Creative Business newsletter

CREATING BUSINESS STANDARDS FOR CREATIVE SERVICES BUSINESSES

INSIDE: HOW ORIGINAL IS YOUR WORK? BUSINESS ENVIRONMENT UPDATE FEE + COMMISSION ESTIMATES BUSINESS ADVICE

www.creativebusiness.com NOVEMBER/DECEMBER 2009

VOLUME 21/NUMBER 8

EDITOR’S COMMENTS:

RESPONDING TO THREE SENSITIVE SITUATIONS In one way or another, every CB article addresses situations that are or could become business problems. If not immediately, then sometime in the future. Same with the answers to the subscriber questions we select for each issue. Something similar could easily affect you someday.

We believe that the more you know, the better prepared and more successful you’ll be.

The three articles in this issue not only provide this, but also cover subjects a bit more sensitive than most others. They are also subjects very topical in this time of economic worries.

The first, starting on the page opposite, is how to respond to clients who want assurances about the originality (exclusivity) of what they are paying you for.

These are usually reasonable requests, but are also ones that are sensitive because they strike at the very core of your creativity and integrity. How to respond satisfactorily, yet tactfully? Where and when to draw the line?

Responding appropriately first requires being familiar with the way

clients think about originality, and how it is probably a little different from how you think about it. After that comes making sure you are familiar with the legalities.

With this background understood, you can then address client concerns in a suitable and diplomatic fashion. The article goes on to provide several responses ranging from indemnification clauses in contracts, to trademark searches, to E&O insurance.

Perhaps most importantly, though, it provides guidelines on what is realistic, the risks a firm can run from trying too hard to please, and when it is best to walk away.

The title of the second article, “An Update on the Business Climate,” starting on page 6, is self-explanatory. It was compiled from the type of sensitive financial information you could never get directly from your peers. It provides insight into how others are really doing, and gives you a way to compare your circumstances.

The article can also serve to prepare you for the question many clients seem to be asking: “How’s your business been lately?”

If the survey results show you to be one of the fortunate ones, be sure to comment on your successes. If you’re closer to the norm, be prepared to say that you recently saw a survey of the creative industry and (you’re holding your own) … (business is down but things are starting to turn around).

The article, “Combine Fee-For-Service and Commission Billing?,” starting on page 8, addresses situations where small clients expect media commissions to cover some of their advertising costs. The article provides the math that illustrates why this is usually not possible, and offers two alternatives that can desensitize the issue.

If you haven’t yet joined the CB-sponsored “Graphic Design Business Group” at www.LinkedIn. com, let me take this opportunity to encourage you. It is free, and a great way to make contact, share information, network, and ask questions of other CB subscribers. If you need help, let me know and I’ll assist.

For those who have asked about differences, the new, second edition of “The Creative Business Guide to Running a Graphic Design Business” (see the back cover) brings references up to date and includes about 15% new content. I’m pleased to report that it has become the standard text for teaching design firm management.

Finally, this is the last regular issue for 2009.

(There will, however, be a special December issue.)

So this is my only opportunity to thank everyone for their many contributions, and to wish you the best for the coming new year and decade.

IN THIS ISSUE: HOW ORIGINAL? . . . . . 1 HOW’S BUSINESS? . . . 6 AD ESTIMATES . . . . . . 8 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.

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Design: David Lizotte.

Illustration: Mark Bellerose.

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ISSN: 1073-8444.

November/December 2009, Volume 21 Number 8. 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—November/December 2009

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ASSURANCE MARKETING:

HOW ORIGINAL IS YOUR WORK? WILL YOU GUARANTEE IT?

hatever its size or specialty, the one thing that most distinguishes a creative firm is, well, its creativity. That is, how effectively it develops original ways to generate opportunities or solve problems.

Clients expect nothing less than eye-arresting and compelling ads… attractive and easily navigable websites… appealing and persuasive sales literature… well-focused public relations… and so forth.

Whatever the need or project, clients also expect that what’s produced will be different… novel… original. That’s what they’re paying you for.

For most projects most of the time, this poses no problem.

Fulfilling client expectations is a big part of your job description.

You are, after all, a talented and trained professional.

There are expectation exceptions, though, particularly when dealing with projects on which there’s a lot riding. How far should your promise to provide something exceptional go?

Are you, for instance, willing to guarantee that a concept is unique? Can the design you’ve produced be registered, or your website code copyrighted? Do you carry professional practices liability insurance? Are you willing to indemnify the client against suits resulting from your work infringing on the rights of others?

eye of the beholder depends on where they’re standing.

A typical creative’s viewpoint. Originality and creativity are usually thought of synonymously: that is, anything having a high level of imaginative aesthetics and expression. Given this mind-set, means and methods can easily assume the same or even greater importance than the message conveyed. So, too, presentation and polish.

Also, there’s seldom a downside. Being too original or too creative is an oxymoron.

Creativity/originality is satisfying, stimulating, and rewarding activity. It exercises talents and skills.

It provides samples to solicit clients with. And it enhances the respect of peers. It is all good.

DEFINING ORIGINALITY Originality can’t be promised without first defining it. Set dictionary definitions aside. In the world of commerce, originality is defined by perception. And the

This article is based on U. S. customs and law, which are similar to those of most countries. Some do, however, have a broader definition of what can be protected.

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Creative Business—November/December 2009

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ORIGINALITY QUIZ QUESTIONS

As examples of the ambiguity between imitation and inspiration, following are four situations in which the ideas of others play a role in creative development. How original do you believe a concept derived in each case would be? For our opinions, see the sidebar opposite.

Situation #1. You’re at an awards show, and you see a piece that makes a lasting impression on you. Sometime later, maybe even years down the road, you come up with something very, very similar.

You may not even remember seeing it done before. Are you ripping off someone else’s effort, even unknowingly?

Situation #2. You’re stuck for an idea. So you start thumbing through awards manuals or go to your “swipe file,” a collection of samples of work you admire. You find exactly the right solution to the problem. Some changes here, a few more there, and voilà, you have your concept. But is it really original?

