A DMI/Creative Business Survey
By Cameron Foote, Principal, Creative Business
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| Cameron Foote |
How’s business? After a several-year drought that has seen
most U.S. creative organizations cutting back and some smaller ones
even folding their tents, how are things now? How good is the current
business climate? Are business and personal incomes up or down?
What are the trends emerging from key business indicators? Which
markets offer the most opportunities?
Knowing the answers—that is, being aware of conditions, trends,
and confidence levels—has practical significance: it helps
with informed business planning and decision making. Moreover, because
the creative services industry is among the first to be hit by a
business downturn and last to recover from it, conditions among
other businesses are not always indicative of our own well being.
Then, too, there is the human-interest dimension: most of us are
curious about how we are doing relative to our peers.
The data presented here, from a survey conducted jointly by Design
Management Institute and the Creative Business newsletter,
answers these questions. We trust it will provide inspiration for
change where comparisons are below the norm and confidence to stick
with the status quo for those that are thriving.
This report addresses
United States economic conditions. It is not necessarily indicative
of conditions in other countries.
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The Survey
In July of 2004 we sent an e-mail asking roughly 5,000 individuals
located within the United States to record their impressions of
business conditions. The individuals represented a broad cross section
of the creative services industry—freelancers, principals
of firms, and managers of corporate creative departments.
Response rate. Of the 5,000 invitations sent,
more than 600, over twelve percent, responded by filling in a survey
questionnaire at special Web pages set up for the purpose. The questionnaire
asked for information broadly predictive of the health of the creative
services industry.
Tabulation was electronic. Respondents were not identified. Some
of the questions were also the same as those asked two years ago
in a January, 2002 Creative Business survey. This is to
provide a comparative view of business change and trends.
Creative firm responses by area. They were broadly
representative of creative firm distribution with a Northeast tilt.
32% indicated that their primary business area was the Northeast…
22% the Midwest… 12% the Southeast… 12% the West…
7% the Northwest… 7% the Southwest… and 6% national/
international.
Creative firm responses by size. Here, too, they
were broadly representative of the creative firm universe. 24% of
those responding were freelancers… 29% had two to four employees…
21% had five to nine employees… 12% had ten to twenty employees…
14% had more than twenty employees.
Corporate responses. Roughly 25% of respondents
were from in-house creative organizations. 29% indicated that their
organization’s primary business was in the Northeast…
31% the Midwest… 7% the Southeast… 7% the West…
12% the Northwest… 3% the Southwest… and 11% national/international.
The size of in-house departments responding: 3% one person…
15% two to four individuals… 18% five to nine individuals…
30% ten to twenty individuals… 34% twenty or more individuals.
The Big Picture
There are three conditions that have had a significant impact on
the creative services businesses in the last several years.
Economic factors. During most of the nineties
the United States economy grew robustly, and most creative organizations
had banner years.
Creative Business subscribers first reported a slowdown
in the Spring of 2001, although not universally. These reports presaged
a recession that has now been officially recognized as beginning
that March.
Conditions slowly worsened during the following months, and were
greatly accelerated by the shock of 9/11. The official low point
of the recession was November 2001.
Because the creative services industry can be a “lagging
responder,” many organizations didn’t feel the full
effects until later in 2002. This situation—some much affected,
some not—was reported in the Creative Business survey
conducted in January of 2002, some of the data of which are reprised
here. The downturn’s inconsistent progress is also reflected
in these sample respondent comments.
Since the beginning of 2002 the economy has been gradually improving
and the creative services market has also improved, albeit more
slowly and with many more ups and downs. Economic indicators were
very positive in the first quarter of 2004, although more recently
they have been far less so.
Business trends. The market for creative services
has become increasingly strategy-focused and results-driven due
to clients’ needs in dealing with ever-tougher competitive
environments.
