Stay flexible to ride the cycle

Leaner, fitter design consultancies that can quickly reduce their overheads survive fluctuations in the economy.

Times are stable. The recession at the beginning of the last decade is a distant memory, given the growth we enjoy today. But is it a little bit too far away? Could it be so far away that we have become guilty of complacency about the economic facts of life?

Lessons have been learned and working practices modified since the doom-and-gloom of the last slump. Recession seems unspeakably far off to most of us, but isn’t that just how it felt ten years ago? We were all invincible then, too.

This week the Institute of Practitioners in Advertising published a survey which indicates what could be the first signs of a slowing down in client spending on marketing services. The Bellwether Report showed among its many findings that downward revisions in client marketing and advertising spends are taking place after an unusually buoyant period.

This could be nothing more than an adjustment – the IPA forecast is for “continued economic growth [which] will fuel rising marketing expenditures”. But the report also mentions “a recent easing of business confidence” and a slowing rate of growth. Clearly the boom is not going to last forever.

It is a fact of economic life that the business climate moves in cycles. We are all familiar with the “boom and bust” scenario, the most extreme case, but governments aim to smooth out these curves and avoid fluctuations wherever possible to keep economies stable. Unfortunately, just about the only thing economists all agree on is that sooner or later the good times will turn. Historically it has always been so.

There may be no imminent signs of a slowdown, but if it does happen you can be sure marketing budgets will be one of the first things affected. In its latest Marketing Monitor, accountant Willott Kingston Smith reports that design consultancy fees are slightly up on the six months to June (gross income per head has increased by just 0.5 per cent).

While this may not be of concern for the time being, the report notes that rising employment costs are hitting design groups hard. The result has been a considerable drop in real operating profit per head of 19 per cent over the same period. This cannot continue without devastating effect. Profits and productivity need to rise and employment costs must fall. Clearly, all is not as well as it might first appear on the surface.

“It’s definitely getting more competitive for design consultancies,” says Ticegroup chairman Ian Cochrane on the general state of things, “Particularly as the market polarises and more work is won by referrals through the networks.”

Cochrane doesn’t bank on a downturn for another couple of years, and stresses that this does not necessarily mean a recession. He is also fairly confident that the economic havoc of the early 1990s has changed attitudes to the way that businesses are run.

“I think that people have learned from the last recession,” says Cochrane. “Some areas, such as packaging are tighter than other sectors. Packaging consultancies recognise that when a downturn comes they could well be the first to get hit,” he adds.

But business sense is good, says Cochrane. “I don’t detect complacency – people are planning for it, but some things are out of our control,” he says.

Managing director at Results Business Consulting Jim Surguy agrees. He points out that the performance of the marketing communications sector is tied to the US economy, where most of the big groups are based. And the US economy is outside of the control of most UK design consultancies.

“The two key indicators to monitor are corporate profitability and consumer confidence. As long as corporate profits continue to hold in the design sector we can be fairly confident about the future. The question is, what are the potential hiccups that could trigger a downturn,” he says.

Surguy suggests something as uncontrollable, or as unexpected as an oil crisis in the Middle East or a lack of confidence over the US elections could trigger a reaction from financial markets, now so critical to economic stability. He says the problem for the design community is that as work is project-based, not retainer-based, “the tap gets turned off much faster than in the advertising industry, for example”.

Adopting flexible working practices is the key to surviving the slow times. Using freelance staff rather than staffing to the hilt is one option. Many consultancies have learned from the excesses of the last recession and consequently adopted a more flexible approach for everything from staffing to office space. These factors can be hired, rather than bought outright, or full-time.

WKS partner Mandy Merron reiterates still-ignored advice about linking part of designers’ pay to performance, thus enabling higher bonuses during periods like the present, and more affordable remuneration during the doldrums. All in all, Merron is positive about the current economic situation, despite the alarming rise in employment costs that her company’s report has outlined.

“I think the market for designers is very hopeful. There are some very good business professionals in the sector and I suspect it will sort itself out,” she says.

But, as a cautious reminder Merron adds that consultancies don’t seem to be taking the opportunity to make contingencies for the slower times during this steady period of growth.

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