Creative Business newsletter

CREATING BUSINESS STANDARDS FOR CREATIVE SERVICES BUSINESSES

INSIDE: STAYING AHEAD OF BUSINESS WHAT’S YOUR JOB WORTH? WHAT STAGE ARE YOU AT? CANCELLATION FEES BUSINESS ADVICE

www.creativebusiness.com SEPTEMBER/OCTOBER 2009

VOLUME 21/NUMBER 7

EDITOR’S COMMENTS:

LOOKING BACK OVER TWENTY YEARS The issue in your hands, our 191st, marks the 20th anniversary of the Creative Business newsletter.

Although this has more significance to me than you, the way things have changed, and are still changing, makes the occasion worthy of comment.

Back in 1989, creative services was just beginning a transformation that continues to today and beyond. Prior to that, talent and ambition were pretty much all that was required to establish and run a successful firm. Then, seemingly overnight, they were no longer enough. Now, also required, for both single- and multi-person firms, was capital (to purchase technological equipment), marketing (to maintain cash flow), and management skills (to ensure both viability and enjoyment).

CB was founded because there was no other source dedicated to publishing the industry metrics and best practices needed to successfully navigate this new landscape.

In order to provide information that was both authoritative and realworld, we devised a unique publishing model

based on reader feedback.

By offering subscribers free business advice, we would not only keep focused on what was important, but also be constantly updated on real-world conditions.

Over the years, the Creative Business brand grew to encompass seminars and roundtables, downloadable articles and forms, a .pdf edition, videos, CDs, and the industry’s two best-selling business books, including a brand-new edition of the standard-setting “Creative Business Guide to Running a Graphic Design Business” (see the back cover).

It is with some pride that I can look back on all this and truthfully say that CB has done more to establish business standards for the creative services industry than any other organization.

But I also say this with humility, because we’ve provided only the media.

The information itself comes from you, our subscribers, many of whom have been with us most of the way.

Thanks.

Looking back like this gives me a perfect segue to introduce you to our latest foray, the CB-sponsored “Graphic Design Business” group at www.LinkedIn. com. (To locate it, search under the name at “Search Groups.”)

LinkedIn.com provides what appears to be an ideal medium for networking and connecting to others with similar business interests. Also, a forum for asking business questions

of your fellow subscribers as well as others. If you haven’t already, I encourage you to sign up. Tell your colleagues, too. It’s free.

We will, of course, continue to offer subscribers free, personal business advice, by e-mail or phone. LinkedIn is just an additional resource.

Turning now to this issue, the lead article, “Staying Ahead as Your Business Evolves,” beginning opposite, addresses two areas lately of much concern.

The first section provides a way to figure just how much being selfemployed is really worth —both financially and in lifestyle. The second section will help you better understand the typical progression of creative firms, and what you can do to keep yours fresh and viable through ups and downs.

Finally, returning to the subject of anniversaries, it happens that our tenth year, 1999, was also a time of economic downturn. One of the articles we ran back then, “Project Cancelled. How Much to Charge?,” turns out to be timely once again. So we’ve brought it up-todate. It begins on page 7.

IN THIS ISSUE: STAYING AHEAD . . . . . 1 Self-employment value 2 Business stages . . . . . 4 CANCELLATION FEES

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ADVICE . . . . . . . . . . . . 10

Creative Business is published nine times yearly; six regular bimonthly and three special report issues. Editorial content is directed to company principals and self-employed creative individuals working within the communications business.

Editor: Cameron S. Foote.

Circulation: Lee Straube.

Publisher: David Lizotte.

Design: David Lizotte.

Illustration: Mark Bellerose.

Editorial office: 101 Tremont Street, Suite 300, Boston, MA 02108. Telephone: 1-617-4510041. Fax: 1-617-338-6570. email: mail@creativebusiness.com.

Web site:www.creativebusiness. com.

New print subscriptions $159; renewals $149. Canadian and overseas print subscriptions $169 U.S. funds (renewals $159). New electronic subscriptions (PDF format) $149, renewals $139, sent anywhere in the world by e-mail.

ISSN: 1073-8444.

September/October 2009, Volume 21 Number 7. Copyright ©2009 Staysail Enterprises Limited. All rights reserved.

Reproduction in whole or in part is prohibited without written authorization. Printed in USA on recycled paper using soy-based inks.

Creative Business is intended to provide timely and accurate information on subjects covered.

The publisher, editor, and staff are not engaged in rendering legal, accounting, or other professional services and assume no liability for errors or the ways in which information is used.

Creative Business—September/October 2009

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LONG-TERM SUCCESS:

STAYING AHEAD AS YOUR BUSINESS EVOLVES

s a subscriber to this publication, we can assume you’re self-employed—either working independently or as the principal of a multi-person firm.

Being your own boss could be the fulfillment of a desire to work alone, to do your own thing. Or perhaps the motivation is the opportunity to build your own business and control your future. Or self-employment might have come about unpredictably through an agency layoff, corporate downsizing, or a personal situation.

Whatever the reason(s), selfemployment provides a degree of creative and economic freedom seldom available working for someone else. Yet, as we all

know, things aren’t quite that simple. There are also other factors that need to be considered.

And when business tanks, as it has recently for many, these factors generate much introspection. How do I, and my business, compare?

The first section of this article, starting overleaf, is about evaluating your salary and perks. When you work for yourself, your paycheck is an imperfect indicator of what you’re actually making.

In addition to what you take home, there are benefits, primarily tax breaks, that effectively raise your salary. On the other hand, there are conditions, such as stress and burnout, that can make those salary dollars very hard earned.

Since everyone is different, we can’t tell you how things break out for you. But we can show you how to roughly calculate the many factors, both

financial and lifestyle, that affect the true value of being selfemployed.