Creative organizations that have benefited are those whose positioning
emphasizes working closely with clients in ways that add value to
their products—i.e., “partnering” with them. Organizations
that have lost out are those that continue to have a style or craft
focus, and those that work for clients rather than working with
them. This is true for both creative firms and corporate departments.
Similarly, each year the bar lowers on projects that clients (both
external and in-house) can handle themselves. Thanks to continually-improving
computers and easier-to-use software, clients have the tools to
do more. (However badly.) Put another way, each year clients need
to send fewer projects to professionals, so what they do send are
increasingly those requiring strategic input and high levels of
experience and talent. (Exception: interactive, where esoteric knowledge
and tools largely unfamiliar to clients still drive the market.)
Pricing and productivity. Business costs continue
to rise with mild inflation. (Currently 2.3% annually.) Yet, project
prices charged by most creative organizations (independent and in-house)
have not kept pace. Blame competitive pressures, client resistance,
and a reluctance to raises prices in times of economic uncertainty.
Whatever the reason, the result is the same: declining profits.
To protect profitability (viability for in-house departments),
the only alternative to increasing project fees is to increase productivity.
That is, to be able to accomplish more in a given time. And when
fees are based on time estimates, labor rates must keep pace with
inflation. Creative organizations that ignore this logic will never
again attain the prosperity of the nineties.
Survey Caveats
Before letting the survey results speak for themselves, please
take a minute to understand some of their limitations.
Representation. The lists used to invite survey
participation included individuals from all creative disciplines.
However, graphic designers were disproportionately represented,
so the results are most indicative of the state of the design business.
Senior individuals were also disproportionately represented. This
probably skews the responses in a slightly more positive direction
than might otherwise be the case. Experienced individuals managing
stable organizations were less likely to have been as strongly affected
by the business downturn, and more likely to have recovered from
it.
And it should be recognized that survey respondents are largely
individuals who have weathered any business fallout (survivors).
So their responses could be positively biased.
Conclusions. Organizations are seldom equally
affected by economic conditions. Even during the worst of times
some will prosper. Moreover, some bad practices, such as having
too much business tied to a few clients, often lead to temporary
prosperity, but later disaster.
In general, the larger a creative organization, the more likely
it is to be indicative of economic conditions. Larger firms have
a broader client base and more fixed obligations. Smaller firms
with fewer clients are more likely to be either greatly or minimally
affected, depending on how well their few clients are doing. On
the other hand, fewer fixed obligations (e. g., salaries) give smaller
firms greater flexibility in reacting to economic swings.
Survey results that compare 2004 to 2001 (see Figures
2, 3, and 4, below) also
have a positive bias built in. Because 2001 was the last good year
for many, even less than “normal” 2004 conditions (“normal”
being activity level of the nineties) will show up rather positively.
Finally, keep the following in mind: the business-generating activity
of any creative organization—i.e., its marketing—can
have far greater impact on success, or lack of it, than the state
of the economy.
Business Climate
As Figure 1 below shows, most responses were positive about current
and future business climates.
The higher “good” response from in-house (corporate)
departments likely reflects that they are more insulated from market
forces, and enjoy relatively greater stability. The higher “improving”
numbers among creative firms are the result of business activity,
but probably also somewhat influenced by hope.
An attempt to break down results by region was inconclusive, probably
because most regions contain a variety of factors that affect economic
conditions.
Figure 1. General
business conditions as reported by creative firms and in-house (corporate)
creative departments.
Income/Activity
These two metrics, income for creative firms and activity for in-house
departments, are the best overall indicators of the economy’s
impact on the creative services industry.
Creative firm income. More than any other indicator,
income—i.e., sales dollars—is affected by conditions
beyond a firm’s control. Others, such as changes in staffing
levels, are internally discretionary and reactive.
In looking at the responses charted in Figure 2, keep in mind that
a creative firm’s income is not necessarily the same as its
prosperity. Although they can correlate, it is also possible to
reduce costs faster than income is lost, actually increasing financial
well-being despite disappointing sales.