Situation #3. You did a successful ad for a former client several years ago. You now take the same approach, even the same headline, and recycle it in a new ad for a client in a totally different industry, thus saving substantial development time. You are only copying your own work, and the concept is still original to the client.

So there’s no problem, right?

Situation #4. You take several photos and illustrations, scan them, combine them, then do a little Photoshop work. The result is new artwork for the cover of a client’s capability brochure. Since you made the artwork, it is your original creation. Correct?

A typical client’s viewpoint. Originality and creativity are not usually considered synonymously. When clients think “original,” they usually have a different vision. It is of something that will be unfamiliar and motivating to their customers.

Even more specifically, it is the way in which their product will be differentiated from competi-

tors’. Their desire for originality seldom extends beyond this.

Efforts with too much originality—those that push the creative envelope well beyond what they’re used to—are often rejected. Most believe that work that is very innovative, far outside the norm, will end up either a huge success or a huge failure. And they’re unwilling to gamble; most are risk adverse.

Similarly, they also believe it possible for an approach to be too original in the sense that it may alter the market’s perception of their product or brand.

That a certain creative approach might have been used before will seldom be of much concern as long as it will be effective when they use it. And while polish and presentation are important, they take a back seat to effectiveness.

In short, practicality takes precedence over originality. In the minds of most clients, originality is a unique response to their needs, not necessarily a unique creative direction.

LEGAL CONSIDERATIONS Whether viewed from a creative’s or client’s perspective, implying or promising originality has a legal side. Specifically, originality and ownership are usually, but not necessarily, linked.

What follows is a non-lawyerly, layperson summary of originality as it applies to creative work. Use this as general purpose information, but when faced with a specific situation it is wise to get more accurate and detailed information from an intellectual property lawyer.

Is the work derivative?

Given the billions of individuals who have lived over more than two thousand years of recorded history, everything is probably derivative in some way. But for legal purposes, something is derivative if it substantially borrows from or closely resembles something else. When a work is derivative it is not only not orig-

inal, it has probably violated the copyright of the originator.

The problem arises from subjective interpretations of phrases like “substantially borrows from” or “closely resembling.” Because of this, interpretation often requires court intersession.

Rulings are typically decided by what’s called the “reasonable person” method—i.e., would a reasonable, impartial person think the work in question is derivative, or enough different to be considered original?

Does original work need to be registered? Copyright protection occurs at the time a work takes a tangible form. It does not have to be registered to ensure its originality. Nor does there need to be any indication on it. However, copyright notice on the work (e.g., copyright ©2010, Creative Business) reduces the possibility of a violator using the “innocent infringement” defense.

Registration, through the Patent and Trademark Bureau in the U.S. (www.pto.org), and similar bureaus in other countries, establishes a public record that’s necessary before suing for copyright infringement.

When is it okay to borrow? Others have the right to reproduce limited amounts of copyrighted material, primarily for educational or informative purposes. Examples are a passage from a book being reviewed in a newspaper, or artwork reproduced in a research paper.

Although what constitutes “fair use” (called “fair dealing” in some countries) is a legal grey area and often takes judicial interpretation, using copyrighted material for commercial purposes seldom passes the test.

Is an original idea mine?

Perhaps ethically, but not legally. No one can claim ownership to an idea. All that can be owned is the specific way in which an idea is expressed. Put another way, the idea must be in a tangible form.

DEFINING TERMS All the above still leaves unanswered questions: what is appropriate, everyday business behavior? And how does it affect you, and your clients?

For these purposes, think of originality as being a continuum.

The low end represents outright plagiarism, the high end pure inspiration, and the middle borrowing and modification. All creative activity falls somewhere on this plagiarism/inspiration scale. The closer your work comes to the high end, the better for both your self-respect, and a client’s comfort level.

Inspiration. A concept is inspired when it comes without any direct aid—no swipe files, no idea starters. Concepts seem to appear “out of the blue,” although in reality most are triggered by some event, activity, or experience. This is the work you should be proudest of, and can stand behind with comfort.

Borrowing. How comfortable you should feel about these concepts depends on how much borrowing. Merely getting ideas from source books is one thing,

taking creative executions and modifying them just enough to be questionably original is another. There is usually nothing here that will land you in legal hot water. However, the more extensive the borrowing, the more the damage to your selfesteem, and the greater the chance of embarrassing a client.

Plagiarism. This is the act of substantially copying someone else’s work, then passing it off as your own. It might go unnoticed, but discovery is also a real possibility. If discovered, it could lead to anything from an embarrassing outing to the client up to a cease and desist court order or copyright infringement suit.

Ethics and law aside, the time saved is never worth the commercial risk involved.

RESPONDING TO THE “JUST COPY THIS” REQUEST Most clients want original thinking and innovative creativity.

Occasionally, though, there are those who don’t. For budget or taste reasons, they bring out something produced by someone else and ask that it be more or less copied.

How to respond? First, use the previous definitions to decide whether you think the request will violate copyright. If so, or questionable, explain that doing so could result in them, as well as you, ending up in court.

Clients are generally unaware of the risk of copyright infringement, will appreciate a headsup, and back off.

If what they’re seeking involves appropriating another’s idea or just a little borrowing, try to pin down their objectives, what they’re really looking for.

Then indicate that it can probably be achieved better with a direction that’s original and distinctive. Also, with only a small budget increase.

“Actually, picking up that idea won’t save much, since creative development is a small portion of the overall expense. Plus, you will be losing out on having us

ORIGINALITY QUIZ ANSWERS

Below are our opinions about the originality of the work produced in each of the situations described in the sidebar opposite. While based on well-accepted ethics, they are opinions only. Legal advice might be appropriate in similar situations.

Situation #1. This falls onto the inspiration end of our continuum, because you can’t rip off something you don’t remember. Also, memory is imperfect enough that it is likely that whatever you came up with would be largely original anyway.

This said, “subconscious plagiarism” is not legally defensible.

Situation #2. This probably falls into our definition for acceptable borrowing. The crucial factor, though, is how much borrowing occurred. Apply this test: If you honestly believe the modifications are substantial enough to have produced something original, they probably are. If not, they probably aren’t.

