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Global firms have been entering the Australian design market in the last few years - what does this mean for our local design firms? Is it a good or a bad thing?

Below are some of the firms that illustrate the trend:

• Futurebrand: merged with FHA (Flett Henderson Arnold)

• Enterprise IG: acquired Horniak & Canny in Sydney & Melbourne, and Springham Anderson Design Group in Perth & Singapore

• Landor Associates: established an affiliation with Lewis Khan Staniford Design

• Interbrand: from a strategic alliance with John Allert to building a full-scale business (with John as MD)

• Grey Communications: merged two studios to form Lancashire Blenheim Design Group
  

Additionally, there are "pureplay" studios such as Attik and KSDP who have opened offices in Australia. Having said that, even KSDP is now part of a larger design group called BrownKSDP.

The players behind the players

So why are these global firms entering Australia? To answer that question, it is worth understanding that many of these large design players are actually owned by even larger communications services groups. For example:

• Futurebrand and Interbrand are owned by The Interpublic Group (www.interpublic.com, 2000 revenue: US$5.2 bn)

• Enterprise IG and Landor are owned by the WPP Group (www.wpp.com, 2000 revenue: US$4.5 bn)

• Grey Communications is owned by Grey Advertising (www.greyglobalgroup.com, 2000 revenue: US$1.2 bn)

• BrownKDSP is owned by the Tempus Group (www.tempusgroup.com, 2000 revenue: £151m), and in November 2001, the Tempus Group itself was in the process of being acquired by WPP
  

So what do these ownership structures have to do with why global firms are entering the Australian market? All of the parent companies above are publicly listed. That means they all have to answer to shareholders, who generally want to see a decent return on their investment. Growth, in revenues and/or assets, is one way for a company to increase its share price and thus the returns to investors. Therefore, growth is generally viewed as a good thing by many shareholders. One way of achieving growth is to enter new markets, like Australia. And the thing about growth is that you can either grow organically (build up the company from scratch) or you can grow via acquisitions and mergers.

Australia is an small but attractive growth option for global players. Firstly, the creative/communication services industry is less mature than in the UK and the US, but the services required by clients are very similar, the level of sophistication is comparable and if you adjust for differences in the cost of living, the price points are reasonable. Secondly, there are plenty of firms that are good potential candidates for entry via acquisition or merger. Finally, the scarcity of firms providing a range of services broader than just pure design highlights a clear opportunity for entry.

So what does the emergence of these players imply for the Australian profession, and in particular for the local independent companies? It would be naÔve of me to suggest that I have predictive powers here. What I can do is suggest some logical consequences. Then it is up to you to compile these consequences (and others you might think of) into potential scenarios. I have considered potential consequences in the following areas:

• Industry structure
• Creative standards
• Professional standards
• Staff
• Clients
• Pricing

Industry structure

The term "industry structure" refers to the way an industry is split up between the players.

For example, Australian retail banking has a highly concentrated industry structure because the top 5 banks control more than 85% of the retail market. In a highly concentrated industry structure, the big guys tend to set the defacto standards for bank fees and the way things are done. In this type of industry structure, many small players have to specialize (either in product focus or geographic focus) in order to compete with the big guys.

In contrast to the retail banking example above, the graphic design industry is very fragmented. There are lots of small players (1-3 staff), with only a small handful of businesses at the top of the pyramid. There is no data available on market share in the design industry, but my guess is that the top 5 design companies in any state don't account for more than 10-15% of the total market. In a fragmented industry, the ability of the Top of page design companies to affect the entire market conducts business is very limited. The emergence of globally-backed players could change thatÖ

My guess is that the globally-owned design firms will get bigger: in total revenues, staff size, range of expertise and client base. Why?

Three drivers of growth in the creative professional services are professional management, medium term funding and preferred access to potential customers. Global groups can provide all three.

Management professionalism will be driven by the financial discipline imposed on these companies by their publicly-listed parents, and by the fact that large companies can afford to have a cadre of professional business managers in addition to the creatives.

Medium term funding is easier for a company whose parent can generate funds from the stockmarket rather than having to build revenues from clients. However, before you go thinking that your merged colleagues have it easy, rest assured that they probably have to meet tougher financial targets than most. It's just that the parent company can, and will, distinguish between investment capital and operating costs.

Access to potential customers is provided by the ability to tap into a broader services group that encompasses advertising, direct marketing, public relations, brand consulting, etc. Of course, the studios won't just get handed these potential clients on a silver platter, but at least they have sister companies to pester for introductions and assistance.

Creative standards

Hard to say how visual creative standards will be affected. One argument is that the global players are about making money, not about great creative, therefore creative standards won't improve any more than normal. Conversely, if creative quality is seen by global management as a primary driver of their success, then it is likely to improve faster than if the globals were not present.

Another effect might be faster adoption of overseas visual design trends. Global networks can potentially work faster than the usual design publications in passing ideas and approaches around. Once the new ideas land in Australian subsidiary via the internal nextwork, personal networks will take care of disseminating the ideas into the rest of the design community.

On the non-visual front, white papers and other forms of intellectual capital are likely to proliferate as the global groups look to get the most out of their internally-connected pools of thinkers. Take a look at what Interbrand has done with its http://www.brandchannel.com idea.

Professional standards

Project and client management standards are likely to go up. Large companies have to show a more disciplined and organised face to clients, otherwise it would be bloody hard to justify the differences in fees compared to smaller local companies.

Large groups also have the benefit of being able to share experience (people, practices, methodologies) across their own internal networks of people, with the option of singling out "best practice" global centers wherever they spring up.

Finally, groups that are genuinely integrated globally can do "overseas expert fly-ins," which can be quite powerful in landing local clients who are afraid of being provincial in their thinking. Apart from impressing clients, fly-in experts inevitably inject new types of thinking into local teams.