The second section, starting on page 4, is about where your firm is now, and where it might be headed. It theorizes that creative firms fall into one of three categories: immature, in-thegroove, or over-the-hill.

Size and age have little to do with this. Rather, a firm’s stage is determined by the way it responds to everyday challenges and opportunities. Some never move beyond immature because they don’t operate as businesses.

Others are over-the-hill from the get go because they never adapt proven business practices. Only those that find the grove have viable, stable, and successful businesses.

How to recognize each of these conditions is explained, along with suggestions for change where needed.

Read on. >>>>

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EVALUATING LIFESTYLE ISSUES:

RECOGNIZING THE TRUE VALUE OF WORKING FOR YOURSELF

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ince you know how much money you take out of your firm each year in salary and profit, it’s easy to compare it to what others are making. All you have do is look up representative salaries for your experience and region. The best source for this is the free web site www. designsalaries.com.

There’s more, though, to selfemployment than a paycheck.

How do you calculate how much the financial perks and lifestyle benefits you also enjoy are worth? Or the cost of the income fluctuations and owner’s responsibilities you dislike? How much do they add or subtract to the attraction of having your own business?

Then, too, how do you put a value on freedom? Or is worrying about finding work, dealing with clients, and sweating a paycheck (or a payroll) really “freedom” at all? Where does it all shake out?

Having a feeling for the largely intangible factors that affect personal well-being is important in its own right. It provides a more nuanced and balanced view of one’s career path than just earnings. After all, few of us work for money alone.

And there are practical reasons as well to weigh all the pros and cons of self-employment. What if you were to change career paths? How much would you be giving up? Or what if someone was to offer you an attractive job? How much salary would you need to equal or exceed what you’re now taking home? Working for someone else might mean immediate saving on some essentials (e.g., health insurance), but would probably mean losing some year-end tax advantages (e.g., “business” expenses).

Because we all hold different things to be important, there is

actually no quantifiable, totally objective way to put an accurate number on the myriad factors that affect the true value of selfemployment. But that doesn’t mean that you can’t make a reasonably informed judgment.

Here’s how to do it, using the form opposite.

INCOME Start by filling in the amount of your yearly before-tax salary— what you pay yourself. Then put down all your non-salary income. This is any other money (disbursements) you take out of the firm during the year. Add it up.

TAX-ADVANTAGED PERKS Enter the yearly amount paid for each of the tax-deductible perks you monetarily and legitimately benefit from. For instance, personal health insurance premiums paid by your firm.

In addition, estimate yearly amounts for those activities and items that you personally benefit from but that you report as business expenses. For instance, taking a spouse out to dinner and calling it a client meeting, or purchasing something for personal use with company funds.

Put down what you actually do, even though you shouldn’t.

Don’t, though, put down legitimate business expenses, such as travel, unless you enjoy and personally benefit from them.

Now, add up the spending on all these perks and multiply the total by .40, a rough approximation of the after-tax savings (40%) you’re getting by paying for these activities and items with before-tax company funds.

The resulting Adjusted Tax Advantage, added to the previously arrived at Total Income, produces your Total Adjusted Income, the direct monetary benefits of being self-employed.

NONFINANCIAL FACTORS These are the other things that add to or subtract value from self-employment. From the list below, select what best describes you. Then enter the appropriate multiplier in the form opposite.

Financial security. How much is this a concern?

Little concern Somewhat worrisome I feel very insecure

.10 .00 –.10

Opportunities. How do you feel about the long-term?

Mostly optimistic Could always improve Mostly pessimistic

.15 .05 –.15

Diversity. It leads to stability with clients and projects. Your firm is: Very diversified Could be more so Not very diversified

.15 .05 –.15

Stimulation. It’s what makes you get out of bed each morning. Your work hours are: Mostly stimulating Somewhat stimulating Not very stimulating

.20 .10 –.15

Responsibilities. Whatever yours are now, if you could you would: Keep things the same .10 Give up some but not all .00 Be happy to give all up –.10

Staff (if applicable). How do you feel about management responsibility specifically?

I dread it I do what I must do I enjoy it

.15 –.05 –.15

Burnout. It’s a threat to longterm health, success, and business viability.

I’m not that stressed out .10 I’m tired of the same old –.05 I need a change badly –.15

Clients. How to you feel about yours?

They’re all great Mostly good More bad than good

.15 .10 –.10

Wildcard 1. Whatever else you particularly like about selfemployment, it is: Very important Moderately important Minimally important

.10 .05 .00

Very important Moderately important Minimally important

–.10 –.05 .00

Lifestyle. All things considered, do you think self-employment offers a good one?

Definitely Somewhat Usually not

.20 .10 –.20

Once you have written down all the multipliers, average them out. Then multiply that average times your Total Adjusted Income.

Finally, add the Total Adjusted Income and the Addition to Adjusted Income to get an approximation of the value of being self-employed. We’ll call it your Comparison Income.

THE BOTTOM LINE Being aware of your Comparison Income is useful for several reasons. First is to satisfy curiosity and to boost self-esteem—when all things are considered, you are probably better off than you thought. Motivation is enhanced when there’s a better appreciation of the full extent of rewards.

Second is because what you get in both financial and lifestyle benefits from year-to-year is probably all your firm will ever produce. Most small to mid-size creative firms do not acquire any market value. So unless your firm is of adequate size, and is professionally managed and structured, there is little chance it will be sold off in the future.

In short, chances are there will be no back-end payout.

Third is that finding your Comparison Income can help you evaluate an offer to leave the world of self-employment and work for someone else.

Filling in the blanks opposite, then comparing the difference between what you have and what you could have will give you a good indication of when it might be in your best interests to pack it up and move on.

