The relationship between traditional advertising agencies and the local ecosystem consisting of local media and directory entities and their vendors has never been an important one. “Agencies” to local media have generally meant the Certified Marketing Reps who distribute and redistribute Yellow Pages ad budgets.

But a shift is occurring, as national brands look to local as an important channel that provides arguably stronger contextual value than other segmentation such as gender, education, etc. At the same time, many agencies are eyeing local and regional accounts such as political advertising, insurance, utilities, local government, autos, medical and dining. So for the first time, they’re really paying attention.

Against that backdrop, 140 small and medium agency types came this week to Bolo 2010 in Scottsdale to assess where they are, as the economy gets back on track for most of them. Bolo is an annual event run by Agencyside, and an excellent one.

I addressed the audience, noting the strong interest of many specialists in working with agencies and their larger accounts as a hedge against the difficult, fragmented world of working with SMBs. We’re seeing companies such as Reply.com, Clickable, PaperG, AdReady, Mixpo and others all courting agencies to make various local ad products and placement easier and more valuable for them. These range from local search to templated ads to video.

We’re also seeing strong interest in local coming from larger agencies that have assigned entire new divisions to local, such as Geomentum.

Other speakers discussed ways that the agencies will need to remake their culture, incorporating all the features of social media that have made the modern ad agency less a “Mad Men” world of presenting big marketing ideas as a fait accompli to clients than a collaborative work with the client, the agency and the audience.

Consultant Jay Baer, who runs Convince & Convert, for instance, noted that the modern agency must be equal parts photographer, scout, interpreter, politician, firefighter, accountant and trainer.

“It is about humanism. We need to help clients tell their story.” As an example, he noted that Subway had a pretty good campaign touting six sandwiches with less than 600 calories. But no one will remember that, he said. They will always, however, remember the campaign’s successor: Jared, the Subway guy who lost a ton of weight on his Subway diet. They will remember Jared when they are in their rocking chairs at the nursing home, he said.

It is also about better engagement with customers, rather than just focusing on sales. The Nationwide Insurance iPhone App, for instance, is especially brilliant. When customers get into a car accident, they can rely on the app to walk them through all the steps they need to do (take a picture, call the police, etc.)

Making a change from the traditional role of the agency is not going to be easy for anybody, but it is essential, noted consultant Michael Gass, who said he has transformed his firm from a little local player to an international concern through the avid use of social media — all with an annual budget of $932 (for hosting).

Gass noted that agencies always talk about their ability to target potential customers, but don’t practice what they preach in their own business. Social media lets them do that — without any cold calling, he notes.