The agency model is under pressure

Agencies are little factories, and have been for nearly three centuries. Creative hubs that produce campaigns, videos, advertisements, websites, webshops and all sorts of other things.

Over time agencies have grown into a serious industry. But one that, underneath the ‘artistic’ still operates like an 18th century factory.

How viable is that business model in the age of AI?

TLDR

• Current State: Agencies have long operated like factories, producing creative work across many channels, but their business model hasn’t evolved.
• Challenges: Companies are in-housing more work using tools like AI, reducing agency demand. Productivity is decoupling from hours worked, making hourly billing harder to justify. And freelancers are increasingly competing for specialized work, attracting top talent away from agencies.
• Future: Agencies will need to focus on niche expertise, coordination, and proprietary tools, while freelancers take on specialized roles.
• Response: Agencies should prioritize creativity, adopt new tools, and explore alternative pricing models to stay competitive.

Where agencies are at nowadays

From the Industrial Revolution onwards, as competition between companies increased, so did the need to ‘stand out’. Agencies started to specialise in doing just that. Managing ‘channels’ for clients to get noticed, increase sales, stay competitive. The invention of marketing, effectively.

And gradually the number of channels exploded from simple newspapers, to magazines, retails, billboards, radio, tv and banners behind an aircraft. And as the number of channels grew, so did the entire creative agency industry.

Agencies faced various disruptions with the arrival of each new disruptive advertisement channel. And one of their biggest disruption around 20 to 30 years ago the rise of digital. Many of the most successful agencies today are still riding the wave of that shift. While “digital” drastically increased the number of ‘commercial channels’ a company, and therefor an agency, had to manage, it didn’t fundamentally alter the agency’s value proposition, or business model.

Value propositions

Over the course of 2 centuries the value proposition of agencies haven’t changed much. It still revolves around a combination of four things:

1. Specialist skills and knowledge: Agencies offer expertise that clients don’t have. This could be production skills (design, video, coding), strategic skills (campaigns, branding, architecture), or niche knowledge (target audiences, channels, tools, distribution networks).
2. Talent as a team: The best agencies don’t just have talent, they organize it into high-functioning teams. Teams where the whole is greater than the sum of its parts.
3. Flexible availability: Clients don’t want the overhead of hiring in-house talent for everything. Agencies give them the flexibility to tap into skills when needed without long-term commitments.
4. Outside perspective: Agencies bring fresh eyes. They shake things up, challenge assumptions, and offer creative ideas that companies might not see from within.

Business model

Agencies use hourly rates, fixed price projects, retainers, weekly team rates, and sometimes subscription models. But underneath that basic business model everything remains straightforward: agencies bill by the hour, capture a margin, and pocket a profit. This model has been around for nearly three centuries.

There is a direct relationship between hours worked and works produced. And because of that, the business model of an agency is very hard to scale.

Agencies typically sit at the ‘commercial end’ of business. They deal with attention (ads, content, branding) and sales channels (retail, mail-order catalogi, webshops).

Critical assumptions under pressure

The dependency of agencies can be summarised on three key areas, each of which are facing increased pressure.

1. Demand for work

Agencies need a continuous stream of work. When the work runs out, the hourly invoices run out, and thus the revenue stream dries up.

What happens if clients start to do more in-house? What happens if that becomes a viable alternative to outsourcing? A strategically desirable alternative even?

I believe this is exactly what is happening. With a slurry of tools like Canva, LLMs, and more digital production proficiency of young marketeers - companies can do more and more ‘entry level’ production work in-house.

The first driver of this pressure is more in-housing of capabilities that are deemed ‘strategic’. Take software development, which is sure to become critical for any e-commerce company. Better to in-house, than to be dependent on an outside agency.

The second driver of this pressure is better tooling and accessible tools like generative AI (ChatGPT, Dall-E), but also creative production tools like Canva. Combine this with a greater skill profiency in digital production, and you have a trend where it becomes economically viable for companies to do more production in-house. That trend will be further exacerbated by companies being able to more quickly adapt to (local/viral) market trends.

Combined these pressures result in fewer ‘entry level’ work for agencies. This will result in a demand for more specialised work. Overall I believe it will result in a reduction in the demand for ‘generalist’ work currently by agencies. This provides opportunities for more specialist agencies, but also opportunities for a broader specialist freelance market.

