Built on shaky foundations

Client failures are starting to undermine the financial well-being of design consultancies. Gina Lovett looks at how they can protect themselves

If the past week’s headlines are anything to go by, insolvency and liquidation are the order of the day in the design world.

Dream Design & Architecture, badly hit by bankrolling client Guest Hotels’ fall into administration (DW 9 October), is on the brink of insolvency, while product design consultancy Pearson Matthews awaits an official liquidation date, and tales of clients defaulting on invoices resound throughout the industry. Scaremongering aside, it is time for practicality.

While the instances brought to light by Design Week underline the vulnerability of designers, this need not be the case, according to Design Business Association chief executive Deborah Dawton. Putting in place structured internal and external processes, such as rigorous credit control and client risk assessment, can help safeguard against insolvency or being fatally hit by clients going bust.

Dawton says, ‘Practices like cutting down your debtor base require regular discipline. If this is done on an ad hoc basis, [design groups] will automatically find themselves on the bottom of the paying pile. But if mechanisms are put in place so that payment terms are demanded consistently, money that is owed comes in, and it also means being able to react when it doesn’t.’

In the case of Dream, not only has director Duncan Dalgleish had to let go of seven of his 11 staff, but the ‘substantial’ financial blow to his business looks ‘potentially terminal’.

Dream had found Guest Hotels to be a significant source of revenue that would allow it to blossom quickly, and within a short space of time it began to recruit staff for three interiors and architecture projects.

Dalgleish explains that payments were coming through from the time terms and conditions were agreed until this July, at which point, things began to unravel. ‘There were promises back and forth, and in the meantime we had salaries, recruiters and our own debtors to pay,’ he says. ‘In the end, our bank withdrew financial support because of its own problems.’

Dalgleish is forthcoming about things the business could have done differently, admitting that it should have diversified its client base more, and halted work on projects until payments had been met.

‘I think what exacerbated the situation was our being optimistic and trying to help the client out,’ says Dalgleish. ‘The obvious golden rule is to diversify your client base as much as possible to insulate yourself from any big hit, but we were keen to grow.’

Obligations and loyalty to clients are all very well, but why extend payment terms to a client like Procter & Gamble? Why should you prop up a business that it is several times the size of your own?

Product design consultancy Pearson Matthews founder Mike Pearson recounts that one of the group’s major clients circumvented payments to a point that ultimately affected the consultancy’s ability to continue paying its staff, an influential factor that forced the business into voluntary liquidation.

‘The irony of all of this is that while we owed X, we were owed five times that amount by our largest client in Russia. When they found out about the situation, they said they were shocked, that they were relying on us. They would have paid us,’ he says.

Having those difficult late payment conversations with clients is a commercial reality and should not be embarrassing, suggests Land Securities head of development marketing, retail, Tom Foulkes.

‘If you are providing a service, it has to be paid for, and there is nothing embarrassing about that,’ says Foulkes. ‘It’s best to have conversations about payment schedules before a situation arises, explaining that your business can’t suffer or allow late payment.’

Foulkes, who works with a host of external design consultancies, stresses the prudence of documenting client assurances on payment schedules and terms and conditions. ‘If you’ve got a letter from your client agreeing to payments schedules, your bank’s going to be more sympathetic,’ he says.

But while the prospect of insolvency is a definitive factor in the demise of some consultancies, in the case of Pearson Matthews, the continuation of a business with an offer that did not have a viable future was another reason.

‘China can do the type of product design that we were doing, every bit as well,’ says Pearson. ‘I should have woken up years ago and moved into a different space.’

‘When you realise that what you have put your heart and soul into for 25 years is no longer relevant, it’s difficult to accept. It shakes your value system, but you have to learn from it. It’s a cathartic process.’

Pearson confesses that he should have had the gumption to respond to changes within product design long before the threat of insolvency forced him to re-evaluate the future of the business. He advises those in a similar situation to react to changing markets with expediency.

‘Although it is the end of Pearson Matthews as we know it, I’m not sad. Such a situation forces us to think into a new space,’ he says.

Design Business Association Advice

• Carry out thorough risk assessment of clients and revenue streams, build up a picture of client security, ditch risky clients and concentrate on secure ones

• Know what’s going on in the sectors you service

• Avoid depending too heavily on one client to bankroll your business. Diversify your client base and insulate yourself against a big hit

• Be proactive in communicating openly about how payment issues could affect your business with clients

• Stick rigidly to client budgets. Overspending will not be tolerated in the current economic climate

• Agree and document new payment schedules if necessary

• Discontinue project work unless payments are met

• If your business is fighting to find money to pay salaries, get external advice from industry bodies such as the Design Business Association immediately

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  • Anon November 30, -0001 at 12:00 am

    I’m curious to know why with such good advice, Deborah Dawton didn’t pass this on to her husband, former managing director of Pearson Matthews, to prevent PM from going under.

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