Situation #3. True, you can’t plagiarize yourself. We would still place this on the unacceptable section of our continuum, though.

Recycling your own work is usually a cop-out; creative solutions are seldom transferrable. In addition, running the ad probably gave a copyright claim to the previous client. If they see the new ad running, they may call and complain, or serve your new client with a cease-anddesist injunction.

Situation #4. This is plagiarism as legally defined because you’ve copied others’ work, then called it your own. That several items were combined is probably immaterial.

Should any owners of the work copied see your effort, you can expect an invoice for using their copyrighted material.

develop something that will be distinctive and memorable.

Frankly, it is not the most costeffective way, and will not have as much impact as something specific to your objectives.”

For skeptical clients worthy of an investment in time, it might also pay to volunteer doing an alternative direction at no additional cost (voluntary spec).

Creative Business—November/December 2009

For example, let’s say you come up with an ad concept for a new agricultural product that relates it to something new on a farm—perhaps a newborn calf, or a fresh-mown field of hay. As original as your concept might be, you can’t claim ownership.

All you can claim is the specific, tangible way in which you express it—your written words, ad design, illustrations, etc.

Do I own what I create for a client? Certainly you do when working on it. After the client pays, things aren’t so clear cut.

Without getting too technical, it probably depends on the circumstances and degree of artistry involved. Note, however, that excepting illustration and photography, most clients assume they have ownership of what they have paid for, and would challenge in court anyone claiming otherwise.

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Creative Business—November/December 2009

“My experience tells me that this is not the best way to accomplish your objectives. Let me try something a little different. It won’t cost you any more, and I promise it won’t delay things. If you’re not happy with what I come up with, I will gladly take the route you’ve suggested.”

If these approaches turn out to be unsuccessful in convincing a client, you’ll have to decide whether working with them is worth the professional compromises required.

CLIENT RESPONSES TO ORIGINALITY CONCERNS

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While the “just copy this” response can come from clients of all sizes, it is more likely with small ones. Likewise, concerns about originality can come from all size clients, but are more likely with large ones.

Whatever a creative firm’s size, the materials they produce for a client affect its activities and profitability. Sizeable investments often hinge on effectiveness, which in turn hinges on originality. Materials of questionable originality can also increase legal costs; defending against possible lawsuits arising from contested ownership can be a major expense.

Given these realities, some clients have adopted a defensive strategy on the recommendation of lawyers. They insist firms guarantee the originality of what they produce, and indemnify (assume the liability for) any legal expenses that might result otherwise.

This guarantee could be as simple as a short “boilerplate” paragraph in a purchase order addressing a few, limited situations. Or it could take the form of a separate indemnification agreement covering a broad range of claims and liabilities.

Whatever the form, they are often presented with little notice or recognition of the burden put on their suppliers: “Sign here if you want to work for us; decline if you don’t.”

YOUR RESPONSES TO CLIENT RESPONSES For reasons to be covered shortly, guaranteeing originality or agreeing to indemnification should be discouraged. (See “Creative Reality” on page 5.)

There are, though, ways that can often get around or minimize the problem.

Ask for intercession. Client personnel generally tend to look upon legal restrictions as impediments to doing their job. The importance of this is that there is usually in-house support for granting exemptions or modifications. All it often takes is explaining to a client contact why what is being asked for is inappropriate, particularly for a firm with limited resources.

For what to say, see “Why you can’t guarantee originality,” and “Why you can’t sign indemnity agreements” on page 5.

Offer your own alternative.

Having your own, reasonable indemnification and originality statement in proposals and agency agreements is often enough to satisfy clients. Use the sample text in the inset below as is, or modify it. Then say something like this: “Actually, we’ve already recognized this need and have a statement in the project’s proposal (that you’ve already signed). I’m sure it pretty much covers what you have in mind.” (Note that in the recommended proposal text

what is left out is as important as what’s included.)

Amend the agreement. The sample text is considerably less inclusive than the standard indemnity agreements presented by most clients. So it might not get your firm off the hook.

When this is the case, ask to have time to study the agreement (or “show to our lawyer”).

Later, bring it back with modifications. Line out or reword any text that puts your firm at unreasonable risk. If changes are minor initial each, sign the agreement, and send it back. If they are major, ask to have a revised agreement reprinted before signing. Anything other than minor, common-sense changes should be reviewed by a lawyer.

Assume that whatever changes are made will be accepted. If not, the client will say so. When asked about your changes, it helps to imply that they were suggested by your firm’s lawyer.

Never hesitate to try to negotiate something more acceptable to your firm. Bear in mind that the default for many client organizations is a standard, one-sizefits-all document. They often are receptive to modifications for specific conditions and suppliers when presented with logical reasons, particularly if a mutuallybeneficial relationship appears at stake.

Indemnification & Responsibilities We agree to indemnify and hold you harmless against all claims, liabilities, and damages which arise from: 1) dealings between us and third parties, and 2) preparation and presentation of materials. This indemnification shall include the costs of litigation and counsel fees.

We further agree to take normal measures to safeguard and hold private materials entrusted to us. Also, to undertake due diligence and make every reasonable, best faith effort to ensure the accuracy and originality of material we produce. We cannot, however, ensure that what we produce can be afforded legal protection by trademark registration, copyright, or other means. For this, appropriate legal services should be obtained.

You agree that we shall not be held liable as the result of any defaults of suppliers of materials and services, or actions of persons who are not our employees.

CREATIVE REALITY A creative firm’s products can’t be precisely defined, and are always viewed subjectively. Plus, firms seldom have the legal or financial resources of clients.

Why you can’t guarantee originality. All creative efforts are derivative to some extent, so what’s “original” often depends on the eye of the beholder.

Historic and expensive court

battles have been fought over what is and isn’t.

Then, too, there is the sheer impracticality of being able to look everywhere possible for something similar. Even specialized firms using sophisticated search tools accessing worldwide libraries and databases won’t guarantee uniqueness. All they’ll guarantee is an exhaustive look at what others have done. (See “Have a search conducted” opposite.)

