The profusion of disparate advertising technologies, new media channels, and exponential growth in consumer devices – along with the concurrent mash-up of earned, owned and paid media – is significantly fragmenting the media ecosystem.
This combination of factors has given rise to a host of new technology and data vendors, all attempting to help advertisers cope with and manage this change. This has left agencies asking a perplexing question: what is our role in this new technology and data-driven world?
Some agencies, intent on maintaining control and preventing disintermediation, feel they need to build technology themselves. Others decide to white-label or stitch together disparate technology solutions, but package it as their own unique offering. But the question about their role in the future remains. How do they continue to be a crucial and highly value-added partner to their advertisers, while still generating healthy margins for their shareholders?
And how do they do this now that procurement departments are putting more pricing pressure on their traditional "cost-plus" or media commission-based business models?
To help answer this question, it is worth looking back to the evolution of the world of data-driven finance. In the early days of mainframe computing, financial services companies started to collect, normalise, organise and distribute financial data, which quickly transformed the world of investing from a personality and gut-feel-based model, to a data-driven model.
In the early days of that transformation, the companies that capitalised most on this structural shift were the data providers, the technology/console manufacturers and other innovators that enabled the ability to capitalise on data.
However, over time, the data and content providers, as well as the tool providers, became commoditised and value started to accrue for the companies that had the clearest vision of how to most effectively use this profusion of technology to generate returns for their customers – the hedge funds. These firms took on the risk of generating results, while agreeing to be compensated primarily based on their performance.
Today, advertising agencies are well positioned to fashion themselves in the mould of the hedge fund. The leading firms should be willing to take on media risk to deliver the incremental results sought by their clients, and implement measurement methodologies so that they can be adequately compensated in proportion to their performance.
There is no reason why a model of out-of-pocket costs plus a percentage of profit – the de facto compensation model at hedge funds today – should not work at agencies. The only obstacle to its implementation would be establishing a performance baseline against which the agency would be measured.
The leading agencies should not build technology, but instead be experts in using technology. They should be ruthless about working with best-of-breed technology – constantly seeking sources of new data and new capabilities to stay in front of their competition to deliver superior results.
Advertisers should be willing to highly compensate their media agencies to tightly align their mutual interests, but do so within a structure that protects the downside. Advertisers should also seek the data and visibility to compare the performance of multiple, disparate agencies in exceeding objectives above a baseline over time and across disparate verticals/sectors, in a way that allows them to trade off consistency with performance.
By studying the evolution of quantitative finance and today’s leading hedge funds, agencies can gain valuable insights that can help define and drive their future role, as they continue to march into an increasingly data and technology fuelled world of advertising.
Adit Abhyankar is executive director of Visual IQ