Cutting designers in on the deal

Mike Exon says royalty payments are on the resurgence, especially if it is easy to establish the success of the new product

Most designers are familiar with the legacy of Star Wars film merchandise. The shrewd foresight of George Lucas got a lot of people thinking. By accepting a smaller fee for directing the film in exchange for royalties from toy sales, Lucas added a piece of legend to the American dream.

Richard Seymour once asked Terence Conran how to make money from design. His reply sits him at the same table as Lucas. Getting a slice of what you design is the answer. And designers are now starting to whisper “royalties” in seductive tones again.

While in the past it was not uncommon to negotiate royalty payments if you were an established industrial or product design consultancy, earning a flat fee is the staple for most consultancies. Stories of designers growing richer on royalties without having to lift a finger are told with wishful longing. These days consultancies hardly get a look in on such arrangements, says TKO Product Design Consultants partner Annie Gardener.

“Royalties is one of those legendary subjects that comes up in conversation all the time, but affects fewer and fewer consultancies. Some of the older consultancies have been able to make arrangements with clients in the past, but our generation has not found it to be an option.

“It is probably something that only comes up in manufacturing, and the lessons of the last recession have kept manufacturers away from these sorts of agreements,” she suggests.

But even if most consultancies don’t go looking for royalties any more, occasionally a potential client might suggest an exchange of design work to delay payments, says Darrell Stuart-Smith, partner at Design Business Association solicitor Humphries Kirk. Every contract will be individual to the parties concerned. Any deal struck may depend on agreeing a percentage rate, a time duration and maximum earnings. But there is still a lot of risk, he says.

“What often happens is the consultancy ends up either being underpaid, or grossly overpaid. Designers who get into these arrangements never quite nail down exactly what you have agreed to do,” he says. The consequences are a legal nightmare.

Elsewhere in Europe, royalty partnerships are much more common. In Milan, King & Miranda partner Perry King puts this down to clients realising how fundamental design is to the success of their products.

“I think that on the Continent it is considered a more common practice. It is seen as a way for the manufacturer to invest in design that works. Maybe there are more companies that know [good] design is selling their product than in the UK,” he says.

In King’s experience, royalty arrangements rarely exceed 5 per cent of sales, and would be accordingly scaled down the higher the sales projection.

One hallowed example of a consultancy earning royalties is former ceramics design group Queensberry Hunt Levien. Partner David Queensberry has famously said the business makes more from royalties than it will ever make from fees (DW 17 September). Seymour Powell has a number of ongoing royalty projects, though partner Richard Seymour explains that they are the exception rather than the norm.

“Many of the larger clients we work with wouldn’t be prepared to work in this way. Often companies prefer owning the intellectual property they use outright, with no ‘hanger-on’ complications,” he explains.

Seymour continues: “There is a greater likelihood of agreeing royalties when you bring a new product to market which you have created yourself, rather than [for] the manufacturing company concerned. But the royalty business is not for the faint-hearted. It is definitely a lottery and not something to be undertaken lightly. They are often seen as a hedge against the bad times, if they work, but once established, the ‘earn as you sleep’ aspect is very attractive.”

Priestman Goode partner Nigel Goode warns he has come across many instances of some very well known clients selling consultancies down the river. A low production run can mean you will never recoup all the man hours you have invested.

“We have gone for very high volume markets like toys or publishing. The toy industry replaces 40 per cent of its product line every year. It is important to go for industries that are used to paying royalties. Many industries are just not used to it,” says Goode.

But things are changing as new industries emerge and new deals are struck. It is not just product or industrial designers who are thinking about royalty payments in the traditional sense. Any group that provides products or services that generate sales can tailor them too. The Internet is creating new revenue streams as service companies look for a piece of the boom in Web stocks, and exchange their services for equity.

Deepend founder Gary Lockton also points out that the trackability of the Internet, and to some extent digital TV, makes them suitable for royalty deals to be worked out. The ease of measuring clickthroughs enables remuneration to be linked to the number of website hits or on-line transactions, for instance.

“We have linked some fees for websites to the success of the site. Clients have paid us a flat rate for the work and agreed to pay more if it gets so much traffic. With e-commerce you can agree to a cut of the revenue per transaction,” says Lockton.

The Fourth Room chief executive Piers Schmidt is a notable proponent of changing the traditional client-consultancy relationship, including remuneration arrangements. He sees more and more willingness on the part of consultancies to consider royalty arrangements, a system that was initiated in the US.

“The existing imperfections in the remuneration model can turn you into a fee junkie. The new thinking is about partnering or aligning your interests [with a client]. The base model for this is the power of the multiple rather than straight fees.”

When his consultancy agreed a contract with Arcadia to launch its Zoom home shopping website, payment was partly based on performance. “We get a unit royalty for every subscriber who signs up. It is capped at a certain level and lasts for a fixed length of time. Now when we talk to Arcadia about Zoom we have our interests in mind as well as theirs,” he says.

Many more consultancies are now looking beyond the straight convention of fee payments, as markets and clients, products and brands seek new planes of existence. P&G’s recent decision to stop paying ad agencies a retainer and link remuneration to performance illustrates that clients will not sit back quietly any more either. Performance-based pay can only flourish. Consultancy/ client relationships are evolving into uncharted waters and with them go methods of remuneration. Perhaps the old dream of consultancies earning royalties is not out of reach after all.

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