Further, even when originality is defined as unusualness within a specific context, such as a

bear this cost even if the suit were ultimately dismissed. One or two frivolous lawsuits could easily drive the firm into bankruptcy.

Why not take out insurance against this possibility? Because it is difficult to get, and will kill the profitability of many projects. Or if you did carry it, your fees would have to be substantially higher. (See “Consider insurance” above.)

As annoying as defending against a suit can be to clients, they nearly always have the experience and resources that

Creative Business—November/December 2009

Have a search conducted.

When faced with originality concerns in developing registerable items—logos, trademarks, names, etc.—insist that the client employ (or agree to cover your costs in employing) a firm to search registration databases.

This will take the onus off ensuring originality. And, since search firms are quick to point out that even a comprehensive search can’t guarantee originality, it will reinforce the notion that the only assurance is a bestfaith effort. A source used by many intellectual property lawyers is www.compumark. thomson.com. Other sources can be found by searching the web under “trademark searches.”

Consider insurance. “Errors and Omissions” (E&O) policies and “Professional Practices Liability (PPL) insurance” do provide indemnity coverage.

And riders can sometimes be obtained for standard Business Owner Policies (BOPs) as well.

Unfortunately, the coverage can be minimal and expensive, typically starting at about $1,200 annually for $100,000.

The high cost and limited protection put blanket indemnity insurance out of the reach of many firms. There is, however, a possible alternative when faced with a need for coverage on a specific project or client—limited, customized policies can sometimes be arranged. In any event, firms faced with a request for indemnity coverage will need to go over the many coverage and pricing options with an insurance agent.

All you can promise is a best-faith effort at originality along with distinctive results. client’s market, assurance would require extensive specialized knowledge far exceeding what a creative firm could reasonably be expected to have.

All you can, and should, provide is this: distinctive work backed up by the client’s specialized knowledge of what similar organizations have done.

Why you can’t sign indemnity agreements*. Simply, because it would threaten the very life of your business. No organization, including the client’s, knowingly risks its existence on something completely beyond its control.

Even defending against what would be considered a small, trivial lawsuit could easily run into tens of thousands of dollars. Your firm would have to _____________ *Possible exception. The risk to principals from signing an indemnity agreement for firms with limited assets structured as Limited Liability Companies (LLCs) or corporations is relatively low.

Although a suit would probably result in forfeiting the firm’s assets and lead to its bankruptcy, it is unlikely to have financial effect on the principals themselves.

make it more practical. Another lawsuit is not a mortal threat, and insurance is affordable given most clients’ size. Many also have an in-house legal department or a law firm on retainer.

What about competitors who readily sign indemnity agreements? All you can say is that your experience indicates that their fees must be much higher to cover the risks, or they’re not very good business people.

In contrast, your firm is in business for the long-run by providing the lowest possible prices consistent with the highest possible quality. It works to build mutually-beneficial partnering relationships. Signing an indemnity agreement is not in the partnering interests of either you or the client.

Give up the client. This is the only acceptable option when clients insist on a guarantee of originality. While the possibility of being hit is low, the financial exposure is enormous. No project, no client, is worth the disruption and potential expense.

Let a less-smart competitor take this risk.

CB

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HOW WELL OTHERS ARE FARING:

AN UPDATE ON THE BUSINESS CLIMATE

ew of us haven’t been touched by the past year’s economic slowdown. And, whatever its effect has been on you, chances are you’re interested in its effect on your peers as well.

Also, what’s been going on recently? Do things appear to be turning around? Is there reason for optimism?

To give you a better sense of today’s North American business climate, for the third time in a year we conducted a business conditions survey, this one covering the period May to October. To allow comparisons with the previous survey, which covered the period October 2008 to April 2009,* the list, questions, and methodology were largely the same.

Ten questions were asked, each chosen because it was not only an economic bellwether, but also related specifically to activity in the creative services industry.

Changes reported for the last six months are presented below without parenthesis. Changes for the six months prior to the previous survey are in parenthesis for comparison.

#1 REVENUE Looking at the change in revenue (income) of many firms over several months provides a good indicator of overall industry activity. During the last six

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*A copy of the April survey containing additional questions and more detail on methodology and analysis is available at www.creative business.com/CB192.lasso until January 1, 2010.

months, respondents reported their revenues were: Higher . . . . . . . 24% (11%) About the same . 22% (26%) Down ±10% . . . 15% (21%) Down ±25% . . . 22% (23%) Down ±50% . . . 17% (19%) Analysis. That 46% reported the same or increased revenue versus only 37% the last time is an encouraging sign, especially since the recent survey covered what is normally a slow time for business. It would seem to indicate that things are improving, albeit slowly. Still, more than half reported a decrease in income during this period.

#2 ORDERS The revenue trend looks back at what has happened, not forward at what is or is likely to happen.

So any assessment of the business environment also has to take into account how much work is in house, and how much is waiting in the pipeline.

Here’s what we found: High backlog . . . 15% (13%) Normal . . . . . . . 32% (34%) Declining . . . . . 29% (34%) Very low . . . . . . 23% (19%) Analysis. Here the picture is less encouraging. Overall, things haven’t changed much. How much of the lack of positive change is attributable to the “Summer effect” we can only speculate. But it is unlikely to be of great significance since the survey was taken at the end of September after the Fall business season had already started.

#3 PRICING Lowering prices is one, albeit costly, way to motivate clients and to compete more aggressively. The extent to which firms are willing to give up revenue to stay busy is indicative of how seriously they have been affected. This is especially true for

those with a high fixed overhead. Prices were reported to be: Increasing . . . . . 10% ( 5%) Unchanged . . . . 54% (54%) ±10% less . . . . . 22% (29%) ±25% less . . . . . 14% (12%) Analysis. Marginally encouraging. Also worth noting is that a majority of respondents from both recent surveys have not had to resort to cutting prices— indeed, that some have raised them is encouraging all by itself.

