Winning formula

It is no coincidence that eight of the top ten most bullish companies in Design Week’s 2000 Top 100 survey (DW 31 March) specialise in the digital media sector. With projected growth of 350 per cent for smaller group Green Cathedral, and 143 per cent for Tonic, the rapidly-increasing influence and importance of digital media consultancies is clear for all to see.

This has been reflected in fees across the whole design industry during the past few months. Fees have generally remained similar to the previous 12 months, with the exception of digital specialists.

According to Simon Rhind-Tutt, managing director of client advisory group The Tutt Consultancy, digital design can command “much more money head-to-head” than other sectors. “The whole digital boom is fuelling more money in the design sector and it represents a massive opportunity for design companies. As Internet sophistication comes and people see the benefits and importance of digital design, clients will pay more,” he adds.

Kate Ancketill, a partner at Global Design Register, believes this is already happening to a degree, though she admits that fees are generally “staying fairly static and not shooting up”.

Ancketill acknowledges the strength of the economy at the moment, but says, “It’s certainly not bonanza time for design groups. Fees will continue to go up while things are so buoyant, but they’ll probably go down in about a year’s time, [whereas] with digital design, salaries have rocketed and consultancies are having to put their costs up as a result.”

The varying sizes of design consultancies is another important factor in the significant imbalance in fees, according to Ancketill, who cites a recent naming project as an example.

“A leading identity group asked for £60 000 to create a name and register a domain name, while a much smaller branding and identity consultancy agreed to do it for half that amount,” she says. “Clients are being quite tight and one leading supermarket is very tight on what it will pay. But groups will pull the stops out if they want certain clients on their list.”

However, the digital media sector is demanding even higher fees, according to Ancketill. “Digital projects for 30-strong consultancies have to pay at least £100 000 because below that amount they can pick and choose projects.

For small up-and-coming groups of five to 15 people, they would look for £25 000 to £50 000.”

Rhind-Tutt puts this general imbalance in size and fees down to two reasons. “What is happening in the business arena generally is massive consolidation among the bigger players. There has also been a polarisation in the design industry in the broadest sense, particularly in digital design,” he explains.

“The bigger projects are worldwide now, rather than national or European, and reassurances are needed by clients which want to work with truly global players. The bigger the consultancy, the more it can charge, putting it into the top 20 or 30 with one big win. A group like Enterprise IG can pick up a £10m project without blinking, but small and medium-sized design groups have to justify what they are doing.”

On the other hand, Ian Cochrane, chairman of management consultancy Ticegroup, warns that, unlike the giants of the industry, design consultancies at the smaller end of the scale may face increasing pressures in the not-too-distant future.

“With big businesses, price doesn’t come into it, as proposals and reputation are hugely helpful. But there’s pressure on small groups and it will always be difficult for them, because most clients are aware that they can pay what they like,” claims Cochrane. “They screw people down as there will always be someone who will do it. But I think it will get tougher. In recession – which may be in two years’ time – those businesses will be struggling because we are continuing to see a polarisation,” he adds.

According to Cochrane, non-strategic areas such as product, packaging and interior design are facing pressures on margins, which leads to people trying to move upstream.

“In the packaging arena, my impression is that fees are being squeezed. However, identity fees are holding up, because companies are dealing at a chief executive level and are prepared to pay top dollar for it,” says Cochrane.

He predicts that it will be those design groups in the mid-market that could end up in a precarious position. “Those at the bottom end with low overheads, cheap staff and good technology and those at the top end will be okay. It is the people in the middle who have to decide whether to go up or down – be strategic or cut their overheads.”

Cochrane believes the image of design consultancies overall has become devalued recently. “What is the definition of a design consultancy?” he asks. “I don’t think design is highly valued, although strategic design is. Digital media companies don’t want to be referred to as design groups.”