Creative Business—September/October 2009

Wildcard 2. Whatever else you particularly dislike about self-employment, it is:

CREATIVE BUSINESS’ SELF-EMPLOYMENT VALUE CALCULATOR Income: Salary Profit Undistributed corporate income Retirement fund contributions Bonus _________________________ _________________________ Total Income

$_________ $_________ $_________ $_________ $_________ $_________ $_________ $_________

Tax-advantaged perks: _________________________ _________________________ _________________________ _________________________ _________________________ Total Multiply (probable tax savings) Adjusted Tax Advantage Total Adjusted Income

$_________ $_________ $_________ $_________ $_________ $_________ x.40 $_________ $_________

Non-financial factors: Financial security Opportunities Diversity Stimulation Responsibilities Staff responsibilities Burnout Clients Wildcard 1 Wildcard 2 Lifestyle Multiply average by Total Adjusted Addition to Adjusted Income Comparison Income

.______ .______ .______ .______ .______ .______ .______ .______ .______ .______ .______ Income

._________ $_________ $_________

___________________ COMPARING AN Financial: Salary offered Insurance contributions Retirement fund contributions Bonus potential _______________________ _______________________

EMPLOYMENT OFFER $_________ $_________ $_________ $_________ $_________ $_________ $_________

Total Financial Package Costs of change: Non-cancelable leases Additional commuting _______________________ _______________________ _______________________ Total Costs of Change Total Employment Offer

$_________

$_________ $_________ $_________ $_________ $_________ —$_________ $_________

Difference between self-employment and employment offer

$_________

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EVALUATING BUSINESS PROGRESS:

UNDERSTANDING THE WAY THE COSTS AND BENEFITS CREATIVE BUSINESSES EVOLVE OF BEING SELF-EMPLOYED

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ll businesses, regardless of type or specialty, evolve over time. Given their nature, however, creative businesses typically change more abruptly. A new firm can suddenly become very businesslike when a novice owner figures out the ways of commerce. And a successful firm can go downhill quickly should an owner lose her or his creative spark and enthusiasm.

THREE BUSINESS STAGES Creative firms typically fall into one of three stages—immature, in-the-groove, and over-the-hill.

These stages don’t necessarily follow in order. They aren’t dictated by age, size, or specialty.

And what type of business or specialty a firm pursues is immaterial. The only thing they have in common is that they are in the creative services business.

A creative firm’s stage is determined by its procedures, and how it responds to everyday challenges and opportunities.

As examples: some new single-person firms immediately take on all the damaging characteristics that mark them as being Stage Three (over-the-hill) businesses; some multi-person firms have all the hindering characteristics of a Stage One (immature) business; and there are firms of all sizes and age that are successful Stage Two (in-thegroove) businesses.

STAGE ONE: IMMATURE

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Although age does not determine which stage a business occupies, most creative firms in business fewer than five years are Stage One organizations.

This is because they have not yet acquired the maturity—wisdom, judgement, and procedures—that are essential components of organizations that have long-term viability. It may, or

may not come in time, but for Stage One companies it is not here today.

The positive side. By itself, immaturity is not bad. In fact, there are many desirable characteristics of a Stage One business.

Perhaps most important is the joy of being one’s own boss that permeates many. This is a freedom envied by most of the rest of the world, and one often taken for granted, especially later on.

Also common is the enthusiasm and willingness to experiment that often results in unusually fresh and innovative ideas.

Then, too, naiveté and a lack of negative experiences can lead to opportunities that more seasoned firms overlook. And for smaller Stage One firms, size can allow flexibility in all aspects of operation—pricing to personnel.

The negative side. There are, however, more than enough negatives in Stage One businesses to outweigh the above positives. All Stage One business suffer from one or more of the following: Most common among young firms, especially single person ones, is going into business without enough forethought or preparation. This can be seen in a lack of adequate capital… not considering “the freelancer’s malady” (loneliness)… inadequate personal and business insurance… poor working habits… the absence of business procedures… and ill-advised partnering or other arrangements.

Common negatives shared by Stage One firms of all sizes include: having one or two dominant clients… inadequate marketing efforts… lack of longterm thinking or planning… not knowing one’s costs of doing business… charging too little… not investing in the business’ future… poor organizational

skills… arbitrary personnel management… constantly operating in a “crisis” mode.

If some of the above describes your company, it is more than likely still at Stage One, regardless of any other indications of success, such as current profitability. Business stages are simply an indication of long-term viability, not present conditions.

Typical progress. Because every creative firm is a combination of different talents and experiences in different markets and clients, it is tough to predict when a firm should be able to leave Stage One behind. Some new firms manage to move through it in a few years, or even months. Some others, a decade old and still hanging in there, never quite acquire the skills needed.

As a general rule, Creative Business believes that most firms should move beyond Stage One within five years. If your firm is younger, and you’ve been eliminating the negatives as you gain maturity and experience, don’t worry. But also don’t relax.

The important thing is to recognize the negatives that could mire your business at Stage One, and work to eliminate them.

Further, to do so without losing any of the positive Stage One attributes, such as freshness and enthusiasm.

STAGE TWO: IN-THE-GROOVE Despite its size or age, this is where a creative firm should be—a place that’s fun, creative, and stable, although never one of total comfort. Few Stage Two firms possess all the characteristics outlined below, but they do have enough of them to make work life both pleasant and routine.

A combination of personal rewards, enjoyment, and business stability is the secret to long-term viability.

Workflow. Maintaining two to four or more weeks of work in the pipeline is their highest

ing for someone else, and comparable to what other business professionals with equal responsibilities make. More, and there should be, is year-end profit.

Enjoyment. This is the bottom line because running a creative business is tough without it. Indeed, as will be seen below, the loss of enjoyment is often the first indication that a business has moved on to Stage Three.

STAGE THREE: OVER-THE-HILL Stage Three creative firms are best described as being tired.

make an attitude adjustment before it is too late.

