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| Salaries
going up, Charge Out Rates going down – is profitability in
design possible? |
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DBA survey says design groups' profits are at risk
Design groups across the industry could struggle to maintain
profitability
in 2006, warns a survey out this week, which finds that salary
costs are
going up, while charge-out rates are decreasing.
The Design Business Association survey of 135 consultancies
across the UK
reports that, while salaries have increased by an average of
10 per cent
this year, direct charge-out rates have fallen by 5 per cent,
to an average
of £96 per hour.
According to Mandy Merron, a partner at accountant Willott Kingston
Smith,
this is a worrying trend and groups should take urgent action
to remedy the
situation. 'It is critical that this ratio is improved. Consultancies
can't
remain profitable if staff costs continue to rise and charge-out
rates don't
reflect the increase,' she says.
Financial consultants across the sector agree that the survey
is an accurate
reflection of what is happening in the market. Results Business
Consulting
managing director Jim Surguy points to the surge in the use
of procurement
departments to buy design as a key cause of falling charge-out
rates.
'Procurement departments, by and large, don't realise the value
of design
and that is tending to drive fees down,' he says. 'Designers
need to deliver
an added value proposition that helps them justify the fees
they want to
charge.'
DBA chief executive Deborah Dawton agrees and says design groups
also need
to focus on improving their negotiation skills.
'Clients are clearly putting designers under pressure and, for
the large
part, [consultancies] lack the confidence to justify their proposition,'
she
says.
Dawton believes groups need to be better prepared for a 'cost
versus value'
negotiation with clients, and must also be aware of 'the point
at which it
is not profitable for them to do the work'. 'A lot of designers
don't know
what their threshold is,' she maintains.
The survey found that the industry remains ebullient about its
growth
prospects, with 52 per cent of groups anticipating an increase
in fees.
But 72 per cent of consultancies also expect to see an increase
in staff
numbers, and most anticipate a 5 per cent increase in rates
of pay; the
combined effect of which is likely to negate the benefits of
any fee
increase.
There is consensus among experts that the issue of rising staff
costs are
firmly within the industry's control. Surguy believes they are
symptomatic
of 'endemic over-servicing' within the industry. 'Design consultancies
need
to become more efficient and cut down on over servicing, which
inflates
staff costs,' he says.
Merron agrees. She says a common feature of more profitable
groups is that
'staff are told when to stop the creative work'.
'Designers are passionate about doing fantastic work but, if
clients are
only paying for "good enough", that's all they should get,'
she says.
Dawton believes design groups should also take a more creative
attitude in
their approach to rewarding employees.
'There are ways of motivating and retaining staff that are far
cheaper than
salary hikes,' she says. 'Consultancies should be looking for
more creative
approaches that tap into the lives of the people that work for
them and what
makes them tick. This kind of incentive goes beyond monetary
value.'
Overall, the outlook isn't bleak. Merron and others agree that
the market is
picking up. But they're also clear that only those groups that
differentiate
their offer, and are efficient and productive, will reap the
rewards.
By Trish Lorenz, Design Week, 1 March 2006
The hit on profitability:
o Salary costs up 10 per cent
o Charge-out rates down 5 per cent to an average of £96
per hour
o The ratio of salaries to charge-out rates up by 16 per cent
this year
o 52 per cent of consultancies expect an increase in fees in
2006, but 72
per cent also expect an increase in staff
o Pay increases of 5 per cent likely to be necessary
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