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These kinds of posts generally start with statistics on how Kindle outsold paperbacks, digital is bigger than TV, print, and outdoors in the U.K. I don’t think whether digital is the future is now left to debate.

I am not predicting the end of outdoor, print, TV, or radio, just that the above mediums may also metamorphose where they will eventually also be delivered through digital. Example: in a radio show, the show host will give options of 20 songs through social media, the users vote, and the song that gets maximum votes from the listeners is automatically streamed to the listeners. It may still be radio from the consumer point of view, however the advertiser may receive the ability to have different ad jingles based on the car he drives.

In order to succeed in this digital world, the agencies will also need to evolve at every level. Let me elaborate a few and leave the rest of them for you to imagine and prepare.

Remuneration. The remuneration of agencies on the conventional side of the business has been under debate for decades, in digital the same has become much more complicated. In conventional media, the input can be monitored and controlled. For example, if the agency does not do the messaging right, it can be reworked until it is perfect, thus one needs to put a lot of emphasis on the negotiated price. In digital it is almost impossible to monitor or control input. Let’s take an example of paid search, which is probably 60 percent-plus of all digital spend. An agency can charge 6 percent of spend and make more money from the client or charge 13 percent of spend and end up having a lesser margin. The advertiser finds it almost impossible to control the quality of technology, personnel deployed, and the number of man-hours invested in optimization. I am sure all of us have seen campaigns that were managed for a lower fee but ended up wasting four times as much of media cost due to inefficient optimization. The advertisers must realize, if the agency is honest and actually deploys the extra revenues into further optimization of the campaign, each 1 percent extra may lead to 3 percent savings in media cost. In most conventional mediums, the investments made in ad units, media buying, and other incidentals are less than 10 percent of paid media, while in digital the paid media to management ratio can be as much as 30 percent of paid media. I am not saying pay 30 percent to the agency, but provide budgets for content creation, analytics, multivariate testing, technologies, number of ad units, etc. This 30 percent investment would lead to the remaining 70 percent of the budget delivering more returns than 90 percent of paid media investments would have given you.

Figure 1 – Conventional Digital Agency

Vs.

Figure 2 – Evolved Digital Agency

Figure 3 – Optimization Rewards

Team structure. In conventional mediums, the number of outputs is limited. Even the largest client would not have more than a few creative themes and a few tens of ad units in the year. The number of people at the top is the key; even a single award-winning national creative director has the capability to transform an agency. As the junior people in a conventional digital agency rarely deal with senior management of advertisers or have a final say into the creative unit that goes live, agencies were generally structured to be top heavy. As dynamic pricing, measurement, and contextual-based advertising gains prominence across all mediums, agencies would need to develop expertise at every level of the organization thus leading to flatter organizations.

Figure 4 – Changing Team Structure

Capabilities. Advertising has always been a balance of art and science; there is a strong possibility that the role of science in advertising may become dominant. As the world of advertising becomes digital, agencies will have to develop added expertise in technology, analytics, content creation, data mining, etc. in order to sustain their success. Malcolm Gladwell mentions a tennis coach who is able to predict a double fault just based on how a player would connect with the ball; he got it right 16 out of 17 times. Exceptional advertisers have this unique ability of taking a huge amount of data and forming communications, which may seem like intuition. This is the precisely the reason why the best human chess players are still able to beat computers. Having said that, only the best human players are able to beat computers; for the rest of us mortals data may start trumping intuition, thus it is important to start augmenting data mining and technology capabilities within our agencies.

Figure 5 – Optimization Rewards

Business model. As most mediums begin to be sold through an auction process, the dependence on volume discounts on media buys and treasury operations will need to reduce. As advertising becomes more measurable, agencies will need to link their performance to revenues their earnings as well as build consulting capabilities.

The next five years are going to be extremely exciting for the advertising industry. However, only for agencies that are able to adapt to this new reality faster.