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Yesterday I had the pleasure of keynoting the final Owner’s Summit conference for digital agency owners in New Orleans.
It was bittersweet since I’ve been presenting our research at these for the last four years, and this had become my favorite conference. It’s sad knowing this will be the last. It was a rare event where owners dropped any pretense they had and connected as contemporaries, not competitors.
We could use more of these.
For my talk, I ran through an early read of the State of Digital Services survey results. I figured it’d be valuable to share some key results with you too.
TL:DR
- Revenue growth slowed in 2022 back to the historical trend of about 15%
- Agencies saw continued strong pricing power last year with 38% of shops raising prices
- Net margins fell to an average of 13% in 2022, down from 17% in 2021 due to continued salary growth, poor utilization rates, and high turnover
- Hiring and retention issues have eased
- Remote work has settled into a groove as owners aren’t expecting any major changes to their remote-onsite status in the next year.
- Still too early on the 4-day workweek as only 4% of shops are running one currently
- Owners are expecting AI to have only a moderate neutral impact on the industry
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Revenue Growth & Pricing
After a fantastic 2021, revenue growth slowed to 15% Y/Y in 2022. This is about half of what owners were expecting. This created some utilization challenges as many firms were staffing up to meet that expected demand that never materialized.
For the second year, we saw strong price increases across the board, as 38% of shops raised prices. Studio (<10 FTE) shops were most likely to raise prices as they played catchup from not raising in 2021.
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Margins
Margins fell to an average of 13% in 2022. Salary growth appears to be the main reason for this margin pressure, but poor utilization rates and high employee turnover also contributed.
Salary growth for key functional areas averaged around 20% from 2019-2022. This growth was only partially offset by pricing increases.
Utilization rates for production teams came in significantly below average, which also weighed on margins. Agencies staffed up in early 2022 in preparation for continued growth that never materialized. The lack of growth forced more bench time before agencies could right-size their teams.
Turnover rates were roughly double what they should be, which caused a significant amount of internal disruptions at shops. This disruption to team dynamics also weighed on margins.
Key Trends
Hiring and retention issues have eased a bit, but they’re still more challenging now than they were a few years ago. The layoffs and hiring freezes at large tech firms are playing a small part in this easing.
Most shops won’t be changing their remote work arrangements in the next year. If they’re remote now, owners plan on being just as remote next year. The small return-to-office push we saw from big tech firms doesn’t seem to have taken hold, or at least it hasn’t trickled down to agencies.
It’s still way too early on the 4-day workweek as 4% of shops are actually implementing one and only 7% of owners are planning to experiment with one in the next year. Early research on the impacts of a 4-day workweek was positive, but it’s still a fairly new concept, and with hiring and retention easing, there’s less incentive for owners to take a chance on it.
One of the most surprising results from the survey came from the AI impact questions. On the whole, owners are expecting AI to have a moderate impact on their industry. They’re also expecting that impact to be only slightly positive. There’s a large divide between those who have stayed up on all the latest AI developments and those who’ve yet to look into it. This difference in understanding the capabilities could account for this tepid response.
Recap
Overall agencies faced a challenging growth environment in 2022 and saw margins suffer. Luckily, these are all challenges shops have faced before, and there are plenty of levers to pull to bring financial performance back in line.