#4 SCHEDULING The tougher the times, the more likely clients are to stretch out a project already underway, or put off one that’s planned. So our surveys asked about the extent of delays that firms have experienced. Schedules were reported to be: Normal . . . . . . . . 28% (27%) Stretched out . . . . 33% (29%) Projects on hold . 39% (44%) Analysis. There’s not a lot of sunlight in these numbers. Over two thirds of projects are still taking longer than normal. If there’s any good news here it’s that no more are being delayed than six months ago.

#5 ACCOUNTS RECEIVABLE When clients’ incomes contract, some pass along their pain to suppliers. They stretch out payments for work completed. The smaller the supplier, the more likely it is to be taken advantage of. Receivables percentages were reported to be: 1-30 days . . . . . . 33% (36%) 31-60 days . . . . . 50% (42%) 61-90 days . . . . . 14% (18%) 90+ days . . . . . . 3% ( 4%) Analysis. While these figures don’t show improvement, keep in mind that payment within 30 days is an ideal situation that’s often difficult for even the best clients to meet. 31-60 days is

Analysis. Generally positive.

Nearly 40% of multi-person firms are either growing or holding their own, up slightly over six months ago. Staff reductions have not increased.

#6 SALARIES Whether a creative firm has a single person or dozens, salaries (including principals’ take home) are by far its largest expense. When times become tough, salaries become a logical place to look for savings.

Respondents reported making: No reductions . . 38% (47%) Principal rdctn . 35% (28%) Employee freeze 17% (15%) Employee rdctn . .10% (10%) Analysis. The only positive spin to put on these numbers is that salaries, along with benefits and staffing, are often considered lagging indicators of an economic upturn. That is, business owners tend to wait to make sure any improvement is sustainable before relaxing personnel cutbacks.

#7 BENEFITS Whatever a firm’s size, benefits typically make up around 20% of its expenses. While some, such as contributions to health insurance, are difficult to cut, others, such as year-end bonuses and office amenities, are relatively easy. Here’s the extent of cuts: No change . . . . . 75% (75%) Modest cutbacks . 20% (18%) Major cutbacks . . 5% ( 7%) Analysis. Surprisingly, the benefits most firms offer have largely escaped cutbacks.

#8 STAFFING Reducing staff (downsizing) is the step principals of multi-person firms are often compelled to take when reducing salaries and benefits is not enough.

Respondents reported: N/A (individuals) 36% (38%) Grow/no change 35% (31%) 10%/25% rdctn . 18% (21%) 26%/50% rdctn . 8% ( 5%) 51%/75% rdctn . 1% ( 2%) 76/100% rdctn . 2% ( 3%)

#9 PURCHASES & EXPENSES Reduced discretionary spending by businesses is among the first indicators that things are headed downhill. It works the other way, too: an increase in discretionary spending (or less of a decrease) is among the first indicators that things are beginning to improve.

Little change . . . 33% (49%) Modest cutbacks . 48% (49%) Major cutbacks . 19% (24%) Analysis. Less cost cutting is a small but marginally positive change for the better.

#10 SATISFACTION How have current business conditions affected you, personally?

Since being the principal of a creative firm is self-selected, this could be the most important question of all. That’s why we asked it on the 2008 survey, and on both those in 2009. We found respondents were: Lovin’ what they do . . . 10% May 2009 ( 8%) Oct. 2008 (14%) Challenged/happy . . . . . . 49% May 2009 (53%) Oct. 2008 (61%) Unlike before . . . . . . . . 31% May 2009 (27%) Oct. 2008 (19%) Discouraged . . . . . . . . . 10% May 2009 (12%) Oct. 2008 ( 6%) Analysis. Another mixed bag.

Enthusiasm is creeping back up, and discouragement is falling.

Yet, on the other hand, fewer are content, and more are looking back longingly at what used to be.

CAVEATS & COMMENTS The number of survey questions and options were purposely limited. This was in recognition of the already well-documented state of the economy, and to encourage broad participation.

The downside of this condensed approach was that it limited the positive options for firms doing exceptionally well. All factors considered, however, we do not feel that this compromise gave the survey results a more negative bias.

Some findings fell well within the margin of error and should be evaluated accordingly. Also, Creative Business surveys do not use scientific polling methods.

Findings are, therefore, only an approximation of conditions in the market for creative services.

And since the survey included firms from across North America, it doesn’t necessary reflect local conditions.

How well any firm fares under any conditions is often as much or more affected by its management skills and marketing activities than the state of the economy.

In addition, good and bad luck can never be ruled out, especially in an unstable environment. Even firms with bad practices, such as dependency on one or two clients, can hit it lucky if these clients keep spending. Conversely, others with a strong and diverse client stable, the tried-and-true formula for long-term success, might have several whose budgets tank at once.

Creative Business—November/December 2009

more the norm. Only 61 days and over indicates a serious problem. So accounts receivable continue appear to be holding up well.

CONCLUSIONS We wish the findings of this and our previous surveys were more conclusive, especially in a positive way. But what is, is.

Overall, the state of business appears to be a mixed bag.

Perhaps the best way to put it is this: At this time business conditions do not appear to be getting any worse, and may, indeed, be getting slightly better.

Hang in there.

CB

7

Creative Business—November/December 2009

E

PRICING ADS:

COMBINE FEE-FOR-SERVICE AND COMMISSION BILLING?

ven under the best of circumstances, pricing is problematic. When there are alternative methods, it is more so. This can be the case when preparing and placing clients’ advertising. Strictly fee-for-service (billing for labor), or a combination of media commissions and fee-for-service?

For example, let’s say you have a new client who expects that some portion, hopefully large, of the cost of their advertising will be covered by media commissions.

What should you bill the client a fee for? What and how much should be covered by the commissions?

SOME BACKGROUND

8

Taking a percentage of the cost of media is the original method of advertising compensation. It dates back to a time, over a century ago, when agencies didn’t handle creative. They merely acted as middlemen, agents, between advertisers and publications.

This arrangement was set up to cover only media negotiation and placement. Preparation of the ads to run was handled by others, usually the client. As it turned out, though, the commissions for placing long-running ads in national media were often quite lucrative. So clients started demanding that the commission cover more.

