It comes down to management. Management needs to understand how SEO/Marketing/Digital Marketing works and they need to know how to scale it properly. It takes a lot of internal training and knowledge of that industry. There are a lot of meaningless tasks that digital marketing companies do that aren't moving the needle for clients.
I'd look at client retention rates, as well. A good agency should have high client retention rates. If they're just bringing in new clients for a few months and then the client leaves, then there's something seriously wrong.
I don't know if a web agency is hard to scale but there is no benefit to the agency or the customers in doing so.
Long ago, I worked for a failing agency which had once been the largest in town and the founder was convinced the problem was price competition from individuals who didn't have to pay for the overhead of a secretary, sales staff, health insurance, etc. I think the problem might have been more was that was intimidated by price competition and would lowball quotes for jobs such that we made a small profit on 4 out of 5 jobs and gave it back and then some on the last job which we quoted too low.
If you are successful your salespeople and devs will realize they can make more money working on their own account (after all you've busted your ass for years and thing you deserve the money instead of them.) Then they leave, you have to hire new people who are less experienced, and you've got more competitors to deal with.
Another issue is that the technology base of an agency inevitable erodes.
That firm was early to the web and used a rather unusual language with a "visual programming" interface for making web pages. It was way ahead of its time in 1997 the same way Cold Fusion was and was an advantage for them at the time.
They got the beat down from an up and coming company that was using mainly Ruby on Rails. (Actually I walked out of the first company and got a job at the second two days later)
A few years later that Ruby shop was heading for the tubes and everybody was struggling to retool to make single page applications.
Ten years from now the "Google Platform" will be a ghost town and the next thing will be Gopher++ or something.