Rough Seas Ahead?

NEW YORK Talk to a digital agency CEO about the coming economic woes and you’ll hear the same mantra: Traditional advertising will suffer much more in a downturn, mostly because of the comparatively lower cost and higher measurability of interactive, and the fact consumers continue to migrate from traditional channels to digital outlets. Yet underneath the surface-level cheeriness, most admit fortunes could change on a dime in the next 12 months — who would have predicted the Wall Street collapse just a year ago? — and are preparing contingency plans.

“The scary thing is not knowing when the other shoe drops,” said Daniel Stein, CEO of EVB, a 75-person shop backed by the Omnicom Group. “That’s why there’s so much anxiety out there now.”

What’s clear is the economic downturn will significantly impact the industry in ways large and small.

There are already signs that interactive has been hit. Clark Kokich, CEO of Microsoft-owned Avenue A/Razorfish, said the shop has felt the effects of the turbulence on Wall Street with its financial services clients and in consumer spending with auto clients like Ford. Across the board, he said, clients are scrutinizing spending much more closely and making cuts to experimental programs.

“If you brought a really good idea to a client the past few years, there’s a good chance they’d do it,” he said. “There’s much more of a need to set priorities and to make trade-offs now, maybe even delay projects. It’s just an overall caution that didn’t exist before.”

This uncertainty has led to some agencies gaming out different scenarios for 2009, ranging from OK to horrible. Last week, iCrossing CEO Don Scales presented three separate outlooks to its board of directors. Like all agency heads, Scales professes he’s buoyant about the outlook for the industry, particularly in search marketing, iCrossing’s specialty. Still, caution dictates that the agency cut back in small ways, such as slashing trade show marketing budgets, and even thinking about toning down the holiday party.

“A majority of your costs are wrapped up in people,” he said. “We still have a lot wrapped up in non-people costs. A half-million dollars here and there adds up.”

Agencies like Avenue A/Razorfish and iCrossing have slowed their hiring precipitously. This could lead to a flip in a labor market where digital talent has been in short supply: Those agencies still hiring will have a bigger pool from which to choose. No major digital shop has made significant layoffs, though the uncertainty of the coming year leaves the door open to cuts in a worst-case scenario.

“We don’t believe at this point there’s a reason to look at reduction in workforce,” said Liz Ross, CEO at Tribal DDB North America. “Two months from now, I could be singing an entirely different tune.”

Other shops have yet to feel the pinch as well. R/GA CEO Bob Greenberg said RFPs are still plentiful, and noted that the Interpublic Group agency is still in full expansion mode: Earlier in the month, it inked a deal to take 16,000 square feet of space in San Francisco, enough room for 100 employees. What’s more, R/GA took the unusual move of opening the office without a major client. Instead, it wanted a way to poach topflight digital talent, Greenberg said.

Still, even the ever-optimistic Greenberg sounded a note of caution and pointed out an uncomfortable fact for digital agencies: What happens to them is largely outside of their control.

“If they cut across the board, it will affect us,” he said. “But if they’re organized around the consumer, then it more likely won’t affect us.”

Like all shops, digital agencies are focused on solidifying client relationships in tough times. The focus on driving business results will only grow in a downturn. Unproven tactics — think viral videos with views as the only success measure — are passe. What’s in is unsexy stuff like customer-relationship management. This will tend to favor not only direct-response agencies, but digital shops that can prove their programs are more than just entertaining experiences.

Juxt Interactive, a Newport Beach, Calif., independent Web shop, recently pitched a fast-food account. While the shop has made its name in large part building flashy microsites geared to increasing time spent with the brand, it instead pitched a program to collect mobile phone numbers that can be used to increase repeat purchases.

“I’m not out pushing viral videos,” said Josh Mooney, CMO at Juxt. “They have their place, but you can’t prove they drive to sales.”

The changed economy will affect more than just the work for a shop like Juxt. The 30-person shop is close to completing a deal to be acquired, Mooney said. But that won’t be the case for many small and midsize independent shops that did not find a partner during flush times. According to Stan Sandberg, principal at Gridley & Co., prices for interactive agencies have already plummeted more than 20 percent in the past year.

What’s more, smaller players without well-heeled backers are vulnerable to project cancellations that could spell doom to shops that haven’t managed their risks appropriately.

“There will definitely be roadkill,” said Sandberg.

The good news, however, is that unlike the dot-com era, when agencies grew fat on venture-fueled startup clients and the Internet was unproven, digital is here to stay. “Digital has proven itself,” said Kokich. “When the market crashed in 2001, a lot of traditional companies said we don’t have to worry about that. That’s not happening. Every brand knows that digital is an important part of their marketing mix.”