The design industry is facing unsustainable wage inflation that could result in further redundancies across the sector, according to industry pundits.
Average annual operating profit per employee in the industry has fallen every year since 1996, while average gross employment costs have steadily risen, according to a report by management consultant David Jebb & Associates.
Jebb describes wage inflation as one of the most serious problems facing the industry.
‘At the moment clients are not prepared to pay more for design like-for-like, year-to-year. This is a serious issue for the industry because wages are going up and up,’ he says.
‘However, at some point in the not too distant future the opportunities for designers to change jobs for more money will dry up and consultancies will put a much tighter rein on the amount of money they are prepared to pay to designers,’ he adds.
Ian Cochrane of management consultant Ticegroup says further redundancies are inevitable.
‘Survival is the name of the game and people are underpricing to win business, but at the same time you have a lot of people on inflated salaries. Many of those people will have to be dealt with via the redundancy route,’ he says.
Amanda Merron, partner at accountant Willott Kingston Smith, says the problem lies with consultancies undercharging for their work, while still paying high wages to their staff.
‘Designers lack confidence in their ability to charge enough. If they pay [their staff] those sorts of rates they have to charge their clients the right sort of fee. Good people always cost money – that’s fine as long as you can cover the costs,’ she says.
Wage inflation is affecting consultancies across the board, but small to medium-sized groups are being hit the hardest, says Jebb.
‘The consultancies that offer a full range of services are most protected,’ he adds.
Merron agrees that the smaller consultancies will suffer the most because ‘they can’t make significant redundancies without losing key people’.
Cochrane attributes the cause of the problem to the dotcom boom and a period when staff demand exceeded supply.
‘During the dotcom period you had to pay top dollar for the right people and match other salaries accordingly. Combined with an industry that was booming, when demand for designers often exceeded supply, you now have salary levels that are about 20 per cent over the market value. And it’s difficult to recover in a market when clients are not prepared to pay,’ says Cochrane.
The report highlights that regional consultancies are in a better position than London-based groups, with lower wage costs and improving margins.
‘Wage inflation is affecting London consultancies the most. I don’t think the level of euphoria when things were booming reached the provinces in the same way,’ says Cochrane.
According to the report, graphic design remains the most profitable sector of the industry.