It has certainly been an interesting year for consultancy fees, although consultancies are still as guarded about “exposing” themselves as ever. Fee-income being generated this year could be somewhat atypical, as many consultancies are talking of skews resulting from millennium projects.
The outlook remains cautiously positive across all sizes and disciplines of design groups, with top fee-earners apparently enjoying some spectacular earnings. Clients are reported to be paying for more and more lucrative consultancy services, particularly in the branding, corporate identity and Web sectors.
According to accountant Willott Kingston Smith’s latest Marketing Monitor report published in next week, gross fee-income increased by 3.6 per cent since the start of the year, after levelling off in the end quarter of 1998. It reports fee-income rose by only 0.8 per cent up until January 1999, hopefully suggesting that predictions of recession have just not come true.
However, employment costs have risen by more than fee-income. Staff overheads have increased by more than the fee-income generated by new employees. This seems to result from salary rises and more senior level recruitment, says the accountancy firm.
Global Design Register partner Richard Watson believes that although levels of fee-income have remained steady over all, proposals and costings are becoming noticeably better compiled and more comprehensible for clients too. “Proposals are being put together better so that clients can understand where the figures are coming from, instead of just seeing so many pounds for phase one, full stop,” he says. Clients are more receptive to a step by step breakdown, he says.
Coventry product design group Smallfry Industrial Design recently completed a bicycle light design called Shark for Basta in France. Managing director Steve May-Russell can quickly break down the costs of this seven month project into a pie chart.
Although in the product sector, every job is different, May-Russell says that productivity is being stepped up by reducing the duration of projects.
There is some evidence that fee-income is increasingly being used as a measure for staff efficiency. Average fee income per head of staff can reach almost £140 000 according to Design Week statistics this spring (DW 26 March). One top ten consultancy director says that £100 000 per staff member is considered a good target ratio by big groups in the branding sector. Average levels rose across the Top 100 consultancies this year, however there are unfortunate signs too of redundancies resulting from low income per head measures.
Individual project costing is in general based around projections for time and materials involved, plus a profit margin which to some extent depends on how much nerve a group has, or how desperately it wants work. Top ten consultancies are currently commanding splendid premiums, and many will refuse any work for under £50 000 or £100 000, confides one consultancy head from the branding and corporate strategy field.
“The very top end has seen prices creeping up, but for other consultancies it is an over-supplied market which is preventing income from rising. This is making life very hard for smaller groups. The UK is still more expensive than just about anywhere else. Of course consultancies argue that quality costs,” says Watson.
Watson throws a warning to the top ten consultancies which he says are being irresponsible, and even suggests that the situation in many ways parallels the late Eighties, before the recession. “Some of the figures being charged at the top end are making clients’ jaws drop. To be honest they are taking the piss. There doesn’t seem to be concern about financial stability and some consultancies don’t even want a project and will quote an absurd price so that if they do win it they are at least compensated for the inconvenience. If things do crash, clients will not forget how they are being treated and this will come back on everyone.”
Ian Cochrane, chairman of strategic management consultancy Ticegroup agrees that the situation “isn’t healthy”, but does not believe that the economic conditions parallel the boom and slump of the Eighties. “In economic terms we have had a soft landing, without recession. Interest rates are still low and the US is still strong, so I don’t think there are really any similarities with the Eighties in this respect,” he says. Marketing Monitor figures seem to suggest that a recession was narrowly avoided at the end of 1998, when fee-income in the design sector levelled but did not fall.
Willott Kingston Smith partner Amanda Merron corroborates this cautiously positive outlook. “Fee-income continues to increase steadily but there is a big battle to contain costs. More design groups are becoming the principal owners of the brand and are briefing ad agencies on the brand values,” she says.
“The most profitable consultancies have somebody adept at communicating the value of their work to the clients. This enables higher premiums to be justified. My perception is that fees in the design sector are being kept down by a shortage of client-handling type jobs, to some extent preventing consultancies from marketing their ideas.
“Where there is currently most pressure on profits is at the mid-to-bottom end of the consultancy scale,” she adds. Merron is not alone in highlighting the disparity between the big, the small and their fees. Cochrane is convinced of an ongoing polarisation which is splitting the field more and more.
“At one end of the consultancy scale are some truly sophisticated businesses, but at the other end consultancies are still in the dark ages. Their fee-income and client work reflects this,” he says.
Fee-income in corporate identity work is on the increase and spreading across a wider number of groups. Enterprise IG chalked up an increase in fees of over £15m last year (Top 100, DW 26 March), while The Identica Partnership and Interbrand Newell and Sorrell saw increases of £2.15m and £2.7m respectively. Gone are the days of three of four big players reaping all the work, according to Cochrane. “The same is true in packaging and branding. There are many more players and everybody is much better equipped to produce more sophisticated work.”
Cochrane introduces another fee-income gauge to project value – the fee: performance ratio. It may sound obvious but the only way to increase the price you can charge for a job is to improve the service or product that you provide. This can be achieved by training existing staff, recruiting higher quality personnel, or by offering more consultancy or servicing facilities to clients, he says.
Technology can also improve productivity in this way, and there are some signs that the cost of capital investment in technology is having to be passed on to clients. This is particularly true in disciplines like product and interior design where small to medium-sized groups, which cannot absorb the cost of capital as easily as the big players, need to increase fees. May-Russell says the growing set-up costs of CAD technology is also preventing start-up firms from entering the market at the moment.
This year’s millennium projects seem to be affecting certain groups, particularly in the events and packaging fields. Some evidently have a large slice of 1999 fees emanating from year 2000 jobs, which is skewing levels of income, staffing and man hours. Others are not being affected, suggesting an interesting end of year turnover line-up with possibly a few surprises in store. Cochrane says he has not seen prices being hiked for the millennium although there is still a gradual upward trend.
Fee-income for Web design groups has originated mainly from clients in the financial sector this year, according to former Razorfish creative director Mike Bennett. He says there are still opportunities there to be exploited but the next revenue provider will be retail and the e-commerce applications associated with it. Bennett cites NikeTown as his vision of the future of retail, where consumers (not customers) see, feel, and try out the products in newly designed interactive style stores, then go home and buy the goods direct on-line. The interactive retail unit is already being trialed by retailers such as Thomas Cook and Boots.
Consultancy is also generating more and more revenue for new media shops, as for conventional design consultancies. “Some of the big players [such as Razorfish and Online Magic] are stealing ground from McKinsey Consulting or Andersen Consulting and moving into very lucrative strategy work,” says Bennett. The other revenue provider to watch is interactive TV. Although Web consultancies will not talk openly about interactive TV due to confidentiality clauses, it is certainly going to be adding to the bottom line this year and beyond.
The outlook for the next 12 months looks good. If recession at the start of the year was narrowly avoided as the statistics suggest, groups should be able to look forward to fee-income continuing on its upward course of the past six months. Growing staff costs are the only real factor dampening the current climate, but if the Cochrane fee: performance model is right, the investment in employees should pay off with higher premiums and profit margins claimed by groups in the months ahead.