Thus was born the practice of negotiating with an agency for which services they would be willing to provide “free” for the media commissions, and which

would be an additional charge, and at what price. Among large budget advertisers and their agencies this is still the case.

Although every arrangement negotiated between clients and agencies with large accounts is different, as a generalization some level of media research, account service, and administration are covered by commissions. Creative development, production, and expenses aren’t.

an agency placing a full-page ad in a commissionable trade magazine where the rate card price is $4,000 will get a bill from the publisher looking like this: 1 page @$4,000 Commission @15% Balance due

$4,000 – 600 $3,400

A REVIEW

The agency pays $3,400, billing the client the full $4,000 and keeping the $600 difference. In addition, there are other factors about commissionable advertising to keep in mind.

Know when 15% becomes 17.65%. It depends on which way you view a transaction. In the above example, the $600 commission is 15% when the $4,000 bill is discounted. But the commission would be 17.65% if a $3,400 bill was marked up to $4,000.

By tradition, many agencies use 17.65% as their markup percentage for other bills. CB believes this figure is too low in today’s environment. We recommend 25% for all but large bills.

(For more, download the article “Markups—Why, When, Where & How Much?”*) You have to qualify. Most publications have criteria that must be met to get a commission discount, often a certain number of insertions per year. Creative firms (and clients where appropriate) should always check first to be sure a commission discount will be granted to them.

(For agency basics, download “What Makes a Creative Firm an ‘Agency’”?*) Space is billed up front.

Whether commissionable or not, media space should be billed at the time it is reserved, not after the fact, as would be the case

The traditional media commission is 15% of the cost of ad space, often referred to as the “rate card” price. As an example,

*Available until January 1st at www.creativebusiness.com/CB192. lasso. After, request a copy from circ@creativebusiness.com.

YOUR SITUATION The above is informative, but it doesn’t address the situation CB subscribers can find themselves in. Due to relatively low B2B space prices and short ad flights, media commissions are more apt to fall short of the cost of providing even basic services.

For this reason, and because some business and local media no longer even offer commissionable space, many small-tomedium size agencies work exclusively on a fee-for-service basis, handling commissions separately.

In fact, every decade or so, the death of commissions is forecast, at least as it applies to smaller budgets. Yet even in an era of non-traditional media and accountability emphasis, it lives on. One reason is that commissions can reward agencies that develop long-running ads.

Another, usually more significant, is that small clients in particular are apt to be more comfortable with it because it provides the illusion of lowering their advertising costs. Keeping such clients satisfied is the subject here.

EXAMPLES OF COMMISSION PRICING The negative impact of replacing fee-for-service income (primarily in account service and administration) with media commissions is easily hidden by other markup income when billing, as the following examples illustrate.

(Note: these examples do not necessarily reflect market pricing. They are intended only to show financial effect.)

Single-person firm: A local furniture manufacturer wants to advertise in a commissionable trade magazine reaching dealers. Three ads are planned, each running in rotation for four months over a one-year period.

The firm’s billing rate is $135 an hour.

The projected costs shown are the outlay that can be expected; projected billing is the income, including markups for outside services.

Projected costs Space: $4,000 rate card per page (12x rate) with a $600 commission discount per insertion x 12 insertions = $40,800 Account service: Average of 5 hours per month—$675† x 12 months = $ 8,100 Creative development: 12 hrs (4/ad) teaming with an outsider —$1,620. 12 hours of outsider @$125/hour—$1,500 = $ 3,120 Photography: 2 days on location. Photographer—$3,000, art direction—$2,160 (16 hours), expenses—$200 = $ 5,360 Production: 6 hours—$810, materials—$400 = $ 1,210 Administration: 4 hrs $ 540 Total costs: $59,130 †The billing rate and the principal’s salary cost are not differentiated in single-person firms.

Projected billing Space: $4,000 per page (12x rate) x 12 insertions = $48,000 Account service: (covered by $ 00 commission) Creative development: 12 hours (4/ad) teaming with an outsider— $1,620. 12 hours of outsider @$175/hour ($125 marked up 25%)—$2,100 = $ 3,720 Photography: 2 days on location. Photographer—$3,750 ($3,000 + 25% markup), art direction—$2,160 (16 hours), expenses—$200 (no markup) = $ 6,110 Production: 6 hours—$810, materials—$500 ($400 marked up 25%) = $ 1,310 Administration: (covered by commission) $ 00 Total billing: $59,170 The bottom line: Even with the markup income that was added to the media commission, the loss of account and administration billing meant the owner of this singleperson firm only covered his/her time.

Multi-person firm: The same campaign—3 ads, 12 insertions, one year—as it might be priced by a larger firm.

The difference here is that in addition to a markup on outside services, the firm’s actual salary costs will be marked up the standard three times when billed.

Projected costs Space: $4,000 rate card per page (12x rate) with a $600 commission discount per insertion x 12 insertions = $40,800 Account service: An average of 5 hours per month of a $60/hour salaried employee ($300) x 12 months = $ 3,600 Creative development: 12 hours (4 per ad) for a copy/art team with combined salaries of $75/ hour = $ 900 Photography:2 days on location. Photographer—$3,000, art direction—$720 ($45/hr x 16 hrs), expenses—$200 = $ 3,920 Production: 6 hours at $50/ hour, plus $400 for materials and expenses = $ 700 Administration: $25/hr x 4 hrs $ 100 Total: $50,020

Projected billing Space: $4,000 per page (12x rate) x 12 insertions = $48,000 Account service: (covered by $ 00 commission) Creative development: 12 hours at the team billing rate of $225/hour = $ 2,700 Photography: 2 days on location. Photographer—$3,750 ($3,000 + 25% markup), art direction—$2,160 (16 hours at billing rate of $135/hour), expenses— $200 (no markup) = $ 6,100 Production: 6 hours—$900 ($150/hour), materials—$500 ($400 marked up 25%) = $ 1,400 Administration: (covered by commission) $ 00 Total billing: $58,200 The bottom line: The results look positive until analyzed. The potential for $10,800 in account service fees ($180/hour billing rate x 60 hours) and $300 in administration fees ($75/hour billing rate x 4 hours) were replaced by only $3,200 in commission. The firm actually gave up $7,900 ($10,800+$300-$3,200).