A firm’s prosperity can only be determined by its profitability.
This was not a question asked in the survey because profitability
is not consistently defined by privately-held firms. One indication,
however, is principal’s compensation as shown in Figure
5.
The 2001 responses shown were compiled in January 2002 before the
full effect of the economic downturn hit many firms. For this reason,
they are not reflective of the depth of the downturn. Similarly,
2004 figures are projections and might be swayed by hopeful thinking.
Figure 2. Projected
2004 versus actual 2001 creative firm income. 2001 data is from
a Creative Business survey conducted in January, 2002 before
the full effect of the business downturn was felt.
In-house department activity. Corporate creative
departments don’t always operate on a cost-center basis or
bill for their services. So activity, rather than income, is the
best indicator of economic conditions.
Figure 3 shows responses to a question asking to compare 2004 activity
to that of 2001. The strongly positive results are probably a mix
of two factors: One is that economic growth is showing up first
in the corporate sector. The other is that more work is being done
internally as opposed to using outside firms.
Figure 3. Respondents’
estimates of current in-house department activity as compared to
that of three years ago. (Specific comparative data are not available
for 2001.)
Staffing
Principals of creative firms and managers of in-house departments
were both asked to compare 2004 staffing levels with those of 2001.
The results, shown in Figure 4, are largely encouraging. Since
staffing increases are driven by need, the response indicates that
managers of in-house departments have confidence in continuing economic
recovery. This is no doubt bolstered by the fact that, unlike creative
firm principals, there is little personal financial risk involved.
The higher “level” response of creative firms, as well
as the smaller staff increases and larger staff decreases, reflect
the personal nature of the hiring decisions made by creative firm
principals. They are generally more reluctant to let employees go
in hard times, but also less likely to hire as quickly when activity
picks up.
Figure 4. Creative
services organizations’ staffing level changes over the past
three years as reported by respondents from both independent creative
firms and in-house departments.
Principals’ Compensation
In the absence of an accurate measurement of profitability, the
best indication of prosperity in a privately held firm is what the
owner’s pay themselves. When business turns down, overhead
can’t be easily reduced. It can be faster and less painful
to cut their own salaries rather than employees’, particularly
when there is expectation of a turnaround.
Creative Business’ 2002 survey reported that over
70% of principals had taken a recent salary cut. Our 2004 survey
results, shown in Figure 5, are more positive in that they indicate
salary stability for nearly 50% of respondents with a total of 33%
reporting increases.
Figure 5. Creative
firm principals’ 2004 compensation to date. It is a good indication
of increasing profitability for privately-held firms.
In-House Salaries
Among large, professionally-managed organizations, raises can be
looked at as an indication of business strength. When times are
tough, employers give less; they give more when they feel they can
afford it.
Salary growth by U.S. corporations in 2003 averaged 3.3% (all raises).
Given the 2003 inflation rate of 2.2%, this was not a particularly
strong vote of general economic confidence. There is no average
for in-house creative departments, but the results of our survey,
shown in Figure 6, indicate that raises in the respondents’
organizations were around the national norm.
Figure 6. In-house
department salary increases. Salary increases are an indication
of corporate economic confidence. (2003 U.S. average was 3.3%, or
about 1.1% above inflation.)
Creative Firm Trends
We asked principals and freelancers to tell us whether fees, competition,
employee benefits, productivity, and overhead costs were increasing,
staying level, or decreasing.
The results, shown in Figure 7, were much as expected. One heartening
surprise, however, was the percentage (34%) charging higher project
fees. Given lingering economic uncertainty, we expected this number
to be much lower, and the “same” or “lower”
numbers to be much higher. Similarly, we did not expect to see any
increase at all in employee benefits, although respondents may be
indicating rising costs, instead of additional benefits.
Figure 7. Trends
in five key business indicators as reported by creative firms.