Burnout. Every principal’s tolerance level is different; one individual’s killer workload is merely stimulating to another.

But we all recognize burnout— too much work, too little pleasure, for too long. When this type of pressure continues, month after month, it’s a sure sign of a Stage Three company.

Too much experience?

Having lots of it should be positive: it enhances client comfort and reduces the time needed to “get up to speed.” But for Stage

Creative Business—September/October 2009

priority. Their secret? Nothing more profound than consistent, amply-funded marketing.

Cash flow. They recognize that it’s as important in the short-term as profit is in the long-term. They typically generate it through realistic pricing, progress payments, aggressively managing payables and receivables, and keeping an average of approximately 10% of AGI (income excluding passthroughs) available as working capital.

Pricing. It is based on the costs of doing business, not arbitrary “what the traffic will bear” guesstimates. Prices are adjusted up or down depending on individual job circumstances, but the starting point is always “our costs plus a fair profit.”

Diversity. The greater the number and variety of clients, the more protection there will be against client cutbacks and industry slumps. Same with projects: the more types handled, the greater the insulation against seasonal and industry cycles.

Talent. It is nurtured because it determines the quality of the product, and the quality of the product determines the quality of clients and projects. The ageold formula: provide a stimulating environment, look for diversity, hire the only best, encourage experimentation, and reward amply.

Management. Best described as consistent, predictable, and seldom arbitrary. Everyday procedures are routine.

Performance indices and business ratios are monitored.

There’s a willingness to invest in the future. And there’s some form of planning.

Perspective. Principals realize that to be a totally mature business is to be dying one. So they stay young by constantly redefining what they offer, how they offer it, and whom they offer it to.

Profitability. Principals’ salaries are slightly greater than what they would draw if work-

Stage One firms are still immature. Stage Three are tired and over-the-hill.

They are on the downward slope, whether they recognize it or not. Sales, clients, profit, etc., can all look relatively good because they lag behind the real problems.

The problems of Stage Three firms are attitude and flexibility.

As might be expected, more older firms fall into this category than younger ones. Half or more of all shops over ten years old qualify. But, again, all ages and sizes can fall into this category.

Resenting clients. This is the most telling characteristic of a Stage Three firm: more than occasionally resenting the demands of its clients. Not every client should provide a pleasant (or neutral) experience. But when many don’t, something is wrong.

Creative firms are service businesses, and providing good service requires mutual respect.

You don’t have to respect all your clients, but you do have to respect most. When you believe that more than an occasional client makes dumb demands, wastes your time, or can’t recognize your talents, you need to find new ones. Or more likely,

Three firms it often results in a “been there, done that” weariness. This exhibits itself as a lack of originality, general ennui, and a paternalistic and patronizing attitude toward client requests.

“Can’t do” versus “can do.”

The essence of a successful creative business is its ability to problem-solve. Often, this means exploring the unfamiliar. Stage Three firms approach problems from a narrow viewpoint that limits their solutions to what they want to do, or what they find comfortable. They dismiss other approaches as too difficult, impractical, or a waste of time.

Wrong size. Growth and size are not essential to economic viability. Creative firms enter Stage Three whenever they exceed the interests and capabilities of their principals. Most problematic is the transition from small shop (2/5 employees) to mid-size shop (6/11 employees). It usually requires new procedures and a new way of looking at business.

Not investing. The need to constantly invest in new equipment, procedures, and opportu-

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nities has long been taken for granted in other industries. It is a new phenomenon among creative firms, and lacking among those in Stage Three. We are in an industry that is being constantly transformed by new technologies. Not to keep up is to guarantee decline.

OTHER CONSIDERATIONS It should be apparent from the preceding that there are some elements of each of the three stages within every creative organization. So what matters is overall performance. It is

ee stress and low morale), or operating procedures that are too relaxed (it usually results in loss of billable time and missed opportunities). A very strong company culture is often (albeit not always) detrimental to business.

Age. That of the principals has an effect. Younger creatives typically have more energy, willingness to experiment and appreciation of current trends, but this is often offset by lack of experience and the judgment that accompanies it. Older creatives typically possess the effi-

The ideal for most firms is to get to, and remain within, Stage Two, in-the-groove.

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formed by hundreds of individual, daily actions. Each of these can be defined, analyzed, and modified as a business evolves or grows.

In addition, there are also several other factors, not as readily recognized or addressed, that can affect business stages.

Culture. Every organization has one. With smaller entrepreneurial companies, it is initially an extension of the founder’s personality. For example, a company begun by a fast-paced individual likely operates in overdrive; one formed by a laidback individual probably runs at a relaxed pace.

Modifying the culture of a creative firm is particularly hard because of the personal relationship most principals have with their businesses.

Nonetheless, most successful, Stage Two firms have evolved a culture that is usually described as middle of the road: businesslike, friendly, efficient, and professional. In other words, they have overcome such business-damaging personality traits as always running at a frenetic pace (it usually leads to employ-

ciency and wisdom that comes from experience, but usually are less energetic, and less in touch with trends.

The absence of family and other obligations among younger creatives encourages more freedom of action; accumulation of responsibilities among older creatives encourages more deliberation.

Because of these and other age-related factors, it is the experience of Creative Business that the age range of principals at successful, Stage Two creative firms is normally from 30 to 45.

Stage Two principals who are younger have an unusually mature business sense; those who are older have learned the lessons of business survival very well.

Clients. Those with styleand trend-driven assignments often prefer younger firms; those with market- and strategy-driven assignments, more experienced firms. Significantly, the most profitable work, the work that is the bread and butter of Stage Two firms, usually comes from corporate clients who are also somewhat middle-of-the-road

and only occasionally style- and trend-obsessed.