Creative Business—November/December 2009

with creative and other costs.

This reduces a firm’s carrying costs and minimizes the chances of getting hung-out paying the media bills of a slow-paying or deadbeat client.

SATISFYING CLIENTS If the above demonstrates why commission income can’t replace service fees in small advertising budgets, it doesn’t satisfy clients who view discount commissions as a way of lowering their advertising costs.

There are two ways to address this. One is to have publications bill clients directly for advertising space. This takes a firm out of the position of payment middleman, and it allows the client to receive discount commissions. The other way is for the firm to continue to write the checks for its clients’ advertising space, but to rebate to them any commissions earned.

Finally, there is still another approach. That is, to explain to clients up front that the effort involved in creating and placing small campaigns necessitates retaining media discounts as well as billing for account and administrative time.

CB

9

Advice Creative Business—November/December 2009

FEE INCREASES… PAY MULTIPLIER… LOGO CHANGES… ROYALTIES… DRESS CODE… FILE OWNERSHIP… RFPs … IDEA PROTECTION… FOREIGN WORK… CLOSING RATIO

I sent a proposal to a company a year ago, and they are just now coming around to move forward. They are wanting me to resubmit the proposal.

What is a good percentage I can increase the cost without them getting turned off? My overhead has increased drastically since I submitted the proposal.

S. M., Lansing, MI Normally, clients wouldn’t expect costs to increase more than the rate of business inflation.

This had been running about 2%, but most recently has been 0% or even lower (deflation).

So a rise in your overhead costs is specific to you, and would not be a easy justification to most clients. Your operating costs are your concern, not theirs.

10

All Creative Business subscriptions include free business advice. Anytime you want another opinion, send an e-mail to: mail@creativebusiness.com.

Or if you prefer, you can call us weekdays from 9 to 3 Eastern Time at 1617-451-0041. We attempt to answer all e-mails within a day, and to return all calls as soon as possible.

Probably the best approach is to say that in the year that has gone by your business has grown, and you’ve adopted a new pricing structure that is more reflective of what competitors charge for work of your quality. That is, that you were underpricing before, and your new price is realistic.

In any event, raising prices in today’s economy is risky. Unless you’ll end up losing money on the project, we would not raise the price.

We are currently using a former employee of what was one of our largest clients. He is doing strategic consulting with us, helping with some of our high-level clients. My partner and I are considering how he might fit into our company on a more permanent basis. We are very satisfied with his contributions so far.

The question is: How do we calculate the financial contributions he must make to justify his salary request—$120/$150K per annum?

B. M., San Antonio, TX It is usually expected that an employee’s salary

should not exceed one third of the income he or she contributes, although there might be circumstances, such as great potential, that warrant exceptions.

With billable employees, expected contribution is easy to figure out or predict—just multiply her or his salary by 3.

With non-billable employees, where income can’t be tracked, it is your call as to what an employee is worth when all contributions— productivity, efficiency, creativity/ideas, etc.—are factored in.

The 3x salary multiple is a broad business standard, not just for creative firms. Some high overhead businesses use a 4x salary multiple.

The rationale is that only about half of most employees’ time is spent on work that produces income. The rest is taken up by everything from vacations, to holidays, to slack time. Then, too, there are the costs of benefits as well as business overhead, profit, and capital expenses.

So unless a firm can bring in several times what it is paying out in salary alone to an employee, it will probably end up losing money on him or her.

I have worked with a local business coach on a barter basis—my design for her advice.

This past year, she got me involved in branding her business, and also put me onto her “advisory board.” I have successfully completed both tasks.

Since then, she engaged another local creative firm to design and manage some print materials. I was fine with this as I didn’t want to overdue it on the barter hours. I just found out, however, that the other firm adjusted my logo mark. It looks like the original but there’s enough change in the type to make a difference.

I’m happy that she has a new look that she’s happy with.

However, I’m not sure whether to let it go or mention that I feel my mark has been infringed upon from a creative standpoint.

Also, should I continue to show the mark in my portfolio now that it’s obsolete?

What do you think I should do?

B. R., Vancouver, BC As much as it irks you, it is probably better

I have a friend who has an idea for a great T shirt, and wants me to design it. This is something that could really take off. I’d like to discuss the possibility of royalties with her. Is there a formula that is applicable? She would be producing the actual items for sale using my artwork.

C. J., Allentown, PA Working on a royalty arrangement rather than charging a design fee is more complicated, but doable. To set it up you would need to engage an intellectual property lawyer for two things: 1) a contract spelling out responsibilities and how the income would be split, and 2) arranging an independent way to certify (audit) actual sales.

There is no formula for royalty payments as a percentage of sales—it all depends on how much of the potential

emphasis on style could unique twist. It was set up as a “flowwork against you. All through” company things considered, clients with no employees. give business to those We created the flowwhom they feel most through company so comfortable with. This we would have a joint usually means someone and branding in name who is like them, but a the specialized indusbit more stylish. try.

The LLC “hires” For instance, appropriate dress when calling my firm for all of its design, and my parton banking clients is probably not the same as ner’s firm for all its marketing. Together appropriate dress for she and I develop concalling on technology cepts, then my firm startups. This is not to does the art direction say one has to change and design, and hers dress from client to the writing and marclient, but it does mean keting. being at least as sensitive We have been sucWhat’s your advice on to what clients want to cessful, but my partsee as what you want to how an account and ner is now ready to project. Small dressing sales person should move on for various dress for a small mar- changes can make a difreasons.

We both plan ket studio/agency try- ference. to continue to work Suits and ties are not ing to project an for some of our LLC necessary in most situaimage of smart, hip, clients, but now will tions any more; casual and creative? We do so under our own business dress almost believe our culture is names. what brands and posi- always is. Slightly conThe question has tions us vis-a-vis com- servative without sacrificcome up: who owns ing style. In a phrase: a petitors. the electronic files? contemporary business We’ve interviewed Since the LLC has no several applicants who look. employees, and hired talk a good talk but my firm to do all its I am the owner of a have all been dressed design work, does my small graphic design very conservatively. firm own them? Or firm. I’m also a partHaven’t things does the LLC own changed from the suit ner in an LLC advertisthem because my parting agency that speand tie, business conner and I collaborated cializes in one indusservative look? on the concepts?

