Not many creative businesses are feeling good at present, and the design industry is no exception. Yet beneath its gloomy disposition are several important issues.
Are the bigger boys increasing their market share, as in theory might be expected in a recession, or are they losing ground? Does bigness provide a competitive advantage? Or can it also prove a competitive disadvantage? And which specialisations are likely to be most recession-proof?
It’s no coincidence that some of the biggest consultancies have specialised in certain types of big budget work. Fitch was built on a specialisation in interior and retail design. Imagination focused on events and similar projects. Interbrand and Wolff Olins benefited from major branding and corporate identity work.
They all had one thing in common – a requirement for much more than talented graphic design. They needed other skills, as well as the ability to reach out to a wide variety of locations on behalf of their clients. This breadth of resource became a competitive advantage, as it was harder for small consultancies to put together such a comprehensive offer. It also helped justify high fees when compared to the simpler process of packaging design, for example.
Yet the very nature of those consultancies’ expertise is also their Achilles heel. In recessionary times, clients are far more cautious about committing big bucks to projects that may not deliver an immediate return to the bottom line. It’s easier to defer the roll-out of a new retail design or a corporate identity project – on grounds of cost and timing – than to cancel modestly budgeted new packaging for a product that’s ready for a fresher look.
So, it should have come as no surprise to hear WPP Group boss Sir Martin Sorrell bewailing the state of his branding and identity businesses last year.
Looking at how a sample of the larger consultancies were faring a year or so ago, there were clear signs that activity was on the decline and profit margins being squeezed. Year-on-year gross profit margins had fallen by 5 per cent while operating profit margins (operating profit as a percentage of revenue) had slumped by 58 per cent. Worst hit were Interbrand and Wolff Olins, both of whom had jumped aboard the massive Omnicom omnibus, only to see their revenues and profits decline.
The situation cannot have been helped by one or two well-publicised cases where branding and corporate identity consultancies produced work that left both clients and the public bewildered about its real benefits. It’s hard enough persuading clients to fork out on identity work during a recession without also having to counter wider scepticism about its value.
Where does all this leave the smaller design consultancy or those contemplating starting up on their own? Some crumbs may be handed down from the big players whose clients are determined to cut the costs of the simpler graphic design assignments. But at the same time, there will be an increasing number of good designers available to do that work, including those who have left the big consultancies – either because they abhor the large company environment or because the large company abhorred them. They add capacity to an already crowded market, even if they simply work freelance.
The really difficult decision for the multinational holding companies is whether or not to merge their various design businesses in order to achieve operating economies. Cordiant Communications Group has already announced such a move as it first pulled together PSD and Bamber Forsyth under the Fitch banner, and is now planning to bring all its design brands into the Fitch London reporting line. Was that client-driven or profit-driven?
The clue is in CCG’s half-year profits announcement: ‘Revenues decreased by 17.2 per cent on an underlying basis in the first six months, reflecting reduced activity levels in branding and design and business communications, particularly in North America.’
That reorganisation seems nothing more than a rationalisation of some problematical businesses. Yet good consultancies seem to thrive best by preserving something of the cottage industry ethos in which they were brought up, rather than by thrusting them altogether.
WPP also seems to have started down the road of consolidation by collecting its various consultancies under just two umbrella brands – Enterprise IG and The Brand Union – but so far the individual businesses have retained their own identities.
The most obvious cases for merger are under-performing consultancies that offer a similar service. If recession lingers on, might Omnicom force a marriage between the two fiercely competitive identity businesses of Interbrand and Wolf Olins? The fallout would almost certainly involve some very talented people and some highly valued clients.
At the bottom end of the market, over-capacity and price competition will continue to undermine profitability – a situation exacerbated as new start-ups emerge. At the top end, resource-hungry consultancies will remain vulnerable to the economic cycle and the current reluctance of clients to invest in big-ticket projects.
The battle for market share is likely to be played out at both ends of the scale. There’s no easy answer to whether smaller independents can profit at the expense of bigger players. It’s not that simple. The only real winners will be those with the greatest design talent, the greatest ability to deliver what clients want, and the strongest entrepreneurial management.