3 ways the generative AI boom is upending the advertising agency business

• Advertising agencies have been quick to tout their AI offerings.
• As they jockey for AI leadership, agency groups are also discovering new business challenges.
• Those include sourcing GPUs, reconstructing payment models, and figuring out the head of AI role.

As the generative-AI craze sweeps the corporate world, ad agencies have been eager to show their clients — and shareholders — their AI expertise and deep relationships with companies like Google, Nvidia, OpenAI, and Microsoft.

As agencies assist the world’s largest corporations in adopting AI, they are beginning to consider how the technology will disrupt their own businesses, including what to automate, where to source AI talent from, and how to balance potential revenue uplift with business risks.

Some of these challenges are well-known, such as avoiding copyright infringement issues and disclosing when content is AI-generated — but the advertising industry is also dealing with a number of new issues that many hadn’t anticipated.

Here are some of the most recent challenges that agency leadership teams are encountering as they race to be the leaders of AI in advertising.

Some ad agencies fear GPU shortages could delay client work

The increased use of artificial intelligence by businesses has resulted in an increase in demand for graphic processing units, or GPUs — chips that can process large amounts of data and media simultaneously and quickly. Companies are increasingly being classified as GPU haves or have-nots.

For the time being, most agencies with GPU demand simply rent compute power from cloud service providers such as Amazon’s AWS, Microsoft’s Azure, and Google Cloud.

As Big Tech and VC-funded startups like OpenAI use case studies to gain market share, agencies are benefiting from the competitive environment, according to Nick Coronges, global chief technology officer at ad agency R/GA.

“The benefit for us is that this stuff is relatively cheap,” said Coronges.

However, as the market matures, some agencies anticipate that those prices will rise. And, as agencies promise clients that they can generate thousands of creative assets in minutes using generative-AI, many will be forced to start sourcing their own compute.

If they don’t plan ahead of time, they may find themselves at the back of the line with months-long waitlists, according to Lewis Smithingham, svp of innovation at digital agency Media.Monks. Already in the media.Monks said he is booking GPUs six months in advance for some projects.

“Agencies may discover that they are being overcharged for use and purchase, or, more likely, they will discover that they are unable to deliver on their pricing because their in-house compute is out of date, or they underestimated the amount required to produce the content they have promised,” Smithingham said.

AI productivity gains risk undercutting agency fees.

Many agency executives have praised AI’s productivity benefits, which range from creating lists of search keywords to making time-consuming tasks like cataloging invoices more efficient.

However, increased productivity may result in lower agency fees.

Agencies typically charge on a “full-time equivalent,” or FTE, basis, based on the number of hours spent working on a client’s business, which is equivalent to full-time employees.

“With the level of automation now possible through generative AI, it does raise the question of how sustainable those traditional time and material-based compensation models are,” said Ryan Kangisser, managing partner for strategy at MediaSense.

Forrester analysts believe that agencies may need to transition from FTE to HTE — “human plus technology equivalents.”

“What is being delivered is not simply human hours; it’s augmented human hours, processing, AI, and all of that enriched with a lot of data and expertise,” said Jay Pattisal, vp and principal analyst at Forrester.

Agencies have not determined what to do with the AI talent they have hired.

Much like the heads of digital, mobile, and programmatic before them, agency heads of AI are now getting their due.

Once such AI talent is found, agencies face another quandary: where should a “head of AI” sit within the organization? According to Ruben Schreurs, chief strategy officer at marketing consultancy Ebiquity, most businesses began with this as part of the responsibilities of the chief technology officer or the IT department.

According to Schreurs and other experts, the AI mandate is much broader than just technology, given the future business impact and corresponding legal and compliance risks.

As technology advances, more agencies will turn to what Richard Robinson, managing director of the Xeim Engage consultancy, calls “a singular leader armed with the fiscal responsibility and decision-making authority to deliver the necessary recommendations and decisions on agency structure, culture, and purpose.”