I’d Any suggestions, or try. The LLC has a are we looking for a type that doesn’t CREATIVE BUSINESS MANAGEMENT BENCHMARK exist?

M. C., location withheld

sales attraction is attributable to the product or idea, and how much is attributable to the graphics and marketing. It varies all over the lot.

Most agreements are also based on a sliding scale—the more sold, the higher the percentage usually attributed to the marketing part of the equation.

You and she would have to work out something you are both comfortable with. The lawyer could help you with this as well.

Finding good account and sales people can be more difficult than finding good creative people. Even more so when style requirements are high.

While whomever you hire should represent the firm’s culture, don’t forget that clients also have to feel comfortable with him or her. Too much

Creative Business—November/December 2009

to let it go. The infringement is from a creative not a legal standpoint. It is her logo to do with as she sees fit. Moreover, it is possible that she isn’t even aware of the subtle difference. One of the prices we all pay for being in a commercial business is having clients occasionally change (mess up) what we labor so hard on.

We would not stop using “your” logo in your portfolio. Most prospects will not be aware of the revised one, and if they should be it will give you the chance to explain the subtleties of good design, and why your solution works a little better.

TOO MUCH DEPENDENCE ON TOO FEW CLIENTS IS THE LEADING CAUSE OF FIRMS FAILING. How much is too much?—more than 25% of income from one client (all units and divisions) or 50% from two. Why so?—because sooner or later all clients depart. Individuals relocate, organizations are bought and sold, tastes change. Usually without warning.

Those invested heavily in working with just a few clients are often left without enough income to sustain them until it can be replaced. If you must work this way, insure against major clients departing by having at least six months of “unemployment” reserve in the bank for each one. Otherwise, a few projects from many clients is a safer bet than many from a few.

11

Creative Business—November/December 2009

12

appreciate your know these people could be modified for insight. very well. this purpose. Such agreeH. L., Fort Worth, TX D. T., Charlotte, NC ments are common between businesses The files would, we Since they have where there’s lots at believe, be the property accepted you as part of stake. Even then, though, of the LLC inasmuch as the team, your time they only protect the you and your partner henceforth should be execution of an idea, not collaborated on the pro- billable. They get paid the idea itself. And, of jects under the name of for their team involvecourse, most prospects the LLC. ment, so you should would look askance at If you plan on dissolv- expect to also. such a request. ing the LLC—recomTo make sure they Otherwise, there is no mended to avoid poten- understand this, ask for practical way to avoid tial future legal and tax a purchase order (PO) having an original idea issues—its assets will number, and go over or concept misapproprihave to be split evenly your terms if they were ated from a presentation. between the principals not previously spelled Except in rare situations, unless there has been a out. Note that some new business pitches prior arrangement other- RFPs (especially from should consist of descripwise. When there is dis- governmental agencies) tions and examples of agreement on valuation do provide an official work you’ve done for or who gets what, disnotification, so check to others, with the promise putes are settled by make sure this is not the that you can do somemediation, arbitration, or case. If it is, request it thing equally effective for in court. along with the PO. the prospect.

The only solution we Also, check to make can suggest that avoids sure that the RFP does I need to prepare a legal involvement is to not dictate payment proposal for an overcome to an agreement terms. If it does, you'll seas client who conwith your LLC partner. have to live with their tacted me based on Perhaps she could take procedures. Otherwise, what they had seen on half the files, and you unless it turns out to be my web site. Do you half? Beyond this, we’re a dragged-out project, in know how rates in afraid you would have to which case you might (country) compare to talk to a lawyer. want to bill monthly, those in the U. S.? your terms should probC. T., San Diego, CA I was brought in on a ably be a third up front, local RFP type propos- a third after first major We don’t have a clue al which I completed deliverable, a third plus about pricing in this for an upcoming apart- expenses upon comple- country. But it shouldn’t ment complex. I then tion. make any difference. You met yesterday with the have to charge what is necessary to make a rea“team” and I was “offi- Is there any way to cially” accepted as part protect yourself when sonable profit where you are located. Pricing in pitching unsolicited of it. the other country shouldideas/art to a busiNext, they want a n’t enter into your conplan of all I would do ness?

C. J., Baltimore, MD sideration unless for for every step of the some reason you want to project. They are to work with a client there.

Yes in theory, probasend me specifics as to You should, however, bly no in practice. the scope. be very cautious about You could ask a Would this time be working with out-of-thebillable or not? If bill- prospect to sign an able, how do you sug- agreement not to use or country clients. Get payment up front. It can be disclose anything you gest I handle it—bill almost impossible to colshow. The non-discloup front or when the work is accomplished? sure agreement available lect past due invoices for work done across nationfree at www.Creative I want to protect Business.com/forms.lasso al borders. myself since I do not

What is an acceptable success (closing) ratio when pitching work from new clients? I’m a copywriter who used to have a batting average of about .750 (3 out of 4 possibles).

Lately it has dropped to about .500 (2 out of 4), and I’m concerned.

S. M., Detroit, MI Principals of singleperson and small firms competing against others for new business have typically gotten about two jobs out of every four (50%) on which they provide estimates or proposals. Sales representatives in larger established firms don’t usually fare as well, typically getting about one out of every three or four jobs (25% to 33%). This is due to reps casting a wider net, having more competition, and making more presentations. (Many jobs don’t materialize, and the selection process is often stacked.)

You should not put too much stock in these figures, however. Some individuals only pitch projects with a high probability of success (e.g, referrals). Others do extensive prospecting and are less successful. It is also better to get one very profitable and satisfying job out of every four, then to hit four-forfour with little jobs.

It short, success ratios depend on who’s pitching whom, and when.

Yours seems to be marginally okay. But assuming that you’re still going after the same level of clients, we believe you’re right to be concerned, and should step-up CB your efforts.

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