Here it is, the consolidation in the digital agency market.

Five years ago, when I warned of a consolidation trend in the agency market and encouraged people to think about appropriate strategies, I was largely ridiculed. Since last week, consolidation has presumably entered the collective consciousness of the industry. The process has been underway for a long time.

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Numerous examples

Reply

The examples are numerous. Reply, for example, has acquired many smaller agencies in Germany and England over the last few years. I sometimes wondered a bit about the quality of the transactions. Sometimes it seemed to me as if the decision to buy was made when in doubt. However, if you look at Reply’s figures, they were certainly able to integrate these acquisitions appropriately and derive a benefit from them.

In the first half of 2015, 15.5% of total sales came from Germany and a further 12.2% from the UK. The list of subsidiaries in the annual report is 3 pages long (page 63). I think Reply is doing this quite cleverly. However, whether this strategy will be successful in the longer term depends on whether the synergies can actually be exploited.

Pluswerk

When various smaller agencies joined forces to form Pluswerk, many people were very skeptical. At first, it seemed like a perfect recipe for trouble and strife among small companies. However, the fears have not been confirmed, on the contrary.

From the outside, you get the feeling that the agencies are growing together more and more. Whereas in the beginning the individual agencies were still represented in the communication, today you can only find one unit on their website. If you didn’t know how Pluswerk came about, you’d have the feeling that it’s a single company. In fact, I think it’s really becoming that and it’s quite a remarkable process.

Diva-e

Diva-e is another merger that is still in its infancy. What Pluswerk is doing on the communications side, diva-e is trying to do in the e-commerce sector. Under the guidance of Emeram Capital Partners, 6 agencies have joined forces to form a new player with 380 employees nationwide. One can only wonder about the somewhat unfortunate abbreviation of a name that is in itself good (DIgital VAlue Enterprise) and the stage claims on their website, which testify to an obviously incorrect understanding of the term “diva”. However, this merger is not strategically wrong. There is certainly room in the market for such a player.

Traditional consulting firms

Over the last two years, more traditional consulting firms have been trying to buy various service providers, especially larger ones. Accenture is constantly buying companies. Last year, for example, it acquired the Swedish agency Brightstep. KPMG bought Crimsonwing and Ernst & Young bought NorthPoint Digital in November, for example.

IBM Interactive

And last week, IBM virtually staged its shopping spree: Aperto from Germany, ecx.io and Resource/Ammarati (please change tags from “Independent” to “Dependent Marketing Agency”) “fell victim” to Big Blue. There are lots of details about these deals, but I’ll spare them here because I think you all read them somewhere last week anyway.

Why consolidation?

The consolidation is driven by three things.

Unbridled demand

On the one hand, there is this irrepressible demand that makes it comparatively easy for anyone in this market (if you think that’s not true, then open a free petrol station for comparison, good luck) to sell their time for money. In fact, I believe that demand will remain fairly stable and rise sharply over the next few years.

Big players need to catch up

Many large players, especially from the IT sector, have completely missed out on establishing a presence in the market for web solutions and building up subsidiaries. They are now correcting this through large-scale acquisitions.

Entrepreneurial “tinkering” at the agencies

Most agencies were created out of opportunity. They were set up by people who were (usually mediocre) programmers, but were able to work hard and unfortunately were and are rarely good entrepreneurs. As a result, most agencies are unable to generate the necessary added value financially from the high demand. I know a lot of agencies that get by financially and very few that really earn money.

As a result, many owners of smaller agencies are getting a bit fed up. They have worked hard for many years, have grown older, have other priorities (house & children), but the business is still not generating the income that their colleagues are now generating with their law firms, for example. As a result, many agency owners are willing to sell.

However, the poor performance of their companies in recent years means that their valuations are low. As a result, the potential purchase prices are naturally also low. Many an agency owner has had very sobering experiences in this regard during due diligence.

The classic Internet agency has had its day

However, the classic Internet agency is structurally obsolete. They still exist (in large numbers) because there are still companies (in large numbers) that are still in the first step towards digitization. This will not change any time soon. Fortunately.

In addition, the promises, especially those in the direction of “full service”, could never be kept. Aperto, for example, gained a lot of credit with me when they officially abandoned the full-service concept. I once wrote something about the topic of “full service” here.

Instead, agencies today should transform themselves into multi-layered technology and business service providers. These service providers provide coaching, CX design and technology implementation all in one. In the long term, the classic (decoupled) consulting business, the classic IT companies, the advertising agencies and the Internet agencies will fall by the wayside.

But only the consulting companies and IT groups have the money to take over the other areas. And, oh wonder, this is exactly the development we are seeing in the market.

The new kind of Internet agency

A new understanding of agencies is slowly but surely emerging. The term agency is becoming obsolete. Business/technology transformer is more appropriate. Or trailblazer. Basically, companies that help other companies to use technology for their business in a target-oriented way. Nowadays, this primarily has to do with Internet technology.

Reply is obviously following this path and claimed:

“We support our customers in harnessing relevant innovations that arise from economic changes and new Internet technologies”

Strategies

As strategic options, I have the same advice for today’s agencies as I did 5 years ago: Specialize your business in a maximum of 3 sub-areas that synergize with each other and then choose one of the following two options:

Grow

Try to grow and manage to survive in the market under your own steam. This is not easy and I think the train has already left the station if your company does not already have +200 employees. As always, the exception proves the rule.

Shrinkage

The other option is to downsize in order to be able to provide highly specialized services in sub-projects with a team of a maximum of 10 experts. This is ideal for all those owners who are good experts but not great entrepreneurs.

Profitability

Above all, however, I can only recommend getting a grip on the figures. An EBIT margin of at least 10% is a must in a market like ours (I can hear the murmuring, yes). Profitability is the be-all and end-all in owner-managed agencies.

It ensures that fundamental entrepreneurial freedom is maintained, that new technologies can be tested and used, that fluctuations and problems do not have to be borne on the backs of employees (provided that profits are not permanently distributed).

And it prevents the owners from being fobbed off with an “apple and an egg” when the company is sold.