Artificial intelligence's ability to speed up mundane tasks, bring ideas to fruition faster and reduce costs is a dream come true for advertisers who are under pressure to save costs while churning out content at scale.
However, with agencies, things get a little more complicated.
Gone are the days when 15% commission was charged, but agencies have operated primarily on a time and materials basis: a set number of “heads,” or full-time employees (FTEs), are assigned to clients and their fee is determined based on the number of hours they work on an account.
The older the talent, the more expensive that talent is, which is why agencies often staff their accounts with junior talent to meet the cost demands of their clients, but that's a topic for another blog post.
Under the FTE model, agencies are incentivized to add more staff to accounts and slow down projects in order to increase commission (within common sense, of course). This is likely why it has been so difficult for agencies to transform their business models to embrace the agility and speed required by social media and technology.
But if that model has been outdated for some time now, it is now at risk of extinction due to AI.
As agencies embrace automation, they're able to bring ideas to market faster and with fewer resources. This means that in an AI-driven industry, an agency's value will no longer be determined by how much time and resources it spends developing its work, but by how efficiently that work is done, deployed and optimized at scale. It's not about how many people are doing the work, it's about how quickly they can do it with fewer people.
As automation threatens agency business models, longtime holding company executives like Laura Desmond and Andrew Swinand are moving to creative technology companies that deliver on the promise of AI-powered personalized content at scale. They see what the future holds.
Agencies have been feeling the same signs and have been experimenting with new business models for some time now, such as pay-for-performance and outcome-based fees, but while many contracts have implemented elements of these new models, FTEs remain mainstream.
A 4A survey of 149 agencies conducted this year found that more than 30% of reported projects and more than 25% of AOR relationships were based on a fixed fee, while more than 25% and more than 20%, respectively, were structured on an hourly rate. In contrast, less than 5% of projects and AOR relationships, respectively, were in which agencies were paid based on performance results.
In April, the 4A's and ANA launched a joint task force to address this issue and released a toolkit highlighting business model options available in the market to drive evolution, the opening sentence of which is, “Marketing has changed dramatically over the past decade, yet agency compensation models have remained largely static and often out of sync with the growing complexities of the industry and the objectives of the marketers they serve.”
Agencies are in a dilemma because not embracing automation would be both a game changer and a fatal flaw in their business model: Marketers will demand faster, more efficient, and more personalized creative at scale, and agencies will need to right-size their business models to extract value from the equation.
Of course, the industry can’t change without the buy-in of paying clients, without the mutual end of the race-to-the-bottom tactics that agencies are forced to resort to in their pitches to win or protect business, and it can’t evolve without thoughtful investments on both the agency and brand side to train and adapt staff to these tools and the new business models they require.
In addition to consultancy-like outcome-based pay, performance pay, and annual scope, smart agencies are testing SaaS models and selling technology to clients and other agencies, as Brand Tech Group, for example, is doing with its AI tool Pencil.
The premise of transformation is difficult, costly and challenging, but agencies cannot afford to delay testing and learning new business models now. AI waits for no one.
This article originally appeared on Campaign US.
