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I have been “preaching” for some now that small and medium-sized full-service web agencies should think about the future, because this sector will come under increasing pressure. This has actually taken place during the past three years, but the effects are not yet that serious, as the overall market is still growing.
In my opinion small and medium-sized full-service web agencies meet the following criteria:
Such companies have shot out of the ground like mushrooms during the past ten years. Between 2003 and 2010 the quality of company websites has increased dramatically. Whereas in 2003 most websites were simple constructions using Frontpage, today's websites are CMS-supported, comprehensive web presences (how I “love” that phrase). This extensive overhaul on a broad front has generated enormous momentum in the market. Accordingly, it was quite simple to gain a foothold as a service provider and grow a company. A few entrepreneurs used this opportunity and grew significantly; they actually outgrew the original model and today operate as large companies in the full-service sector (300 to 500 employees) or as large providers in a niche segment. Though the vast majority of agencies also experienced significant growth, these companies were unable to break through the barrier of 50-60 employees. However, most of them are still holding on to the full-service model; it is for this reason that they have increasingly come under pressure the past three years – a pressure they will continue to feel.
I see the following reasons for this:
Knowledge and know-how on the client side have grown rapidly. Example: In 2003 one had to explain the importance of a topic such as a website to numerous decision makers; today, those responsible are often on equal footing. These clients are much more demanding, recognize mistakes and inconsistencies much more often and generally demand a higher level of service.
Full service today means much more than even ten years ago. The field is so broad that a 50-person firm can no longer provide a complete and superior service portfolio. The development in the respective areas is advancing rapidly and it is inevitable that ongoing education and training requires a large portion of available time. Those companies that structure this process, as is often the case in large agencies, have a clear cost advantage, because the employee no longer needs to research the topic and ongoing education is formally organized. This results in employees that are better-trained at lower cost.
When too few employees work in too many fields at the same time performance suffers. As soon as a client works with a specialized provider, vulnerabilities are exposed and the full-service agency is exposed to criticism. A common example for this is SEO. I would wager that every full-service agency with less than 200 employees has already had this experience.
The relationship between ad agencies and Internet agencies has always been a tense one. Though most ad agencies have diminished in importance and lost ground – if even just a little – over time, some have accomplished the transition into the digital era. These agencies have a rather good position with the client and can generate quite a bit of business – especially in the online marketing segment. Today, this is usually at the expense of medium-sized full-service agencies.
With the expansion of the range of services, more and more service providers with specializations arise. Through the increased professionalization on the client side, even relatively small customers have the possibility of implementing a project with two to three different specialized partners, rather than one full-service agency.
Development work is now being gradually replaced by configuration work. Online business know-how is central to a full-service agency. Whereas most decision makers in 2005 were CIOs, today the majority is marketing personnel or the CEOs themselves. However, since projects are still invoiced by time, the average revenue per deliverable is decreasing. This can partly be offset by higher prices. But, in the medium term, time savings through configuration will have a noticeable impact on the billable time of an agency.
There aren't very many yet, but I think we will see more and more of them. Especially the trend toward configuration will play into the hands of consultants in the long run. If they have a good understanding of the business and the customer, and if they are flexible and have a multi-discipline mindset, they can help the customer achieve his goals without being oriented toward a specific product.
The only reason this consolidation effect hasn't had much impact is the still-expanding total market. However, in many places the first signs are apparent. During the past year I have had various discussions with European agencies and almost all of them complained about how the business environment is becoming increasingly challenging.
I think it's time to consider an internal structural shift. Of course one can't expect that all customers will replace their solutions and tread a completely different path overnight. Undue haste therefore would be ill-advised – but movement in this matter definitely not. I think that the following two ways to escape the dilemma are realistic.
There will always be clients who, if possible, would like to receive all services from one source. However, in order to provide these services at an acceptable quality level while maintaining adequate resourcej coverage, a company currently needs approximately 200-300 employees – or likely more. The market is still open for companies that provide a full range of services to develop, but the conditions have become much more difficult.
The alternative is specializing in a specific field. Most of the time this specialization is already extant, at least in rudimentary form. Posing the simple question “What are we particularly good at?” to employees usually leads to astoundingly succinct answers. To be successful as a niche service provider, you need three things: partnerships, inbound marketing and a good reputation. All three. The first two can be actively pursued, the third is achieved only by good work.
These changes in the market provide huge opportunities for full-service agencies. Provided they are willing to change. It doesn't necessarily have to be that an agency specializes in only one area, but a company can also sharpen its profile with different units (and market presences). We should feel free to compare this with other industries that are a bit more mature. A development in the direction of specialization is completely normal. This has been the case in each and every industry. What at first was provided on an interdisciplinary basis is now being offered in a highly specialized manner. After all, the craftsman who fixes your heating system is not the same one who repairs your plumbing.
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