JournalJan 2015

Our View: Why the teehan+lax shutdown isn’t the end of client services

Okay, I don’t know the inside story on exactly what went on inside teehan+lax before they made their announcement that they were closing down last week.

The last thing I want to do is speculate about how Jon, Geoff and David handled the whole situation within their company. The evidence flying around seems to suggest that the rest of the team was offered the opportunity to interview at Facebook, and some took that opportunity and were offered positions. Others are left looking for jobs elsewhere.

I think it’s fair to say that the way their announcement was presented as something quite celebratory from a company perspective, was a bit strange. Potentially even misleading–certainly not in keeping with the openness they showed as a company while they were talking about their projects. Maybe that’s what happens when Facebook legal helps you draft your ‘goodbye’ message. It’s not a style I think I’d adopt personally, in that no matter what spin I could put on it, shutting down the business I’ve put so much of my time into building, and parting ways with so many great friends and teammates would always be a sad moment. I agree with what Brian Krogsgard wrote this weekend: “I just wish they would tell the whole story, even the parts that hurt a little bit.”

But there’s a bigger thing to discuss here. And that’s how some people are hailing this as the end of design firms and client services. They’re saying that this is proof that no matter how good the design firm is, it’s not possible to build great products unless you’re part of an in-house team. And I think that conclusion is wrong.

There’s obviously a very clear recent trend amongst top-end UX design firms right now. We’ve had Jet Cooper, Adaptive Path and now teehan+lax all close their doors recently. But 3 design partners shutting up shop because they’re ready for a new professional challenge (as the t+l partners seem to be suggesting) does not necessarily mean that the entire industry is doomed to fail.

There are two big criticisms that I think we need to acknowledge and overcome as an industry in order to prove that this isn’t the case.

Criticism 1: Outside teams can’t do product design

It’s no secret that I’m somewhat anti-traditional agency. Many of us who have come into this industry as newcomers, without the burden of the past, share the same mindset.

When you watch TV or films, the “creative agency” is presented as a temple of hard work and breathtaking creativity. But you don’t have to talk to many people inside these big agencies to get a sense of the disillusionment that many of them feel, and their pessimism about the lifestyle and quality of work that’s being produced. I’ve heard many great designers whose passion for the job, and determination to do great design, has been gradually eroded by the companies they’ve been working for.

To me, it’s painfully obvious that this whole way of working which puts the designers ‘at arm’s length’ from the client just doesn’t work. How can it be possible to do great design when you shut your design team away in a different building and communicate solely via briefs, pitches and design reviews every couple of days, or weeks, or months? If I’m a designer and I’m juggling 3 different projects at once, each with their own limitations and my mind being pulled in several different directions, how can I be expected to deliver great work?

I’d totally agree with anyone who says that the traditional agency structure we’ve built is incapable of reliably building great products. Leif Abraham wrote a fantastic article explaining why this is the case:

“From a business perspective, what digital agencies are doing well is they are producing most of their work in-house, on an hourly-based fee. The agency becomes an outsourced product team for the client… However, for the client, this is a very expensive model because the agency can charge for any little change to the product on an hourly basis. With an average rate of about $200/hour, something like a quick color change on a button can easily become a $1,000+ job.

As this work becomes so expensive, the quality of the product often suffers and what is finally launched is far away from what the agency and client dreamed up at the beginning of the process.

For agencies the model thus becomes: 'Great for business. Bad for the product'"

Think about how fast your average startup moves. How many hours they put into their product. How they live and breathe what they’re working on. How much they’re constantly tweaking and iterating and looking for new ways to improve their product. It seems pretty clear. If we’re billing on at an hourly rate and still acting like one of these ‘outsourcing partners’ then the chances of the product actually succeeding are pretty low. Being great designers counts for something, but even if we’re putting hours in here and there, how can we get anywhere close to competing?

It’s pretty clear to me: outsourced design doesn’t work any more, if it ever did. I don’t think many people disagree with that. There’s always going to be the low-margin work out there, but if businesses are going to try and sell high-margin services to their clients, they’ve got to be delivering much more in return. A team we have a lot of respect for at Hanno is ZURB, and their founder, Bryan Zmijewski, is one of those who really gets this:

“Will 'web' agencies exist? Sure, but if they want to create a high-margin business, they won’t be able to provide services in the same way. However, chop shops will continue to exist. There will be plenty of work out there, just not the type of business most agencies desire.”

