How AI will impact the agency business model

Two fields where AI is making a huge impact are content marketing and software development – both of which have often been outsourced to specialized digital agencies. So, what does the future look like with the rise of generative AI and LLM tools?

AI is already poised to heavily impact the job market and the economy as a whole over the next few years. Some of it will be direct, i.e. AI replacing in-house roles. But what about when those roles were handled by outsourced personnel? What does this mean for the agency business model? It won’t just go obsolete now, right?

In this article, we’ll explore how generative AI will impact the digital agency business model based on the wants and preferences of businesses. We’ll focus on marketing/creative and development agencies as the ones most likely to be more heavily affected, and we’ll also take a look at new possible avenues for digital agencies.

Can generative AI serve as an adequate replacement for agency partnerships?

One of the main ways in which AI and automation are impacting modern-day jobs is in taking care of the more tedious and time-consuming tasks and processes. This frees up the time of roles such as marketers and developers to commit to more meaningful work which brings unique value.

In some cases, these types of tasks are handled by outsourced virtual assistants, while development and marketing often also get partly or entirely outsourced. But what happens in a world where AI is more and more capable of effectively taking care of these? How viable is outsourcing when it’s getting easier and easier to tap into the power of generative AI?

Considerations for leveraging AI vs. an agency partnership

In this section, we’ll break down the main considerations for deciding between outsourcing work and leveraging generative AI, and finding the right balance between the two.

Convenience

Logically, AI tends to be both more convenient and less costly than working with agency partnerships (however, you shouldn’t ignore the costs of implementing AI!). The latter still require finding the right partner(s), having meetings, keeping in touch and being involved in management, etc., while AI is literally at your fingertips – a prompt can serve as a stakeholder meeting or a piece of complex development documentation.

But how much do companies really stand to gain in the long term if they altogether forego agency partnerships in favor of AI? While AI can free up time with certain types of work, it can also create additional work which requires more time and effort, potentially making the work of in-house employees much more difficult and inconvenient – and this is one of the main problems which an agency partnership addresses in the first place.

How much you outsource

Another important consideration that will help businesses decide on the right approach is how much work would need to be outsourced in the case of an agency. For example, if you’re only a few people short or need an extra boost in a particular area for only a short period of time, a strategic use of generative AI could be your best bet in terms of efficiency and budget.

However, if what you need from an agency partner is not just staff augmentation but instead is an entire project or even a business area (e.g. content marketing), your best bet would be some kind of managed services/turnkey type of an agency partnership rather than trusting it all to generative AI (which still needs to be handled and overseen by humans, whom you presumably lack if you’re considering outsourcing/managed services).

The need for a human in the loop

As just mentioned, even outstanding AI tools need a human in the loop, i.e. they need to be overseen by humans. Therefore, a decision to completely switch from agency partnerships to generative AI may create bottlenecks and lead to poor ROI if in-house employees now need to re/upskill to work as efficiently as possible with AI, as well as free up their time to be these humans in the loop.

On the other hand, if a partner digital agency takes care of this human in the loop aspect, you won’t ever need to worry about any of this; or, if it’s an AI-adept agency, they can help you to efficiently take care of easier AI-related tasks while they themselves focus on the more complex ones.

How your agency partner uses AI

In a digital agency partnership, both parties will want to ensure that their policies and practices on using AI are as aligned as possible. In cases where a large portion of the work gets outsourced, e.g. the entire content marketing department, businesses will need to make sure that their partners’ AI policies follow all legal requirements and industry regulations.

At the moment, this chiefly means disclosing the use of AI wherever relevant, i.e. for each piece of content produced with the help of AI, or, for non-single use cases something about the general role and usage of AI, e.g. using ChatGPT and GitHub Copilot in software development to help with ideation, debugging, etc.

Other key standard practices include checking for accuracy, bias and potential copyright issues, all of which need to be taken care of through human input and scrutiny (see “The need for a human in the loop” above). For digital agencies, disclosing all of this upfront will showcase reliability and proactiveness, help reduce friction and lead to more fruitful and successful client relationships.

