FT CREATIVE BUSINESS
High salaries and poor profits are claiming more victims in the design industry.
Rodney Fitch has been in the design business for 33 years and, along with Terence Conran, is credited with giving birth to the modern-day industry, but last month his 20-strong company went into receivership. The failure of Rodney Fitch & Co, which closely followed the closure of branding agency Basten Greenhill Andrewa, is another stark reminder of the depth slowdown. Many jobs have been lost and there is little prospect of an end to the pain.
The reasons, according to those who closely watch the performance of the design companies, are clear – this is an industry where wage bills have headed north while profiles have been trekking south.
Neil Whitehead, a director at Rodney Fitch & Co who tried to buy the company, says it was run on an old model. “Rodney Fitch & Co was a lifestyle business and the costs were too high,” he says. “You can’t give yourself a massive salary in this climate. You have to be flexible.”
That is not the way the industry has behaved, however. Figures from specialist management consultancy David Jebb & associates, who started producing its quarterly design Business Performance Ratios 12 years ago, show the industry failing to adapt fast enough to the increasingly chilly climate. Jebb’s latest numbers show that during the third quarter of 2002, each employee in the design companies he monitors was generating an annual cash operating profit of £5,188 – 65 per cent less then in July 1997. In a good climate, employees should be generating £13,000 to £15,000 of cash operating profit a year each, says David Jebb.
And the wage inflation of 10-15 per cent a year will have to stop, he argues, if the industry is to recover. As each employee’s annual cash operating profit was diving by 65 per cent, the average gross annual cost of each employee climbed 22 per cent to almost £42,000. Coupled with a 10 per cent rise in the administration costs for each employee and the result is a very unpleasant crunch.
“Salary structure will have to remain constant for the next few years, because there’s no way that design buyers are going to get more generous,” Jebb warns. “Buyers are effectively paying 1997 prices on 2002 costs.” Amanda Merron, partner at accountants Willott Kingston Smith, whose survey of the creative industries, marketing monitor, has just been released, backs this up. “Design consultancies have been waiting for the good times around the corner, but this / difficult climate / is the reality for at least another year,” she says.
Even among the surveyed companies that have survived, 31 per cent are making losses and there have been large numbers of redundancies as companies struggle to get their cost bases down. Imagination, for example, announced 15 redundancies – 5 per cent of staff – in November. Imagination managing director Paul MacKay put the redundancies, which have been made at all levels of the business, down to the “the continued market slowdown”.
But there is a long-term knock-on effect of these cuts. As well as making redundancies, consultancies are not taking on graduates as juniors. As Merron point out, when graduates were left out in the cold in the last recession, the result in mid-1990s was a huge hike in salaries for designers with three or four years’ experience, as there were so few of them around. “Agencies who don’t take on graduates are storing up trouble for themselves,” she warns.
Jebb predicts more casualties this year, and continued shrinkage at large agencies. Wolff Olins, Interbrand and other big names have all shed staff in the past year.Troubled marketing services group Cordiant, meanwhile, is moving its design interests under one roof, to create a 140-strong “powerhouse”, according to Paul stead, who heads Cordiant’s umbrella design brand Fitch Worldwide. He says redundancies will primarily be in non-creative areas. “The economy is tough but we are desperately trying to keep all these creative teams intact,” he says.
These agencies owned by the big marketing services conglomerates such as WPP and Interpublic are more likely to survive that independents, Jebb believes. “the networks want to preserve the equity in the brand name for the better times. “Indeed, one such high-profile design consultancy, which was bought by one of the networks, admits that if it had not been for the support of its parent, it would have gone under last year.
Perhaps not surprisingly, Merron’s prediction for 2003 is stark. “Companies with historic financial problems will go, as will the ones that believe there will be an upturn in 2003”.
Having emerged from Rodney Fitch & Co, Whitehead has now joined eight-strong design agency Ashley Carter. He is convinced that design agencies must change the way they do business to have a sustainable future, and that will probably mean embracing the freelance culture. “You can no longer have the old design model with 20 people in a studio and a marketing force on the road,” he says. “The answer is a creative office that brings in specialists on a project-by-project basis.”
The big question is how much they get paid.
7 January 2003