JournalSep 2014

Why are design and development agencies so expensive?

It’s no secret that hiring an agency isn’t cheap. At least not in terms of your initial outlay.

Apart from the assumption that agency rates are high because that’s what clients can be convinced to spend, I find there’s often a lot of incorrect assumptions from clients about where their fees go towards.

After all, aren’t we supposed to be living in a world where software is cheaper and simpler to build than ever before? And where most of the costly expenses we might have had to factor in a few years ago have now been slashed by cheap and reliable internet services? Software is eating the world!

It’s true–in terms of output, as an industry we’re now capable of building ever more powerful products far easier these days. But that doesn’t mean that there’s a huge margin that the guy at the top of the chain in every agency is pocketing.

I can’t speak for everyone in our industry–no doubt there are plenty of companies out there that are running in a much less progressive way and being very inefficient about the way they do business–I can however tell you where the money goes at Hanno:

  • We invest heavily in training our team. Our team doesn’t work at 100% capacity on projects–we allocate a huge amount of time to pair-programming and pair-designing, the cost of which we frequently absorb as an operating cost. We invest in workshops, training sessions, and our team teaches each other new skills.
  • Bringing the team together. Being a distributed team, we’re able to save money when compared to a team where everyone works in central London, for example. But we still have co-working office costs for most of the team. Any money saved by being distributed gets reinvested into bringing the team together in one place for team meetups. We see this as critical for ensuring that we’re able to understand each other well and collaborate strongly when we’re not in the same location.
  • Distributed is one of our ways of adding value, not just to cut costs. We do not see being distributed solely as a way to cut costs – while one of us might be working in Russia, another may be in Norway (where the cost-of-living is even higher than London). We simply hire the best possible talent regardless of where that person is located.
  • You are really paying for our experience, not for the time we spend. It’s true that once a project is up-and-running, the incremental cost of spending a single extra day working is much lower than the cost we bill that hour at. The reason we bill by time (weekly) and not fixed cost, is that for us, it’s the cleanest and most effective way to put a price on what we bring to a project. The time spent on a project is equivalent to the time a professional athlete spends actually participating in the game they train for every week. Sure–their success is ultimately judged on their performance in that match, but what they’re really being compensated for is the days they put in on the training field. As is the case with us and our relentless drive to improve our skills and the quality of work when we’re not working on a project. This is why we are so productive when we bill for work – we work hard to reach this level of performance.
  • We commit to paying our team fairly. I’m almost certain that you could find a cheaper quote somewhere for any work we might bill for. If we were to squeeze our team, it would be possible for us to pay them less and be cheaper as a consequence. It’s worth noting that a large number of freelancers are not necessarily making enough to live off, nor running sustainable businesses. Our team is not lavishly compensated, but we do commit to paying them an amount they’re able to live upon. We are all design professionals and we are doing this for the long-haul–we want to build our business with that in mind.
  • Admin and operational support. Like any business with a fairly large number of clients, there are a lot of admin costs like banking fees, accounting fees and infrastructure costs that we spend on to keep our ‘makers’ in a position where they can spend as much as possible building things. We spend a huge amount on online SaaS and PaaS services because it allows us to automate aspects of our business and generate far more value than it costs.

Ultimately, it starts to come down to a question of being lean and efficient, versus being cheap. If we set ourselves up to minimise costs wherever possible, we could be cheaper. We could cut our costs and reduce our overheads to allow ourselves to work with clients who have smaller budgets.

But we much prefer to think about the value we can deliver–we can make ourselves as efficient as possible, investing money where it allows us to be stronger and deliver better results.

We’ll lose out on many projects as a consequence, but for the clients we do work with, we’ll be able to deliver a whole lot more value with the money they invest with us.

Posted by
Jon Lay

Jon is a Partner at Hanno. He wears many hats, but his primary focus is on leading our engineering and technical operations.