WHAT TO DO ABOUT IT? There is, of course, much subjectivity in evaluating which stage a business is at. Many of us looking at our own businesses will give ourselves the benefit of any doubts. On the other hand, creatives tend to be insecure individuals, which negatively affects some self-evaluations.

Perhaps the single, best test is the simplest one: if your business is not routine and enjoyable, it is probably at Stages One or Three. If you can describe your business as “comfortable but not complacent” it is probably at Stage Two. In making your own evaluation, keep in mind that the stage of a business is not as important as the recognition that three business stages exist, and that most firms experience each one at some point. Moreover, that the long-term (many years, if not indefinite) success of a firm requires it to maintain most of the attributes of Stage Two. If your firm is not there today, it should be on its way (Stage One), or on its way back (Stage Three).

If you find your business at Stages One or Three, and you enjoy most of the benefits of being self employed, set objectives for changing its negative aspects without giving up its positive ones. All this usually takes is recognition, and the willpower to make changes.

If, on the other hand, achieving the business objectives you set appears impossible or doubtful within a few years, seriously consider whether running your own business is in your longterm best interest. Do some brainstorming to decide what your personal (lifestyle) objectives are. Then examine your options. Finally, start planning the steps now that will allow you to achieve them.

CB

ow much should you bill when a client cancels a job before completion?

Or when you can’t come up with anything they like? It’s a situation that can put firms and their clients at loggerheads.

Many times unnecessarily, too.

The problem is often the arbitrary application of cancellation or kill fees. Such fees have a long tradition, dating back to the days when commercial creativity was less of a business, more of a craft. Projects were focused around the delivery of pleasing art instead of effective communications. Concepts were often requested by clients without a clear idea of what they had in mind. And prices were fixed up front. Kill (or when appropriate, rejection) fees were a logical reaction.

Although some of this undoubtedly sounds familiar today, the creative services business has evolved.

CURRENT PRACTICES One of the strongest proponents over the years of maintaining arbitrary kill fees has been the Graphic Artist Guild (GAG).

For jobs cancelled prior to delivery of a concept, their “Pricing and Ethical Guidelines” (PEG) book reports that illustrators charge on average 25% of the original fee, graphic designers 40%. After completion of preliminary work, they report an average of 50% for illustrators, and 80% for designers. After completion of finished art, the figure jumps to 100% of the original fee for designers.

PROJECT CANCELLED. HOW MUCH TO CHARGE? While many single- and multiperson firms do assess arbitrary kill fees (sometimes called “up charges”), our experience is that it is a dying practice that’s no longer anywhere near as prevalent as PEG would indicate.

Whichever the case, except in a few specific situations (see “Exceptions” on page 9), Creative Business believes that such fees are ill advised and detrimental to the long-term interests of most firms. To see why, let’s take a look at a typical situation.

A CLIENT’S PERSPECTIVE After reviewing the portfolio of several firms, yours was hired to produce packaging for a new product. It was a rush project because the product was already in beta testing and would be rolled out within months.

Your estimate was $15,000, payable in two $5,000 progress payments with the balance payable upon completion.

A week into the project, and after the first progress payment had been made, the beta test results came in. The product was bombing. Badly. So the client decided to pull it, do some reengineering, and delay the introduction timetable by a year.

You had attended three allmorning input meetings, but had shown nothing tangible.

The client asks for you to return the $5,000 progress payment minus a fee for the three meetings. Their reasoning is simply that they should pay only for work you actually did.

Cancellation of the project was due to marketplace forces that were beyond their control. Sorry, they say. Maybe next year.

YOUR PERSPECTIVE Wait a minute, you think. You didn’t take this job with an understanding that it was condi-

tional upon the results of a beta test. You don’t expect to get the other two thirds of your estimate. But you also don’t think it’s fair to give back the $5,000 deposit minus a charge for the meeting time.

You’ve already put a lot more time into the project than just the meetings. You’ve done some research, and have started thinking about concepts. That there’s nothing to show is because much of the up-front creative work on a project is never tangible.

You also set time aside in your schedule to ensure that you could meet the client’s deadline.

Now you have nothing to fill it with because it’s difficult to find significant projects so quickly. To make matters worse, even though you don’t admit it, you bid low because you considered the project a portfolio piece that would lead to follow-on work.

You could have gone after other, more profitable work instead.

Then, too, the product bombing is hardly your fault. And for the client to blame it on forces beyond their control is nonsense. It was readily apparent to you in the very first meeting that it was poorly engineered.

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INVOICING STANDARDS:

THE CONFLICT It should be apparent from this all-too-typical scenario that this type of situation is rife for misunderstandings. The client thinks they should only pay for what they believe they actually got— your attendance at meetings; you think they should also pay for intangibles—your thinking time and commitment.

What should also be clear is that an arbitrary kill fee, such as the 40% reported as typical by PEG in such cases, would appear outrageous to clients under these circumstances. Most

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would never sign an estimate or proposal with such a condition in it in the first place. And those that might do so inadvertently would be mighty upset if you tried to enforce it. Putting an arbitrary kill fee in the estimate or proposal for most design, advertising, interactive, PR, or editorial projects is a good way to sour a client relationship.

Attempting to keep the “unused” portion of a progress payment could lead to a lawsuit.

the meetings. To make this clear, we’d go over the creative process and how up-front activity saves money in the long run by eliminating inappropriate direction before it goes too far.

We’d also state that it was unfortunate that in this case this work ended up increasing the bill, but that couldn’t be anticipated. All cancelled projects have unanticipated expenses.

After this we’d bring up the fact that we’d also reserved time

The phrase “kill fee” is outmoded and offensive to many clients.

Even if resolved in your favor, the cost of fighting it in court would probably be more than winning would be worth.

Finally, not happily acquiescing to the client’s desires (return all of the progress payment minus a charge for meetings) will jeopardize any chance at either continuing on this job later. Or of getting other work from them.

