Making a contract killing

The Design Business Association is calling it one of the most important issues it has faced. It has been to the Office of Fair Trading about it, it has been to the European Union about it, and it has just written to a host of design consultancies about it.

The issue concerns clients forcing consultancies into potentially restrictive and damaging contracts. And according to the DBA, the issue affects up to 50 consultancies, working predominantly for fmcg clients (DW 19 January).

Clauses that are giving cause for concern include exclusivity deals preventing consultancies from working with a client’s competitors for a period of time. Other clauses allow clients to own all rights to all work and to make design groups responsible for issues concerning implementation of design.

“We have been aware of these clauses for about a year, but they have been in existence for longer than that,” explains DBA chief executive Ian Rowland-Hill.

They have also been in existence in similar industries, such as advertising, but its representative bodies have drawn up guidelines between agencies and clients that have proved mutually beneficial to both parties. The DBA hopes to do the same.

“We have a view about what is fair and reasonable, and what is lawful,” says Rowland-Hill. “We are out to improve performance and the relationship between the industries,” he adds.

He admits, though, that some consultancies need to have a greater awareness of complex contractual negotiations, and that, traditionally, clients have been in a better position to negotiate a superior deal for themselves than design consultancies.

The rise of the purchasing director is an important factor in this issue, according to Simon Rhind-Tutt, managing director of The Tutt Consultancy. When dealing with contracts, consultancies often find themselves at the table with a trained negotiator, the purchasing director, who is only interested in securing the best deal for the client, says Rhind-Tutt.

“The mistake the design consultancy makes is it doesn’t put a trained negotiator in opposite him,” he adds.

“The purchasing director is not the ultimate decision-maker, but is often negotiating with someone who is, like a managing director. The purchasing director comes to the table with half his cards showing, the MD with all his cards showing, and the client ends up securing a better deal,” he says.

Landor Associates managing director for London Charlie Wrench agrees that it comes down to negotiating power, and often a lack of legal experience on behalf of the consultancy.

“The issue of contracts boils down to experience and the confidence of the consultancy: it has to be bold enough to place its terms against that of the client,” Wrench explains. “Clients try it on less with Landor because of our experience in dealing with clients.”

While the DBA couldn’t comment on the consultancies affected, it did say that the contracts involve “significant projects with global businesses and are therefore at the upper end of the fee-income scale”.

It is probable, however, that smaller consultancies are the more likely to be affected, a likelihood endorsed by Michael Burd, partner at law firm Lewis Silkin, which represents a number of groups, including The Partners.

“It all depends on the bargaining powers of the design consultancies. None of our major clients would accept [restrictive contracts] but the smaller ones – it depends on their relationship with the client and how dependent on them for work they may be,” says Burd.

Burd believes the shrewder groups will place a different person at the negotiating table from the one that will eventually manage the relationship between the client and consultancy. “The natural inclination for someone who will manage this relationship is to concede during negotiations because they want everything to run smoothly,” he explains.

While Rowland-Hill accuses some clients of employing bullying tactics during negotiations, one prominent former blue chip marketing director who doesn’t want to be named says that clients are just protecting themselves and introduce clauses into contracts to combat the behaviour of some design groups in confidentiality and loyalty issues.

“Clients don’t want to invest time in selecting a consultancy and instructing it on its business, only then to see the group turn around and say we have been offered a better deal and walk. And there are many examples of a client briefing a consultancy on a particular project and within a few days it is being leaked to the press,” he points out.

If design consultancies want to protect themselves, he believes, they need to make decisions during negotiations based on whether the contract is commercially viable and whether any perceived restrictions are “worth it”. “Some consultancies only survive because of one client. But they need to look at their confidence levels and ask themselves ‘Are we going to find two or three clients in the same sector?’.”

As the fmcg sector consolidates and a smaller number of bigger companies are created, the secrecy issue becomes more important for the client. In some instances, designers at consultancies are unaware of non-disclosure agreements signed with the client. This fuels client paranoia.

“Clients want some level of security,” says Britvic marketing director Andrew Marsden. “There is a debate about what is reasonable in terms of exclusivity. There comes a point where the consultancy is not going to know much about the client because the information it held is not current.

“Designers will often build into fees compensation costs for the exclusivity period. You can’t complain on the one hand and take advantage on the other,” he adds.

Williams Murray Hamm director Richard Williams has a different perspective. “They [clients] don’t offer us eternal loyalty and we can’t offer them the same, but we can offer them confidentiality,” he says.

One way for a client to achieve greater loyalty and establish longer relationships with consultancies is to set up a roster. It guarantees the client exclusivity, but does not always guarantee work for a consultancy.

“A well-run roster is a good thing to be on,” says Williams. But Landor’s Wrench warns that an assessment of its commercial viability needs to be made, as some groups find themselves bound to a roster with little benefit in return. “A lot of groups sit in a hope over expectation position,” he explains.

While some industry figures are anxious for the DBA to establish mutually beneficial guidelines, others, such as Coley Porter Bell managing director Amanda Connolly, think such guidelines are unnecessary, but insist design consultancies need to wise up.

Most agree, however, that design consultancies need to become more professional in the way they approach complicated contractual negotiations.

The implications for the design industry, such as a restriction in consultancies’ abilities to gain sufficient experience in selected sectors because of restrictive contracts, are serious enough for this issue to be addressed as a matter of urgency.

Five things clients want:

Loyalty

Confidentiality

Exclusivity

Long-term relationships

Full protection of intellectual property

Five things design consultancies want:

Fair, legal contract guidelines (to be drawn up by the Design Business Association or equivalent and agreed with clients)

Client loyalty

Unrestricted competition

To be more professional in negotiating deals

A fair deal on copyright