Design groups stand accused of ‘burying their heads in the sand’ and failing to take tough decisions to cut high-earning staff as employment costs in the sector continue to rise while profits fall.
According to the latest annual industry survey from accountant Willott Kingston Smith, the industry headcount has fallen nearly 12 per cent, but the average cost of employing people is still increasing, up by 7.2 per cent this year.
With operating profits down by 51 per cent on average across the top 30 groups, compared to a mere 4 per cent last year, WKS partner Amanda Merron is ‘surprised’ that ‘so few [consultancies] seem to be making cutbacks’.
She says, ‘Are companies burying their heads in the sand and avoiding the unpleasant task of laying off staff? Designers should structure their businesses to succeed in the current market.’
While 2004 is widely predicted to show an improvement in trading conditions, Merron says the design industry is ‘not controlling its costs as well’ as other marketing services sectors and her prognosis is not good. ‘[Designers] shouldn’t be gambling on a change in fortune next year,’ she says.
According to WKS, rising staff costs are due to a combination of factors – most redundancies that have been made so far have affected less well-paid juniors, while the cost of severance packages and the bonuses paid to encourage staff that remain are having an impact.
Turnover in the industry was down 11 per cent and total gross income fell by 7.8 per cent to just under £7.5m, on average, per group. On the positive side, many consultancies have improved their net cash balances.
Average gross income per employee was also up to £67 882, but still short of WKS’s target of £100 000 for a well-run business. Significantly, Merron says, productivity was down on the key ratio of gross income to employment costs – dropping to 144 per cent (2002 figure: 164 per cent) when WKS’s benchmark is 200 per cent.
‘It’s important to remember that published accounts are lag indicators. The increase in average costs per employee and the low instance of exceptional reorganisation costs [suggest] groups have already made the easier, less expensive cuts. What’s to come, if it isn’t already in progress, is the major surgery. When profitability declines a design consultancy can live off its reserves, but that can’t be sustained indefinitely. A fundamental correction of employment costs is now overdue.’
John Dewhirst, Consultant, Vincimus
‘An 11.1 per cent drop in turnover and a 51.2 per cent drop in operating profit in 2002 says it all. Reduced client spend – fmcg projects excepted – is here to stay. Smarter clients want quality design done faster and cheaper. Design groups’ business models must change as a result.’
Ian Cochrane, Chairman, Ticegroup
‘Everyone must now manage much more deeply, anticipating trends and digging margin out of the “boring” stuff like cost and process control. But among the disastrous tales of over-optimism, lack of foresight and dreadful productivity, it’s good to see the likes of Coley Porter Bell and JKR getting it right [average gross income per employee above £100 000 and gross income up 37 per cent respectively].’
Philip Lawder, Independent consultant