WHAT TO DO?

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The best solution to problems of this nature is to expect them, and come up with a policy before they become issues. If logical and explained to clients up front, a standard procedure should drastically reduce any later conflicts.

But first, back to the situation at hand. In this instance, we would state our disappointment that the project was cancelled, our desire to continue to work on it in the future, and that we will, of course, return their progress payment minus a fee for the work actually performed.

We’d then explain that the fee for work performed may be somewhat higher than expected because it needs to include the time invested in research and conceptual thinking as well as

for the project on our schedule, and it was now too late to fill it with other work. If the client appeared sympathetic, we’d ask if it would be appropriate to invoice them for several (never all) of the “reserved” days. If they didn’t appear sympathetic, we’d mention it as a cost of doing business that we’d absorb, in the same way that the cancellation is forcing them to absorb losses.

Note that we would never mention kill or cancellation fees.

WHAT ABOUT REJECTION FEES? Now let’s look at another possibility: you can’t satisfy a client.

Your concepts are rejected, and you mutually agree that your involvement should be terminated. How much should you charge?

Ideally, all the time you’ve put into the job. Reality, however, often dictates that the ideal is not possible when a client is really unhappy. In these situations, it is better to compromise, accept half a loaf, than to risk ending up in a no-win legal confrontation. So whatever the real cause, say that given the unfortunate way the project turned out, you’ll only be invoicing them for half the time you

put into it. (Of course, only you know how much this was.)

Graciously thank them for the opportunity, assist them in finding someone else, and apologize for the way things turned out. If the project was sufficiently advanced, offer to turn over any sketches, drafts, or computer files upon payment.

If they object, or offer to pay less, stress the financial sacrifice you’ve made, and their ethical obligation for at least this amount. Add that you will seek legal counsel if necessary.

Eating a little crow (an ego hit) and compromising a little on billing (a financial hit) will hurt.

So will turning over some of your work. Even so, this will probably be a small price to pay for getting out of a bad situation.

COMMERCIAL REALITIES Always try to get as much money out of a terminated project as possible. But also temper your desires with commercial reality. Being unrealistic can cause the hardening of a client’s attitude, not to mention damaging your firm’s reputation.

One universal reality of every business is that not everything works out the way it is supposed to. For whatever reason, preventable or non-preventable, many attempts never go the full distance. When this happens, those involved very often take a bath. It’s life in the business world.

Another universal business reality is that when things don’t work out, you can’t expect to be bailed out, even by whomever caused the problem. It’s a cost of doing business.

The very nature of the creative process is that much of the work we do is tangible only in its advanced stages. In addition, much of the profit for the projects comes in their latter stages.

And, of course, our work is subjectively evaluated. So whenever a project is canceled, we are likely to take a financial hit. This

OUR RECOMMENDATIONS Given all the above, we recommend adopting a standard procedure for handling the billing of cancelled projects. Here is how we would put it in most of our proposals or letters of agreement: “Cancellation. In the event of your cancellation of this project, or any delay of more than two months, we will invoice you for the greater of either: 1) all work completed up to the date of written notification, including expenses; or 2) the amount of any advance deposit made for this project. All work will remain our property, but will be available if the project should be resumed at a later time.”

By adopting this standard, along with the industry norm of getting 1/3 of the estimate at acceptance, 1/3 at first creative submission, and the balance upon completion, clients will be contractually obligated to pay at least one third of the estimate as a de facto cancellation fee.

Given the fact, however, that clients don’t necessarily read

everything that’s in a proposal, we also recommend that it be mentioned when discussing the assignment. The proper way is in the context of the commitments you will be making.

For example: “We’ll be starting to work on this right away, even though you won’t be seeing anything for a couple weeks. In the meantime, we’ll be doing our up-front thinking, making commitments, and reserving time to make sure that everything runs

advertising, PR, interactive, and editorial projects. We would, however, make an exception for the more purely artistic, “commission” work of illustrators and photographers.

Illustration and photography assignments are more likely to be taken on a fixed-fee payment basis. The creative process is more intense and less drawn out, which makes changes in scheduling more difficult to accommodate. For photography

Creative Business—September/October 2009

is unfortunate. But it is also reality.

Think of it this way: One of the costs of doing business for retailers is shrinkage (stealing); for grocery stores it is perishability (spoilage); for recording and software firms it is unauthorized duplication (piracy); for direct merchants it is restocking (returns). For us, it is absorbing the costs of our not-billable time when projects die.

We should, of course, do everything we can to hold notbillable time to a minimum. But we also have to realize that the only real protection to our bottom line is to recognize that it will occasionally happen. Then, recognizing this, to make sure that our pricing structure takes into account that some “billable” hours we are counting on, probably won’t be. Also, to be well enough capitalized to afford taking an occasional hit.

Always include in proposals what happens should a project be cancelled. smoothly. This will use up all of the first third of the estimate that you’re providing as a progress payment.”

For smaller jobs, or any situation with no progress billing, we’d put the following in our proposals or letters of agreement: “Cancellation. In the event of your cancellation of this project, or any delay of more than two months, we will invoice you for the greater of either: 1) all work completed up to the date of written notification, including expenses; or 2) our project minimum charge, which is (number of days/hours) work, or ($). All work completed will remain our property, but will be available if the project should be resumed at a later time.”

We would also take care to explain it using more or less the same rationale as above. (For more, see this issue’s Management Benchmark on page 11, and download “Should I Have a Minimum Fee?” available free at: www.creative business.com/forms.lasso.)

especially, there are often substantial arrangements—studio time, locations, props, models, travel, etc.—that must be made well in advance. And, not at all least, the more artistic nature of the activity makes cancellation fees more readily acceptable to the client.

