Design groups across the industry could struggle to maintain profitability in 2006, warns a survey out this week, which finds that salary costs are going up, while charge-out rates are decreasing.
The Design Business Association survey of 135 consultancies across the UK reports that, while salaries have increased by an average of 10 per cent this year, direct charge-out rates have fallen by 5 per cent, to an average of £96 per hour.
According to Mandy Merron, a partner at accountant Willott Kingston Smith, this is a worrying trend and groups should take urgent action to remedy the situation. ‘It is critical that this ratio is improved. Consultancies can’t remain profitable if staff costs continue to rise and charge-out rates don’t reflect the increase,’ she says.
Financial consultants across the sector agree that the survey is an accurate reflection of what is happening in the market. Results Business Consulting managing director Jim Surguy points to the surge in the use of procurement departments to buy design as a key cause of falling charge-out rates.
‘Procurement departments, by and large, don’t realise the value of design and that is tending to drive fees down,’ he says. ‘Designers need to deliver an added value proposition that helps them justify the fees they want to charge.’
DBA chief executive Deborah Dawton agrees and says design groups also need to focus on improving their negotiation skills.
‘Clients are clearly putting designers under pressure and, for the large part, [consultancies] lack the confidence to justify their proposition,’ she says.
Dawton believes groups need to be better prepared for a ‘cost versus value’ negotiation with clients, and must also be aware of ‘the point at which it is not profitable for them to do the work’. ‘A lot of designers don’t know what their threshold is,’ she maintains.
The survey found that the industry remains ebullient about its growth prospects, with 52 per cent of groups anticipating an increase in fees.
But 72 per cent of consultancies also expect to see an increase in staff numbers, and most anticipate a 5 per cent increase in rates of pay; the combined effect of which is likely to negate the benefits of any fee increase.
There is consensus among experts that the issue of rising staff costs are firmly within the industry’s control. Surguy believes they are symptomatic of ‘endemic over-servicing’ within the industry. ‘Design consultancies need to become more efficient and cut down on over servicing, which inflates staff costs,’ he says.
Merron agrees. She says a common feature of more profitable groups is that ‘staff are told when to stop the creative work’.
‘Designers are passionate about doing fantastic work but, if clients are only paying for “good enough”, that’s all they should get,’ she says.
Dawton believes design groups should also take a more creative attitude in their approach to rewarding employees.
‘There are ways of motivating and retaining staff that are far cheaper than salary hikes,’ she says. ‘Consultancies should be looking for more creative approaches that tap into the lives of the people that work for them and what makes them tick. This kind of incentive goes beyond monetary value.’
Overall, the outlook isn’t bleak. Merron and others agree that the market is picking up. But they’re also clear that only those groups that differentiate their offer, and are efficient and productive, will reap the rewards.
By Trish Lorenz
The hit on profitability:
• Salary costs up 10 per cent
• Charge-out rates down 5 per cent to an average of £96 per hour
• The ratio of salaries to charge-out rates up by 16 per cent this year
• 52 per cent of consultancies expect an increase in fees in 2006, but 72 per cent also expect an increase in staff
• Pay increases of 5 per cent likely to be necessary