Staff

A more disciplined business means better training. Not necessarily in the area of creative work per se, but certainly in areas like project management, personal presentation skills and other important but often overlooked aspects of business. Large companies tend to have, relative to small independents, a more balanced view of creative vs business capabilities.

People who work for larger companies are more likely to have fancier office space and facilities, as well as things such as internal company conferences, HR policies, global internal networks, etc.

I am not sure starting salaries will be that much higher in the bigger firms, but I am pretty confident the top end packages will go up. As the big firms get bigger, they will be competing for the right senior staff to head up their teams. Those senior staff would have traditionally gone out and opened their own businesses, so packages will have to be competitive relative to that option. Interestingly, you can see how "starting your own business" will increasingly become one of two ways to the top, rather than the only way, as it effectively is today.

Clients

Clients expectations of customer service and project management will probably increase.

Global players tend to present clients with very slick, well thought-out presentations that argue for a comprehensive, value-driven, methodical and disciplined approach to branding and design solutions. The global players will also be able to cite overseas examples within "their" portfolio, and even organize a "fly-in" of an expert in a given topic.

Relative to a smaller, less well-organised studio, the big-company approach could be very reassuring and even gratifying. Think about how much better (and safer) a client manager might feel in announcing to her fellow executives that she has chosen a global branding company for the business or flagship product.

Even if the global players are not able to deliver on these claims every time, they will nevertheless progressively reset clients' expectations of any design firm claiming to target their business.

Pricing

Clients are likely to be surprised by how much higher the fees are for the level of service provided by global players. For example, during a visual consultancy selection process in London in early 2001, the difference between a global branding agency, a regional player and a purely local agency was 6 to 1. That's right - the global agency quoted fees that were six times higher than the other two proposals!

However, as we all know from our own holiday planning, the "rack rate" for design services is not the only aspect of pricing that drives the real and perceived final fee. Other contributing factors include additional services (eg. brand consulting), production commissions and free pitching.

I suspect that the large players may use some form of selective discounting to build up market share in sectors or clients that they decide to target. That discounting could be in the form of free pitching or providing free consulting resources to assist clients in identifying the specific issues that need fixing and in developing a tight brief. Having said that, it would be grossly unfair to focus on just global players for these sins - any mid-sized or larger studio has to deal with the same temptations.

Impact on local players - next article!

Rather than drag on here, it might be a good time to pause for thought. In the next article, I plan to lay out some scenarios and then work through some implications and options for local players.

Cheers!

"Yo Andrew,

Good to have dialogue on this interesting subject. Some thoughts on article:

1. The difficulty with commentary on this subject is that you have to account for fiercely held old thought paradigms in the raw emerging landscape. Traditional good design will always be appreciated, however the new genre of communication and customer messaging is way beyond that niche. The scary thing is that its continually evolving (fast!) and new media channels, means that there are many more exciting and challenging ways to communicate to the audience.

2. In my view, the biggest value add that the global opportunities provide are:
   • Intellectual property and access to knowledge
   • Business opportunity through cross-sell
   • Culture interface (people can travel globally interoffice)
   • Opportunities to be ahead of and influence, global trends etc, through dialogue and client into share
   • Creative excellence in regards to quality of people and ideas generated
   • The right to "sit at the table" with the client because of the power of information that can be accessed
   • Putting a $ value on what we do and rewarding success.
   • Reinforce a business attitude to creative work vs the lifestyle approach.

3. Many people think that big means being blunt. In my view the reverse is true. The competition to succeed within the group, to achieve the business expectations and to be creatively challenged 24/7 to deliver individual and collective potential means you have to be very focused.

4. I don't think it can be simplified into "a good or bad thing" for global firms to enter Australia. This is just a symptom of a whole lot of change. It represents a greater emphasis on the value that the creative process and ideas has for business and society at large and that surely is a good thing.

5. It appears that you did not seek comment from those Australian firms that are negotiating the new communication landscape. This might have helped take the guess work out of some of your comments.

6. Interbrand is owned by Omnicom who also, via Clemenger Advertising, own Emery Vincent. IPG owns the global consultancy FutureBrand which FHA sold up into in 2001

7. Finally, we embarked on the global alignment trail 3 years ago because our people wanted to be part of something bigger than we could create ourselves - given our own limited financial resources and the small size of the Australian marketplace. We actively checked out the best global fit, that worked best for our collective vision. I think if you asked our people you would find that they all think it has been a good journey to embark upon.

Thanks for the opportunity to share my top line thoughts

Regards

Richard Henderson
Creative Director, Australia
FutureBrand"

"Andrew,

Enjoyed the article very much especially since being involved in some of the mergers. We share the same views in many of your guesses."

"Andrew, good topic, look forward ot the next installment. My issue is that the mergers may have occurred but the delivery to clients at local level is not commensurate with the global pitch presented. Fly in execs are just that, 'fly in and fly out'. A recent client experience with one of the 'globals' was a very costly but poor project (we are talking strategy here not visual) with shallow thinking. This client admitted to me that he went for the global name. He said if there is a next time he will insist on global talent and not the locals or at least a more strategy experienced global person partnering with the locals. He is very bitter about his experience. I suspect he is not an isolated case."

"Lampo,
A very interesting read old boy. You struck a few chords. Look forward to the next article. Sounds like we had better go looking for a cave! You make it sound like USA vs Taliban.
Waka"

"Hi Andrew,

Interesting article. Certainly one of the key issues as we move forward. The free pitching and consultation is a concern as either of these tactics really devalues the good work that has been done on a local level. Look forward to your follow up article.

Cheers

Ashley Durrans, Nova Design Associates"

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andrew@lam-po-tangcom