For illustration, we suggest the following: “Cancellation. In the event of your cancellation of this project, or any delay of more than one month, we will invoice you for the greater of either: 1) work completed up to the date of written notification, including expenses; or 2) 25% of the amount if before submission of the first sketch or 50% if after the first sketch. All work completed will remain our property, but will be available if the project should be resumed later.”

For photography we suggest the same, except a fee of at least 50% of the estimate, regardless of when cancelled, plus any expenses and irrevocable commitments.

EXCEPTIONS We believe that the preceding approaches are the right ones today for nearly all design,

CB

9

Advice Creative Business—September/October 2009

LOGO MODIFICATIONS… WORK HOURS… MEETING ESTIMATES… INTERACTIVE STRATEGY… EMPLOYEE SAMPLES… PAYMENT SHORTFALL… $ VALUE OF CLIENTS

10

whether or not it has been registered.

Registration is not required for ownership.

Use in a commercial environment is enough.

Registration is primarily a way to prove first use in the event of similar claims, and to protect against using a mark so similar to others that it might lead to expensive litigation.

Since your patterns will be modifying the client’s property, and you are being paid to do so, it would seem to follow that whatever you produce will be owned by them.

You can charge for the time involved in preparing each pattern or a flat rate, whichever you feel is appropriate.

Alternatively, it might be possible to draw up an agreement whereby the First, the client’s exist- logo with your pattern(s) ing logo is their property, is restricted to certain uses, and you are paid a fee for each use, but it All Creative Business would take both a caresubscriptions include free business advice. Anytime fully-worded agreement, you want another opinand an arrangement for ion, send an e-mail to: monitoring. mail@creativebusiness.com.

Otherwise, you should Or if you prefer, you can probably have a proposcall us weekdays from 9 al signed by the client to 3 Eastern Time at 1stating that whatever you 617-451-0041. We attempt provide remains your to answer all e-mails property until an agreed within a day, and to return all calls as soon as upon fee has been possible. received.

We are creating patterns using a client’s existing logo mark that, as far as we know, has not been trademarked or copyrighted. The patterns will be used on their retail products.

1. How should we word any legal property rights and/or ownership agreements?

2. How should we bill? By individual pattern? By commission?

3. What should be the usage terms— reproduction, time frame, quantity, etc.?

4. Should we have something signed before releasing concepts?

5. Should we mark our patterns with any watermarks to prove our ownership?

K. G., Rockford, IL

Beyond this, you need the courts to be properto talk to an intellectual ty, making ownership property lawyer. rights appropriate.

I have a client who wants me to find an image of a (specific manufactured product), then incorporate a rendering of it into a new logo they’ve asked me to design.

Can you offer any advice about what I am allowed legally to incorporate in the logo?

W. S., Boise, ID

I hired my first employee last year.

Since then I have allowed “flexible hours,” meaning she could work less one day and make it up the next when things permitted. She is on a salary of $49,000.

Now, she has asked to have totally flexible hours because of irregular parenting responsibilities. She There’s no legal prob- says that since she is lem incorporating a ren- salaried it shouldn’t dering of a generic man- matter when she ufactured product into a comes and goes as logo. On the other hand, long as she gets her if the product is only work done. She says manufactured by one this is the way it was company, or what you at the firm she previchoose to show is visibly ously worked at. distinctive to a manufacI need your opinturer, you would have to ion: is her request get their permission to valid? Do most firms incorporate it into anyallow salaried emploything of a commercial ees this type of flexinature, such as a logo. bility?

In situations like this, H. M., Wichita, KS the deciding factor is whether someone else No. Allowing for an (you or your client) will occasional and tempomaterially benefit from rary exception, most do using the property of not let employees come another. If so, you have and go as they please. to get permission; if not, Those that do are misyou don’t have to. managed.

An image of a distincWithout the discipline tive and proprietary item of regular hours it is difis usually considered by ficult to keep track of

trickles down to us.

We either have to go back to the client and ask for more money, or take a loss. What are your thoughts?

S. M. Fresno, CA

Can you give us any of from $50 to $150k, and takes two to three insight that may help weeks to research and with this decision?

J. D., Chicago, IL prepare. We don’t charge for this. So far Although averages in 2009 we have an can be misleading, firms 83% success rate on routinely average six pitches.

We don’t have any We feel we’re losing between 1% and 2% of a appropriate language to project's estimated money on the time use, and really don’t see spent creating propos- billing on proposal the need. It would seem als. In addition, we’re preparation. (Not includto us to be common revealing too much on ing sales calls.) Highly sense that one would desirable projects often the strategy side, not jeopardize future go up to 8%, but seldom which could easily be business opportunities higher. taken elsewhere for by grossly exceeding an execution.

More important than estimate. He had a proproposal time, however, We’ve been brandfessional obligation to is a project’s profitability ing ourselves more as tell you there was a potential. Assuming you an “online strategy problem. Otherwise, are pitching new company” than a web We requested a few how would you know prospects, an 83% sucshop, and feel our freelancers to estimate that he was not just strategy is really what cess rate is very high. on some work. We padding it?

(50% is closer to aversets us apart. Web selected one who gave For the above reason, development nowaage.) us a range of four to most large organizations days has become a We don’t see a need six hours. When we that require purchase to change anything if commodity. got his bill it was for orders will not pay an each of these projects is We’re thinking of eleven hours, between invoice that exceeds 10% testing a “pay to play” sufficiently profitable. two and three times of the estimate upon You are losing on the scenario where we what he had said! which the purchase front end (time on the simply give an estiI asked him if anyorder is based. proposal), but should be mate for the Strategy thing had changed in So we would either making up for it on the Document. We would the scope of the work, refuse to pay more than brand this as the first back end (time on the and he replied “no.” So the estimate, or negotiate step of our process, project). Be careful not I then asked him why a slightly larger amount to lose sight of the big and charge (roughly his bill was not within if you think the hours he $5,000) for it. Our picture. the estimate. He simspent were legitimate.

