Within the marketing group of a major beverage company, years of frustration with the performance of external agencies finally came to light. Despite promises from agency management and personnel changes, the agency of record was not meeting the needs of the business and lacked accurate results and reviews. Accountability, quality and timing all suffered. In response, the beverage company conducted an analysis to decide which capabilities to continue to source externally and which to bring in-house. The capabilities it ultimately decided to bring in-house included media strategy, insights and analytics, which made it necessary to hire and train new staff.
The company centralized its data technology and marketing teams and, rather than having a central team, dedicated internal media teams to business units to increase accountability and integrate brand capabilities . At the same time, the company replaced its reference agency with a more suitable partner.
Sticky situations like this frequently arise in companies that have become overly dependent on external agencies for their core marketing activities. Marketing organizations often find themselves saddled with vendors who fail to deliver consistent high-level performance, but come with high costs and added administrative burden due to rigid processes and frequent rework.
Many marketers lack the governance to hold their agencies accountable. In these cases, brand marketers are missing steps of important data, hindering their ability to make decisions quickly and with confidence.
Some 92% of Association of National Advertisers member companies worked with one or more external agencies in 2023, the ANA reports in its latest survey. At the same time, 82% also had an in-house agency, up from 78% in 2018, meaning most marketers have a hybrid approach rather than the extreme approach of either outsourcing everything , or to keep all the work in-house.
Complex agency setups, hybrid or not, often fail to realize their full potential. Marketers may find they spend too much time coordinating in-house and agency experts rather than running the business and making key decisions. In contrast, effective marketers create a deliberate, well-defined agency ecosystem in which the in-house/outsourcing equation is balanced with a consolidated set of closely collaborating in-house agencies and talent, with clear decision-making rights.
Questions to structure the ins and outs
To determine the right balance of marketing talent, companies will need to answer three questions.
What specialized capabilities should we develop internally? Taking more control over brand marketing services first involves understanding what capabilities will help accelerate competitive advantage. The best marketing organizations rarely outsource everything or keep all functions in-house. They prioritize capabilities that will best advance the most important goals and outsource tasks that require external expertise.
Leaders focus on developing talent internally in areas where proximity to brand or industry has the greatest effect, and where fewer handoffs increase efficiency without compromising expertise. These areas typically include media strategy, insights, data, analytics and performance metrics.
Where can we gain an advantage by bringing in outside talent? External agencies are well placed to meet certain needs. These areas of interest often include:
- Creative development and production to strengthen brand value;
- National video buys and media operations;
- Flexible pools of people to execute the strategy; And
- Influence when negotiating contracts and prices.
Rethinking the in-house/outsourcing equation can yield big dividends, as an effective agency ecosystem provides expertise and resources that would be too costly or time-consuming to develop in-house.
Of course, in each of these areas, marketers need to ensure that agency partners are firmly committed to the strategy. Marketers will want to identify opportunities to reduce agency volume and thereby reduce inefficient costs wherever possible. And they should regularly validate quality and price standards with market references.
What is the best way to integrate internal and external activities? It’s one thing to determine the mix of internal and external activities, but it’s another to divide and conquer the work as a single unit.
For example, some activities need to be executed quickly, such as measuring a campaign’s performance against expectations. Other goals, such as improving consumer engagement, involve adjusting multiple activities. Effective integration across teams requires a well-documented workflow, governance, and the right talent for the job.
Marketers must choose between a consolidated model with a single agency team doing all the work; a blended model that consolidates work for one core function (such as creative or media) and uses a series of point solutions for other functions; or a model that divides work among multiple agencies, each managing a point solution (see Figure 1). Each model has trade-offs on dimensions such as profitability and operational friction.
As marketers take control of more activities, they will face a corresponding effect on staffing and productivity. Some agency roles will be moved in-house, meaning new technical staff will need to be hired and trained. The transition will involve periods of overlap between agency and internal teams, requiring additional management to maintain performance. In a multi-brand or multi-business unit company, marketers will need to determine which capabilities to centralize and which to integrate across brands or business units.
Agencies also need to evolve as new ways of working are established. New business models and incentives may need to be negotiated. And both parties will benefit from clearly defined accountability and governance, with explicit guidelines on service level agreements and escalation. To manage the performance of an agency, it would be a mistake to rely solely on the purchasing and sourcing teams. It is marketers, both internal and external, who should agree on interdependent and independent motions.
How generative AI is changing the game
The advent of generative artificial intelligence (AI), focused on analysis and content creation, brings a new dimension to the challenges of managing an agency ecosystem. The technology will bring benefits such as more content at lower cost, increased personalization and faster testing.
We estimate that generative AI has the potential to impact 47% of marketing activities, which is relatively high compared to other business functions. And companies could save 24% on marketing work time with generative AI, translating to about a 30% gain in productivity for marketing. The areas most impacted by technology rely heavily on data analytics: digital marketing and consumer insights and experience (see Figure 2). For example, the technology automates data analysis used to optimize campaigns and user experience, and helps create and visualize customer insights. This leaves some marketers wondering how to keep pace with the latest technologies: should they develop expertise in-house or rely on some of their agency partners?
Generative AI will thus reshape the company/agency relationship on several fronts, each with its own issues to resolve. Obviously, technology creates content easily, but the returns to abundance are diminishing. So marketers must understand when and how more content generates returns, then structure contracts to avoid paying for abundance beyond its marginal value.
Beyond content, generative AI enables more creative production of all types, but the technology can only be deployed if it is complemented by greater capabilities for rigorous experimentation, analysis to measure value and personalization.
The economics of operations will change by substituting automation and its fixed costs for manual labor with variable costs. Agencies will likely capture these returns to scale and spend more on personalization to accommodate variations among consumers. Therefore, marketers should insist that agencies automate activities such as administrative and reporting processes, and that agency fees drop by, say, 20%. Agencies that can experience lower costs through automated quality and reliability will benefit the most.
Generative AI is also expected to accelerate the ROI of launched campaigns, creating opportunities for agencies to gain value, for example by capturing programmatic buying arbitrages. But this capability will become commoditized as agencies compete to provide it. Here, marketers should emphasize optimization during the campaign and price any optimization with value-based or risk contracts.
It’s time for a candid self-assessment
For marketers considering rethinking their agency partnership model, it helps to answer a set of high-win questions:
- Do we have a clear talent strategy for the coming years regarding the skills we need to increase demand?
- Does our agency (paid or creative media) run multiple experiments each quarter (on content, channel, audience, etc.)?
- Can our agency respond to our requests in less than 12 hours?
- Do we and our agencies feel like one team?
- Do we have performance-based compensation?
Depending on the responses, a review of the agency’s operating model may be necessary. And with the spread of generative AI, it’s worth assessing how the new technology will change marketers’ and agencies’ approaches to modern marketing.