However, one leading digital media consultancy disputes Cochrane’s view that design is not being valued by clients. Peter Beech, managing director of Deepend London – which saw a 55 per cent rise in income in the 12 months to April – says his own group’s growth is down to several factors, including the realisation by clients of the value of design, especially digital.

“To a degree, fees are rising at a steady rate, but there’s no rip-roaring inflation. The increase in budgets reflects the scale of projects as the whole market is maturing. We have also got bigger, there’s more work and the overall value of projects is rising,” explains Beech, though he refuses to disclose the group’s own fees.

Charles Wright, managing director of Wolff Olins, says his group’s fee rates are used purely for cost accounting. “Our fees are set in terms of what the work is worth rather than how long it takes to do,” he explains. “Because the market is so busy there is less competition © on price than there might have been four to five years ago,” he adds.

But working with an increasing number of new companies in the digital sector, the international branding specialist has adopted a different approach to some projects.

“With regard to our interactive media work, the majority of our work is for corporate clients – that work is priced as with any other work. However, our work with venture capital backed start-ups is different because we’re taking equity stakes in some of them in lieu of fees. We’ve now got a portfolio of ten or so holdings in client businesses,” says Wright.

Piers Schmidt, a partner at The Fourth Room, says one of the “biggest issues” facing his strategic consultancy is “how to charge for the quality and value of your ideas, rather than the time inputs that you make to come up with them”.

Schmidt claims that because many groups work on “time and materials basis”, it leads to them “grossly undervaluing the contribution they make to their clients and selling a lot of time-consuming process (which they often do not require) so the hours clock up on the time sheets and the invoices reach a decent level”.

“In The Fourth Room we try to encourage clients not to pay us for how long something takes, but to compensate us instead for the quality and value of what we produce,” he says.

Schmidt explains that there are two time-related elements to this approach. “First, one of our values is speed; we make it explicit that we can produce great solutions quickly. Second, the dynamics of the new economy are such that many clients want results fast. Not that I am an advocate of rushing things, but it does mean that the time versus value equation is starting to work out better in the consultants favour.

“In summary, I don’t see fees rising in absolute terms, except in areas of greater demand than supply, like integrated Web development, but there are certainly smarter ways of working emerging to meet a new set of requirements from clients with different demands. Focus and a results-oriented approach are increasing our own margins,” says Schmidt.

In the long-term, Amanda Merron, a partner with design friendly accountant Willott Kingston Smith, acknowledges the inevitable economic decline in the future. But she is optimistic that design consultancies can stave off possible financial problems by incorporating digital media into their portfolios, either in-house or through alliances.

“We are definitely at the top of an economic trend right now, though when that will end I’m not sure. Fees will suffer as a result because it’s easy to cancel projects such as rebranding if companies are short of money,” says Merron.

“Digital will stand up better than traditional design. The two disciplines are quite different, but all design groups are going to have to adopt digital, though it doesn’t mean they can’t continue in other areas,” she adds.

Design Motive brand development director Richard MacGilchrist believes a comparison can be drawn between the digital media sector and any other new market. “The fear of being left behind is an enormous issue for clients and the fees that they are prepared to pay reflects how big an opportunity it is and what specialist skills are being called for,” says Mac-Gilchrist. He foresees the gap in fees between the leading digital specialists and those developing their skills widening in the future, in line with what has occurred in other design disciplines.

“In digital media there are very few consultancies which actually have the reputation because it is so new. Therefore, there are big premiums because clients want the trust factor. During the next three or four years a Premiership League of digital design groups will emerge and there will be a big distance between them and Division One,” says MacGilchrist.

Design Motive’s work is 50 per cent digital, But MacGilchrist is not convinced that all groups should adopt a digital element to their businesses, as the demand for other areas of design will still be high.

“There is a digital revolution,” he says, “but people will still want to go shopping and experience the emotional value of a brand. The elasticity of consumers’ expectation has moved on. This expectation will have to be met as it becomes an intrinsic and natural part of the marketing mix to which clients have to attach an appropriate spend.”

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