So how can we fix this?

Let’s ignore how an agency works for now, and think about what companies really want when they’re trying to get help designing their product:

  • They don’t want to outsource their product, in particular the design and strategy of it. They want to have direct access to the project team, and team up with them to get things done.
  • They want to be able to bring in experts who they simply can’t find, or persuade to join their team. They know they need help–they’re just unable to get it to come in-house.
  • They need to build a consistent team around the product, so that there’s continuity of thought all the way through the product’s development cycle
  • They want that team to be focused on their product, rather than have their attention divided between multiple projects
  • They don’t want to be locked into using the agency forever. They need to be able to move away from the agency in the future if business needs dictate that.
  • Even more so, many companies fully appreciate that if the MVP gets built and validated, they will ultimately need to build a full-time in-house team. Can you imagine Facebook working with a design agency for all of their design needs? At a certain point, things have to go in-house.
  • They don’t want to waste resources and money. They wouldn’t insist that their marketing manager spend a week preparing needless reports and documentation for something which could be communicated in a quick discussion. And so they don’t expect that of their design team either. Nobody except the law firms wants waterfall bureaucracy and rigid project management, and even they will hopefully grow out of it soon.
  • They want to make use of their own resources. Most companies who really need help already have people working in the company–they just lack the skills to fix this. That’s why they’re bringing in specialists. But there’s no point in having these specialists insist on doing everything themselves. Why should they insist on using their own researcher when the client already has a great one on the team? Why would they insist on building everything themselves when the client has some great engineers at hand? Getting deliverables isn’t enough–they want their team to learn and grow too in the process.

But what if we take a different approach? Instead of behaving like outsourced contractors, what if we can find ways to be totally integrated with the client’s team? Well, it’s closer than a lot of people think–it just requires us to do away with most of the structure and overhead that agencies have figured was unavoidable in the past.

This isn’t hypothetical–we’re a relatively young company at Hanno, but we’re pretty confident that this is achievable. The process we’ve built as a team has, so far, enabled us to deliver exactly what our clients are looking for. Other companies like ZURB are doing very similar things.

Instead of the traditional way of working, our goal has been to move as close as we possibly can to building great design teams who are able to essentially join our clients’ team full time, for the duration of the project. There are no longer the barriers between our two teams, and the client gets the ability to ‘rent’ a fully functional team for the amount of time they need. In time, we hope, the product will be so successful that they’ll begin to build their own design team in-house, and that’s something we can be totally supportive of.

Don’t get me wrong–I don’t think this works for every single client and product. I think that it’s inevitable that the biggest companies will be pushing to move this sort of work in-house. They need to be able to run that process themselves, so they have to build their own teams of designs and engineers to do it.

But that still leaves a vast group of people and products who need our help. Not every company has the ability to build a great design team inside their company. Not every company is a Facebook or a Google. I think that leaves a lot of space for a new breed of design teams to help them.

We’re not unique in what we do–companies like IDEO have been building a design company this way for decades. Design agencies will continue to exist–they just won’t look the same as those that came before us. But I can’t see any other future than the one in which this new way of structuring a design agency becomes the only effective way to build great products within it.

Criticism 2: You can’t scale a design agency

So we’re clear that design firms need to evolve. Clients are starting to wake up to the fact that design just can’t be outsourced like this. We need to build smaller, leaner, better and more cross-functional teams. We can’t just throw a project brief over the wall and have a few people put together some deliverables.

That’s clearly going to kill the revenue stream going into the remaining firms who work in that way to build products. I’m looking at you, old-school ad agency empires.

But is that really a bad thing? David Crow wrote about t+l in the last few days and has said the same thing in the past:

“Services firms are not destined to be huge companies. There is great business, it’s just a hard business to scale nonlinearly.”

If we want to scale, how do we do it?