If you face tough strategy could be ply replied, “It took We would also never use taken elsewhere if the competitive pressure longer to do than I him again, and tell him and project pricing is client desired, but we thought.” I told him, why. not profitable enough, would also provide a “Then you should As for the future, it charging for proposals price to execute it. have brought that to can’t hurt to remind outour attention for side contractors that you CREATIVE BUSINESS MANAGEMENT BENCHMARK approval.” He agreed, expect to be informed, and said he was sorry. as early as possible, if What is the best they have a problem ADOPT A MINIMUM FEE POLICY FOR ALL way to make sure this meeting an estimate.

ACTIVITIES, BUT ENFORCE IT SELECTIVELY. does not happen Otherwise, you expect The cost of doing business should never be greater again? Do you have their bill to be at or than the income it generates. So all creative firms, sinany language that we below it. gle- and multi-person, should have minimum fees—the can use when contractsmallest new project that will be accepted; the smallest ing with outsiders that We’re an interactive amount any change or correction will be billed. We basically states the marketing group recommend at least two day’s billable time for small firms accepting new work; several days for larger firms, importance of sticking struggling with the depending on reputation, workload, etc. In-process to an estimate? seemingly common jobs should not be billed for less than one hour’s We rely heavily on dilemma of whether to work—if necessary, save up client changes and AAs freelancers staying charge for proposals. until there are more. Make minimum fees a policy with within their estimates.

Each of our proposall clients, but be selective in enforcing it.

If they go over, it als has a project value

Creative Business—September/October 2009

how busy an employee is, how and much work she or he should be expected to handle.

Workload needs to be based on available work hours. It shouldn’t be open-ended.

As management consultants are fond of saying, “Work will expand and contract to fill the time available to do it.”

Regular, scheduled work hours produce more productivity in less time.

Also, employees often need to be available when others are, especially in larger firms.

11

Creative Business—September/October 2009

might make sense. Also, to position your firm as more of a consultancy.

The scenario only you can evaluate is whether you would make enough by providing plans (consulting) to offset what you might lose in production.

As for how much show & tell, it is always a judgment call: just enough to get the business, not so much as give away the store. If you don’t already, though, you should add language to your proposals to the effect that the ideas presented are proprietary and copyrighted.

Although legally questionable (ideas are not protected, only the execution of them) it can act as a deterrent.

One of our designers (we have four others) recently left to start her own business. We have continued to include her samples in our portfolio. She says we no longer have the right to do so, as it is her work. Is she right?

C. M., Dover, DE

12

No. You have every right to show the work.

Inasmuch as she was working for you when the work was done, it is truly the work of your company. Even though the style may be primarily her contribution, chances are that all other aspects of the job— everything from why the client selected you, to pricing, to service—represent your firm’s efforts.

Furthermore, a portfolio is nothing more than a representation of the type of work a firm is capable of doing anyway.

You may not be able to offer her particular style in the future, but it is no less likely that you’ll be able to satisfy the needs of most potential clients.

you were shorted if you were careful to endorse the check with either of the phrases, “under protest” or “without prejudice,” over your signature.

And in still other states and situations, the client’s restrictions have no legal effect. There, you could cash the check without losing your right to sue for the balance.

In writing a brochure for a very difficult client, I put in many more hours than I had originally estimated for the job. Because they were not completely happy with the result, I billed them only for the estimated amount, $4,500.

Today I got a check in the mail for $3,500, along with a note stating that they felt this was fair given that they, “Had to hire someone else to finish the job.”

The check is marked “Full and complete payment for (job).” If I cash the check, does this mean I can’t go after them in small claims court for the rest of what they legitimately owe me?

R. H., Tucson, AZ

Times have been tough lately, and I recently had a conversation with a small agency that might be interested in hiring me as Creative Director. The salary they are offering is just okay ($85,000).

I have two really good clients who haven’t done much lately, but used to provide about $125,000 annually in fee income. I’m sure they will follow me to the agency. How much should the agency pay me for them?

D. R., Providence, RI

We wish we could answer your question, but it depends on the laws of your state. Our advice is, don’t cash the check until you consult with an Arizona lawyer.

In some states and situations, endorsing and cashing a check so marked means that you are agreeing to a previous offer to compromise and settle. In such cases, cashing the check will make it difficult or impossible to collect the rest of your money later.

In other states and situations, however, you could retain the option to go after the amount

To answer this question it is necessary to look at business potential from the agency’s perspective. First off, there is no guarantee that “your” clients will come with you, or stay with the agency. They may not be as loyal as you believe, especially when they have to deal with a new situation.

In addition, the agency is not interested in the income you may bring in (potentially $125,000), only its profitability, and it may not be that significant. For example, when you work by yourself your profitability on a job

is simply your income minus your overhead, a substantial portion of the $125,000. The agency’s profit, on the other hand, will come from income, minus overhead, minus your salary. So even if you assume that the agency will make a 10% profit margin, and that you could bring in all $125,000 of business, their yearly profit (new business value to the agency) is only $12,500.

You should now see why it is doubtful that the agency will want to offer much, if any, additional compensation— they would be “purchasing” something intangible with minimal profitability.

Your talent, your ability to introduce them to new opportunities, and the marquee value of adding your client names to their client list should, however, all be factors in your salary negotiation.

But don’t expect much additional compensation up front.

This said, it is reasonable to ask for a sales commission on all business that comes from “your” clients for one year. 10% to 15% of creative billings (not media or markups) is appropriate. After a year, you’ll have to accept that the business is now as much theirs and yours.

Finally, if asked to sign a non-compete agreement, be sure that it specifically excludes “your” clients. Otherwise, if you should leave the agency you may be contractually prohibited from working with the very clients you introduced to them.

CB

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