In the early 2000’s, having survived the burst of the tech bubble, it seemed that nothing could go wrong for digital agencies now. A new set of leaders was in place, lessons had been learned, new clients were easy to find again. Investors were all too happy to inject vast amounts of money into companies to push their digital projects, with the – often realized – hope of massive returns. At least in California.
However, bit by bit, year by year, agencies closed shop or were bought up by a few massive conglomerates agencies (which are on a steady path to fail, but have not yet done so)
Why did the success of the Design Agency declining so sharply?
Agencies have massive overhead
Stemming from the times of plenty, where they could charge top rates and still received more contracts than they could fulfill, design agencies invested in expensive employees, ultra cool office spaces (at high rents) and worked hard to develop processes that could avoid contract breaches or other disasters. To woo their clients, they held fancy parties and workshops, and travelled frequently for in-person reenforcement of their positions or to bid on new projects. Internally, meetings became more frequent and lengthy in an attempt to train up new employees and learn from past mistakes. Project Managers were the glue that held huge projects together, account managers were there to ensure the client feels sufficiently wooed. RnD teams were put together to develop a side-line, controllers and accountants were needed to manage the ever increasing accounts payable and receivable. And the costs kept rising. The bigger the agency, the bigger the overhead, until you’re left with one gluttonous beast.
How the crisis effected the digital agency sphere
With the 2008 economic crisis, more and more companies were forced to lower their design and marketing budgets. Many of these companies (the ‘Client’), reviewed the cost to value ratio they received from design agencies and found that they could get the same service for a much lower cost by placing their contracts with freelancers or developing their in-house design teams.
Employees of digital agencies got tired of the constant pressure for ‘billable hours’ and the lack of wage increases, while at the same time witnessing the massive waste that occurs within larger agencies. Many saw a better opportunity if they struck out on their own: they would be their own boss and could implement changes in workflow and management that would make projects run much smoother, they would be able to offer a much leaner yet more effective and higher quality service to their clients, than agencies could, while also making more money. The only risk would be to get the right (amount) of work.
Freelancers and Start-Ups
Today, there is a vast number of freelancers with thrilling portfolios and CVs who offer their services at prices that appear high (if you are an individual or small firm, looking for someone to design and build your online presence) but are in-fact still much below the project bids of agencies.
Furthermore, many agencies who had let go of employees to limit their overhead, found that they could still go after big clients, servicing large projects, by contracting back some of their former employees on a freelance basis.
Start-Up firms were formed by small groups of people who had all their design and development skills between them and in-fact, it would appear that the current wave of start-ups is based on ideas from designers and engineers, not by entrepreneurs, businessmen or executives. Because it’s their own idea and company, these folks work relentlessly and often without pay – until they either receive venture capital from large investors, or until they are bought up (often resulting in a huge payout).** This makes start-ups incredibly lean – producing a new product that quickly stands trial in the real world and that is allowed to fail. Failure is almost programmed into the process, and does not mean disaster, but is simply used to learn and improve. No agency can afford to compete with this process. Large companies now simply wait for a start-up to come up with the idea and early development of products they themselves have been wanting to develop all along but couldn’t afford to fail. Now they simply choose the one start-up product they like best. The price pays for all the design and engineering the start-up invested, and then some – but it’s still a lot less than developing a successful product in-house.
This also means that start-ups don’t have to worry about profitability. If you develop a software or other product, that is valuable to another large company, you don’t have to even attempt to sell your products on the market, you just have to make it attractive enough to a large company who will then buy your entire shop up. You either get a massive payout, or a secure top notch job.
* I’m referring here not only to visual designers, but also software designers, information architects, user experience experts, etc…
** and this is also why most start-ups are run by very young people, who have no family comittments and are willing and able to take some risks