2. Works produced ≠ hours worked

Historically, hourly rate and hourly productivity were tightly coupled. You hire a specialist ‘artist’ to produce creative works, pay him for his craft. Those things are now decoupled. No longer is productivity linked to the hours spend on it.

Through better tools work is shifting from ‘production’ to ‘direction’. This means more time spend on creativity and thinking, less time spend on creative production.

And that is a problem, because those hours are much harder to justify. Especially in a business model that hasn’t changed really for three centuries.

While this is a problem the entire professional services industry is struggling with, it is an interesting paradoxical problem. Especially for those firms with creative professionals currently on the payroll. Will you invoice at 2x the rate? Someone will undercut you, willing to do it for less, or quicker. Will you just simply stick to the old ways, not using any new tools? You will be surpassed by someone more time-efficient.

3. Talent willingness

Agencies are little factories of talent. Their primary job is to attract, retain and team build talent to produce excellent work. All three of these things are under pressure.

Attracting talent will become a challenge. When more and more of the work becomes specialised, the market for freelancers becomes more lucrative. Add to that the rise of freelance communities and the virtually zero-cost of marketing specialist freelance services via LinkedIn, and you have serious competition now as an agency.

Attracting and retaining talent therefor comes under pressure. And as a result, agencies start to adopt more and more crazy stunts and work environments; slides, swings, free lunches, desks and company holidays. But it’s questionable if agencies can keep up those high expectations, and if talent even wants this.

A shift in how creative work is done

What all of this adds up to is three trends that I believe will drive the future of agencies.

Specialisation as the new norm

‘Entry level’ work will be done more and more in-house by clients, specialised work and knowledge remain a vacancy. This is a gap in the market that can be filled by agencies, or more likely by freelancers, at an advantage on super specialised niche marketing.

Million dollar freelancers

Freelancers will scoop up the highly specialised work that is requested by companies, but too expensive to be executed by agencies. T-shaped professionals with incredible efficiency and effectiveness at the top, and insane specialisation and effectiveness within their niche. Marketed through personal brands.

Agencies as platforms

Agencies will shift from production powerhouses to orchestrating platforms for distribution and coordination. Platforms where overarching coordination of freelance work, specialist channels, and some strategy work is integrated into campaigns, webshops. Specialist agencies will continue to serve niche services, but resemble less of a traditional creative agency, and more of a traditional professional services firm.

Proprietary tooling

Agencies can start to shift more work towards the development of proprietary tooling. Serious gaming companies build their own tools for creating games. Agencies can adopt a similar operational model. Where a larger part of the time is spent on creating proprietary tools that help create unique creative works, unique for a niche.

How agencies can respond

Creative agencies are at a crossroads. I believe we’re at the brink of a major shift. A disruption of the industry. But the agency business model is also near and dear to my heart. Here’s how I believe agencies can respond:

1. Become a star agency

Focus on what can’t be automated. The outside perspective, the artistic vision. Agencies that push for creative, daring ideas—ones that challenge the status quo—will always be needed. But they won’t be seen as contractors. They’ll be collaborators, partners in a bigger vision.

Agencies like Wieden+Kennedy and Droga5 have built reputations as creative visionaries. Companies seek them out for their bold ideas, not because they can crank out banner ads.

2. Master team dynamics

Agencies need to get better at building killer teams. A team that operates like a well-oiled machine—where the whole is greater than the sum of its parts—has an edge. Clients will pay for that, and talent will stick around for the chance to be part of something special.

Think of IDEO. They’re famous not just for their output, but for the culture and collaborative process behind it. Companies don’t just hire IDEO for a product—they hire them for the team's creative genius.

3. Leverage new tools

Agencies should lead the charge in adopting the same tools their clients are using. Being at the forefront of tech like AI, co-creation platforms, or real-time collaboration tools is critical. Clients will look to agencies to be thought leaders and early adopters of tech.

4. Explore new business models

The era of hourly invoicing is coming to an end. Agencies need to experiment with subscription models, value-based pricing, or productized services. There’s no one-size-fits-all solution, but the time to innovate is now. Some agencies, like The Future Factory, are already experimenting with subscription models, offering on-demand creative services for a flat monthly fee.

Conclusion

Thus far in my career, I have had an on-and-off again relationship with the agency business model. I love agencies and their creative energy. I love working with agencies, because of that creative energy. And I love being part of an agency.

And though I might paint a pretty bleak picture, I still think there will be a place for that fundamental business model build around creative energy.