In ancient Greece there was the fabled Temple of Apollo. On it were inscribed, in marble, three timeless maxims. The one that is probably best-remembered today is the first one. It has just two words: Know Thyself. Some believe it means that if you don’t know how your mind works, for example what your biases and assumptions are, you have a hard job relating to the world and learning from it. Before absorbing knowledge about the outside, it was considered the height of intelligence to know what is going on in your own head.

I mention it here because the word intelligence, in an agency context, is shifting today. It used to be that when agencies talked about gathering intelligence they were talking about external knowledge – information of their clients’ markets. It would mean immersing themselves in their client’s sector, getting to know who its competitors were, what the big trends were, what customer expectations were, emerging opportunities, and so on.

Agencies are famously hungry for such knowledge. They have to be, because they are expected to be the instant expert on a thousand topics. And in digital, it’s even harder. The required digital skill-set has mushroomed alarmingly, with deep knowledge needed of every technology, every channel, every aspect of social media / search / web / publishing and a lot more.

But such knowledge is merely external. 2011 showed us that all the external knowledge in the big wide world is well and good, but one overriding theme of the year – reducing margins – hangs like a dark cloud above everything else. A world of shrinking margins changes pretty much everything. Simply being the expert on worldly things, and being brilliantly creative, and working flat out, isn’t quite enough now. With slim margins you also need profound knowledge of your business’s internal world to be able to survive.

The new report by Kingston Smith W1 is immensely sobering regarding margins. Their Financial Performance of Marketing Services Companies is now out, and its review of the digital sector shows continued income growth of 8%. But operating margins have plummeted to an all-time low of 4.7%. It means that all of last year’s growth, and more, has evaporated in those reduced margins.

Put simply, clients want more, but for less, and at full speed. If margins continue to decline, this alarming situation will have to trigger a rethink in a lot of areas in the digital world. Low margins mean a real danger of going out of business if you get your calculations wrong. One over-optimistic assumption about how the cash is flowing could be critical. At which point all the external intelligence in the world will make no difference any more.

So if 2011 was the Year of the Emergence of Perpetually Reducing Margins (not a snappy title, I admit), I predict that 2012 will, in response, have to be the Year of Internal Intelligence in order to cope with it. By ‘internal’ I mean knowing exactly how every job you’re working on is helping, or hindering, your survival, day by day. Slim margins mean precious little margin for error. In such a world, you can be focusing on your creative work only to discover that you can’t pay the wages.

Those of you who know me might say that this is what I tend to bang on about a lot. Every year for the last ten years, in fact. They’re right. It’s my job to help agencies be more profitable. But the current trend gives it all a real sense of urgency that wasn’t there before. Margins at an all-time low. Competition at an all-time high. A heady cocktail.

The agencies I’ve talked to recently have expressed a need to reinvent themselves (again) to some extent. Naturally everybody aims for higher-margin business. New clients with more opportunities for strategic involvement and genuinely creative innovation. Clients who can be wowed and won by sheer brilliant talent and focus. But over time, the underlying margins trend simply isn’t going away. From now on, you really are expected to deliver faster, less expensive answers and keep them coming.

Yet in spite of all those challenges, you could hardly wish for a more exciting environment to be in. Creative innovation. Immediate customer interaction. And the best agencies in the world serving a sector of continued growth. A great business to be in.

Just don’t attempt it without having the information at your fingertips. Know thyself...

By the way, just in case you’re not well up on Ancient Greece maxims, the second one was Nothing in Excess. Talking of which... Happy New Year. Cheers.

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