It’s easy to look back to the past to see how big agencies used to do this thing. Snapping up smaller agencies, buying out talent. Just like startups are doing right now. But it goes beyond acquisitions, and more to the business model we’re talking about.

We all know how your ‘typical’ ad agencies work. The founders are often great designers, and build their agency from nothing, bringing in clients through great contacts, marketing and design work. But there are a limited number of hours in the day. In order to scale, they need to hire more people and move themselves above the shop floor. To make more money, they hire more junior staff, getting them to do more of the work. And so it goes, as the company gets bigger and bigger, taking on larger projects and hiring more staff to get the work done on those. If your revenue and profit is directly constrained by the number of people working for you (and by association, how many projects you can take on), then growing that headcount means you can make more money. It’s almost like a Ponzi scheme. If all goes as planned, they’re worth billions.

So the people at the top are nice and comfortable, but the ones further down our little pyramid (the ones doing the work) are carrying all the weight of the business, and most likely earning far less for their efforts. In many respects, that doesn’t feel entirely fair.

But wait a minute… who said we even needed to scale?

This might sound a little bit of a lone voice in a crowd of pro-growth advocates, but here’s a question: who decided that we actually need to massively scale service firms?

Look, I love working with startups myself. It’s fantastic fun, you get to work on brilliant projects, and there’s none of the rigidity that you get with bigger companies. For the reasons I just mentioned, getting rid of this rigidity and actually working side by side is, for me, what we need to do in order to build great design teams.

But Hanno is not a startup. We’re not growing ourselves for a huge exit. We bootstrapped our growth so that we could try and do things on our own terms, without having investors to take into account. We’re just a regular business, trying to do what we do in a sustainable way, and make a big impact.

I have no problem with the concept of investment. In many cases if you don’t have someone bankrolling you, you just can’t get ideas off the ground. As a society, we benefit from the risk that that successful startup pursuing a game-changing idea has taken. We take a step forwards which is much greater than we’d have taken if we’d restricted ourselves to slow, incremental growth. As Peter Thiel says, in its optimum form, a successful startup will deliver vertical growth which drives us forwards: a breakthrough innovation which nobody else has managed.

Sure, for a VC, hitting huge scale is the only real option, because that’s the only way they will see huge return on their investment. But VCs aren’t the only ones participating in this conversation.

The problem I have is the notion that scaling a client services business dramatically is always the end goal. Why should the quality of our work and the good we’re able to do as a company, be determined by the sale valuation of the business? I think it’s important that we distinguish the investment opportunity of design agencies, from the business opportunity for those within them. And even more crucially, to distinguish the investment opportunity from their ability to do great, world-changing work.

After all, if you can build a sustainable business and deliver the quality and impact in your work that you’re trying to achieve, who’s to say that not scaling your business to be worth billions is any sort of failure? For anyone who’s not the founder, or a VC, what’s the real purpose of scaling unless it allows you to do better work?

There’s still a future for design firms. It’s just not the one we’re used to.

I think there’s something missing in all this discussion of whether design firms are dying. It’s that this is far from the death of client services. All this is is a sign that the pyramid model which many agencies used to plan their growth, has become an anachronism. That whole approach to growth and compensation is fatally flawed.

I don’t think you can build a great culture inside that pyramid. We need something better to take us forwards. For that, we need flatter teams, fairer cultures, fairer pay and compensation, less inequality, and more respect for the people who make up our teams, and do all of the work.

I think it’s perfectly possible to build a very successful agency, but it all comes down to what your definition of success is. If ‘success’ to you, as the “CEO”, partner or founder, is measured by how much you can sell your business for, or take home each year, then sure, I think it’ll be harder and harder to build a successful agency in this old way. You’ll need to realign your expectations about how rich you can get by running a design firm.

But plenty of people don’t have aspirations to be multi-millionaires and cash out of their businesses. While we certainly need big teams at times, to solve some huge problems (like designing cities), that’s definitely not the case for a lot of projects.

If you measure success in terms of your ability to create a meaningful impact on the world, then… I think that’s still entirely possible, even as part of a smaller team. As teehan+lax said in their own departure post:

“We think that there is a bright future for companies wanting to continue to offer services—it just may not look like it did in the past.”

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.