional consulting firms have been trying to acquire service providers, especially larger ones, during the past two years. Accenture, for example, has been continuously purchasing companies – e.g. the Swedish agency Brightstep, among others. KPMG has acquired Crimsonwing and Ernst & Young bought NorthPoint Digital in November.

IBM Interactive

And just last week IBM literally staged its shopping spree: Aperto from Germany, ecx.io and Resource/Ammirati (please change the tags from “independent” to “dependent marketing agency”) were all “victims” of Big Blue. There would be many details regarding these deals, but I will forego discussing them, as I think you’ve probably read about them somewhere during the past week.

Why consolidation?

Consolidation is driven by three things:

Unbridled demand

For one, there is this unbridled demand that makes it comparatively easy to sell your time for money (If you disagree, just open up an independent gas station for comparison – good luck). In fact, I think this demand will remain stable and actually increase significantly the next few years.

Pent-up demand with the big players

Many big players, especially from the IT-sector, completely missed the boat when it comes to web solutions and corresponding spinoffs. They are now correcting this oversight through large-scale acquisitions.

Corporate “tinkering” at the agencies

Most agencies arose opportunistically. Created by people who, though they could program only at a (usually) mediocre level, nevertheless worked hard – and were (and are) rarely good entrepreneurs. Thus, most agencies can’t turn the large demand into the necessary value creation for themselves from a financial perspective. I know a lot of agencies that barely muddle through financially and very, very few that really make money.

The result is that many owners of smaller agencies are slowly but surely becoming fed up: They’ve toiled many years, have gotten older, have other priorities (house, children), but still the company doesn’t generate nearly the revenue comparable to that which colleagues with their own law firms are earning in the meanwhile. Many agency owners are therefore more than willing to sell.

But, their companies’ poor performance in the past years causes the valuation of the individual firm to be low. Which of course means that potential selling prices are also low. In this regard, many agency owners have had very sobering experiences during due diligence.

The traditional Internet agency has had its day

Structurally, the traditional Internet agency has come to the end of its usefulness. Right now these agencies still exist in number because there are numerous companies that are still just taking their first steps into the digital age. For the moment this is unlikely to change. Fortunately.

In addition, the promises, especially those in the direction of “full service”, could never be kept. Aperto, for example, gained a lot of credibility with me when they officially gave up their full-service concept. I’ve written about the full-service topic here.

Instead, agencies should now transform to multilayered technology- and business providers. These providers carry out coaching, CX design and technology implementation in one. In the long run, what will be left by the wayside are traditional IT companies, the (decoupled) consulting business, ad agencies and Internet agencies.

But only consultancies and IT corporations have the money to acquire the other areas. And, big surprise, it is exactly this development we can observe in the market.

A new type of Internet agency

Slowly but surely a new agency understanding is being developed. Here, the term “agency” is lost. More appropriate: Business/technology transformer. Or groundbreaker. Basically, companies that help other companies to implement technology expediently for their business. And that principally has to do with Internet technology.

Reply is apparently traveling down this path and claims:

“To excel in helping our customers to exploit relevant innovation brought about by economic transformations and driven by Internet technologies.”

Strategies

My strategic option for today’s agencies contains the same advice it did five years ago: Focus your company on no more than three subareas that create synergies among each other and choose one of the two following options:

Grow

Try to grow and survive in the market under your own power. This isn’t really easy and I also think that the train has left the station to a certain extent if your company doesn’t currently number at least 200+ employees. As always there are exceptions to the rule.

Shrink

The other option is to shrink and to then provide highly-specialized services in sub-projects with a maximum of ten experts. This is ideal for all owners who are good from a professional perspective, but sub-par entrepreneurs.

Profitability

But, most of all, I can only recommend to get a handle on your numbers. An EBIT margin of at least ten percent is a must in an industry such as ours (yes, I can hear the groans). Profitability is the be-all and end-all of owner-managed agencies.

This ensures that basic entrepreneurial freedom can be maintained, that new technologies can be tested and utilized and that fluctuations and problems aren’t taken care of at the expense of the employees (provided profits aren’t being permanently distributed).

And it prevents owners from being fobbed off for a song when selling their company.