In-House Trends
We asked individuals in in-house creative departments whether fees
charged, out-of-house competition, outsourcing activity, productivity,
overhead costs, and employee training (not charted) were increasing,
staying the same, or decreasing.
Figure 8 indicates several interesting trends. A positive one is
the high number showing productivity increases (72%), because productivity
(ROI) is crucial in justifying any in-house department. The percentage
(34%) indicating increased outside competition is not so positive
because in-house departments have historically tended to shrink
when sending work outside is regarded as cost-effective. Of encouragement
to creative firm principals and especially freelancers is the percentage
(55%) of in-house departments that have increased their outsourcing.
Figure 8. Trends
affecting in-house creative departments. (Not shown is employee
training, where 37% indicated an increase, 44% the same, and 19%
less.)
Market Potential
Business opportunity data was collected from creative firm participants
on eight of the most common markets for creative services. This
data is charted in Figures 9 and 10.
Each participant was first asked to rate each of the markets on
how good its business potential appeared. Then, each was asked to
rate each on how poor its potential appeared.
Asking essentially the same question in two ways was done to ensure
that the data did not give the impression that a market was either
all good or all bad. Even in the most poorly-rated (annual reports)
some respondents felt there was good potential. Conversely, some
found the most highly-rated (ID/branding) to have poor potential.
In all cases, the spread between good and poor was less than what
we had expected. We believe this to be an indication that activity
within a market, or lack of it, is more likely the result of temporary
economic anomalies than any long-term shift in client needs. (Figures
9 and 10 also use a larger scale, which can exaggerate differences
at first glance.)
The eight markets we measured were all ones with potentially high
value activity. As indicated previously, there is a clear shift
away from lower level “craft” work and toward that which
provides value-added services.
Figure 9. Attractiveness
of four markets as reported by creative firm respondents. (Responses
in Figures 9 and 10 total more than 100% because of multiple selections.)
Figure 10.
Attractiveness of four markets as reported by creative firm respondents.
(Responses in Figures 9 and 10 total more than 100% because of multiple
selections.)
Perspective
Business conditions in the creative services industry have improved,
but not as much as we would like. And the recovery is far from solid.
Only time will indicate which effects are long-lasting and which
are temporary.
In reviewing the survey results, keep in mind that it was not scientifically
conducted and is only an approximation of actual economic conditions.
In other words, don’t make any financial decisions based only
on these findings.
Further, while numerically based, the data was subjectively reported.
In many cases the data is as much a compilation of opinion as fact.
One individual can view conditions with optimism (glass half-full),
another the same conditions with pessimism (glass half-empty).
The respondent comments
also convey a somewhat more negative picture than the data would
seem to support. This is partly due to the power of words to dramatize
cold numbers and sterile averages. A good picture of conditions
requires considering both data and comments.
If your own personal experience doesn’t correlate well with
the findings, you can take comfort in the fact that you are hardly
alone. If nothing else, the survey proves there is a substantial
range of business conditions, activities, and opinions.
Finally, let us state the obvious: what really counts is how well
your organization is doing. Knowledge of economic conditions or
industry trends may be interesting or even reassuring, but they
are not business-crucial. The crucial factors are relating to client
needs, ensuring the quality of your organization’s work, adding
value to client products, providing extraordinary service, and constantly
seeking new clients who can benefit from your talents and expertise.
Cameron Foote is founder and editor of
Creative
Business, a monthly newsletter directed exclusively to
the business needs of design studios. He has forty years of industry
experience including stints at small and large agencies, as creative
director for a Fortune 500 firm, and running his own business. He
is the author of the design industry’s two best-selling business
books: The Business Side of Creativity
(W. W. Norton, 1996), and The Creative Business Guide to Running
A Graphic Design Firm (W. W. Norton, 2001).
This report appeared in the September
2004 eBulletin.
Comments on DMI Viewpoints
and article proposals are always welcome! Please email jtobin@dmi.org.
All articles reflect the opinion of the author and not the Design
Management Institute.
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