Office
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Anyone paying attention to agency trends in recent years should not be shocked that virtual agencies have been on the rise for some time now, aided by technology, and underpinned by a far more cost-effective model than the traditional bricks and mortar version. The virtual agency model gives advertisers access to a wider network of talent, the flexibility to tailor services and, perhaps most importantly, better value for money.
Which raises the question: After the pandemic is over, will clients, accustomed to working remote, still be quite as willing to accommodate the agency overheads that come with expensive office space?
The agency overhead is a proportion of the direct salary cost, expressed as a percentage. It varies by location, real estate costs, and cost of living. For agencies we typically see overheads that range between 90% and 125% of billable direct salary costs. The agency then marks up its profit over the combined direct salary and overhead total.
Overwhelmingly, rent is the biggest component of the overhead. And thus, a smaller actualized overhead based on significantly reduction of office space will mean a drastic reduction in profitability. It could easily impact 30-40% of revenues and bankrupt traditional agencies that house enormous staff and need a big space.
Clients are discovering that the shift toward working with virtual agencies is not difficult. It is definitely possible to function more efficiently with less travel. Now that most of the world is experimenting with a work from home model, traditional agencies, facing a revenue squeeze, will re-evaluate their expense on physical facilities. Since we’re facing an economic downturn, I expect physical offices will be the first thing to go as agencies tighten their belts – lowering fixed overhead cost and the it will be the end of the high retainer.
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Supply and demand make the virtual agency model a more enticing option post-Covid. On the supply side, you’ll have agency people that will relish the two or three hours they’ve got back each day from eliminating a commute, as they’ve finally been able to fit family time and exercise into their working days. On the demand side, you’ll have clients looking for senior people to do the work directly on their business and not subsidizing the agency bureaucrats, junior teams, overpriced overhead or extravagant office space.
This is an evolutionary moment for agencies as the virtual agency model prevails. While tech companies have long appreciated how being virtual can be innovative, traditional agencies have used an outdated distributed model and have to play catch up adjusting to the new virtual world.
In some cases, we’ll see a “hybrid” model as the outcome from the current disruption, as agencies learn how they can operate a profitable business with a lower cost base. That will require making substantial organizational changes.
No matter how you look at it, it seems clear that the shift to a virtual future, will only be hastened by Covid-19. There will be more virtual agencies, more competition for clients, more reviews of fees and different ways of ways of working.
I think it’s too early to know exactly how the working client-agency relationships will be redefined, but they will require greater flexibility and adaptability. How agencies position themselves to help clients will be the key to long term partnerships.