Impact on individual employees

Last but not least, the final consideration we need to highlight is the impact of AI adoption & usage on individual employees. How will in-house AI policies as well as those of agency partners affect productivity and employee experience? We can break this down into:

• What do your employees want? How much disruption can you introduce?
• How important is it for employees to reskill/upskill? How will you approach this training and upskilling?
• How comfortable do employees feel working with (outside) people as opposed to AI? Are they already used to one of them?
• How can you optimally balance employees’ wants and needs with your business goals?

In all these cases, keep in mind that introducing change too drastically can have an adverse impact on productivity and EX.

The best of both worlds

Taking all the above considerations into account, the most typical and reliable approach will be some kind of combination of AI with the right agency partnership(s) to achieve the optimal outcomes. This may mean diversifying based on business sectors, e.g. having in-house AI-driven content marketing and outsourcing design/development to trusted agency partners.

Another new trend that we’ve previously alluded to will be the rise of AI-focused agencies that help clients become more proficient with in-house use of AI and/or taking care of higher-level AI-related issues. As legal requirements get further developed, for example, this may lead to specialized use cases such as ensuring AI usage is compliant with changing regulations, counseling/coaching on effective and responsible AI practices, etc.

So – what does this mean for agencies & the broader tech landscape?

In the beginning we highlighted content and development agencies as the two most likely ones to be affected by AI, so this section will focus on the particular impact on those two as well as further explore the new avenues opening up for agencies and new tech trends this could lead to.

Development agencies

While tools like ChatGPT are great at quickly producing code and facilitating the jobs of developers in many other ways, generative AI cannot replace developers. A non-developer or even an inexperienced developer can’t just create an effective website through a ChatGPT prompt, and skilled developers are very much needed to make great use of AI.

That said, ChatGPT, GitHub Copilot and other similar tools are already becoming a ubiquitous part of the developer experience, and as such, new policies will be needed on how to work with AI, taking into account both legal regulations as well as in-house standards and how these affect the standards of agency partners.

Creative/marketing agencies

It’s a little bit different with (content) marketing agencies. Generative AI is able to produce high-level content which requires minimal human input/oversight and no engineering experience. The role of the human can be more of an editorial one and as such more easily taken care of in house.

While it’s unlikely for companies which trust their whole content marketing to an agency to wholly transition to generative AI, those that just outsource parts of their content production process may find greater value in utilizing AI, and hence less of a need for agency partners.

What creative/marketing agencies should prioritize is delivering value beyond what can be achieved through AI, which will often also include their own tactical implementations of AI.

AI-focused agencies

One possible new avenue for marketing agencies could be transitioning from content production to more strategy-based content counseling, helping clients make the best in-house use of AI, as we’ve already highlighted. This may include prompt engineering optimization, legal counseling on responsible AI, or even custom AI tools and frameworks, if we go beyond just marketing agencies.

From the client perspective, an effective implementation of AI comes with its own set of costs, which likely include substantial investment in training and upskilling in-house personnel, and in this case leveraging the skills of an agency partner specializing in AI is more efficient in terms of both time and money.

Tools over services?

As AI tools become better and are thus able to produce more and more streamlined digital products, it’s entirely likely that we’ll see a move further away from outsourcing to relying on SaaS and other digital products.

However, if we’re talking about a revolution in digital product development, that also means an opportunity to take advantage of these new needs – for example, development agencies may become more successful in partnering with product-focused companies over other types of clients.

→ Marketing agencies are likely to be more heavily impacted by the rise and innovation of generative AI/LLM tools and are more likely to become more AI-focused themselves.

→ Development agencies will be less directly affected by generative AI, but they will be more indirectly affected by the innovation that happens as a result of this access to generative AI, especially if they’re able to turn these disruptions to their competitive advantage.

In conclusion

So, while the explosion of AI and LLM is definitely shaking up the work of digital agencies, that does by no means indicate that the agency business model is becoming obsolete – if anything, it opens up new avenues for digital agencies.

For anyone interested in this topic, we recently had a great conversation with Nick Petroski of Promethean Research on the impact of GenAI & LLM tools on digital agencies, where we discussed a lot of different factors that are also very relevant here – we highly recommend you check that out as well!

And, in case you’re looking for a skilled and reliable development partner, check out how Agiledrop works with product teams and how we can help you out.