Following the Green

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Following the Green
David Conrad + David Sherwin
AIGA SEATTLE | DESIGN BUSINESS FOR BREAKFAST
Following the Green | ©201...

2
We solve our client’s
business problems
by design…
MAKE WEBSITES F
DO PACKAGING D
DESIGN LOGOS F
CREATE APPLICATI
SKETCH...

3
But studio owners
have even more
problems to solve.
HIRE DESIGN STAFF
PAY TAXES QUART
SET FINANCIAL GO
SECURE NEW CLIE
E...

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Most of them have
to do with money.
HIRE DESIGN STAFF
PAY TAXES QUART
SET FINANCIAL GO
SECURE NEW CLIE
ESTIMATE PROJE
NE...

5
What We’ll Cover Today
1. How design studios make money
2. Ways design studios organize themselves
to support making mon...

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How Design Studios Make Money

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There are only a few ways
design firms make money:
• Bill for time via a fixed fee, hourly estimate, or retainer
• Resel...

8
Bill for
time
Resell
services
License IP Sell things Give away Spin off Zzzzzzz
Great design jobs earn income
like this....

9
Bill for
time
Resell
services
License IP Sell things Give away Spin off Zzzzzzz
Most design firms, however,
have a distr...

10
Bill for
time
Resell
services
License IP Sell things Give away Spin off Zzzzzzz
Most design firms, however,
have a dist...

11
Bill for
time
Resell
services
License IP Sell things Give away Spin off Zzzzzzz
Over time, your revenue streams
can cha...

12
Bill for
time
Resell
services
License IP Sell things Give away Spin off Zzzzzzz
But organic growth carries risk
if it’s...

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Here are some examples:*
• Solo designer
• Small studio (4 employees)
• Medium-sized local studio (12 employees)
• Larg...

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Bill for
time
Resell
services
License IP Sell things Give away Spin off Zzzzzzz
RETAINER
STOCK
CLASS
TEACHING
FILLS REV...

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Bill for
time
Resell
services
License IP Sell things Give away Spin off Zzzzzzz
SMALL STUDIO (4 EMPLOYEES)
PROJECT
NO C...

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MEDIUM-SIZED LOCAL STUDIO (10 EMPLOYEES)
RELICENSING OF
CUSTOM PHOTOGRAPHY
SHORES UP LOWER BILLINGS.
Bill for
time
Rese...

17
Bill for
time
Resell
services
License IP Sell things Give away Spin off Zzzzzzz
MEDIA
LARGE INDEPENDENT CONSULTANCY (60...

18
Bill for
time
Resell
services
License IP Sell things Give away Spin off Zzzzzzz
MEDIA
BIG INTERNATIONAL CONSULTANCY (12...

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What did you notice?
Most common methods of earning money:
Bill for time via fixed fee, hourly estimate, or retainer
Re...

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There are always notable
exceptions to the rule.
Bill for
time
Resell
services
License IP Sell things Give away Spin of...

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A Design Studio’s Greatest Expense

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In any design studio,
time and money are two
sides of the same coin.
+ $
MEANINGFUL
EFFORT
WORK =
Following the Green |...

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But people are the true
currency of our profession.
Revenue always reflects this.
= PROCESS
$ PEOPLE + TOOLS

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“Design businesses are little more
than a collection of people. Assets
come in the door in the morning
and go out the d...

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There are many organizational
models for design studios
to empower their people…
Chain of command
Coaching
Associate
In...

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CHAIN OF COMMAND ORGANIZATIONAL MODEL
Where it works:
• Specialized functions for employees
(a.k.a. assembly line work ...

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COACHING ORGANIZATIONAL MODEL
Where it works:
• Small to mid-sized studios
• Team members are stronger
than the princip...

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ASSOCIATE ORGANIZATIONAL MODEL
Where it works:
• Small to mid-sized studios
• Creative leads take stake
in company, ear...

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INCUBATOR ORGANIZATIONAL MODEL
A design studio that also
functions as a product +
service incubator. Often
split 50/50 ...

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BOUTIQUE ORGANIZATIONAL MODEL
Small design studio that can
mix, match, and experiment
with various other models.
Where ...

32
Alignment
between revenue
and staffing
is critical!
SENIOR
DESIGNER
ACCOUNT
MANAGER
ART
DIRECTOR
DESIGN
INTERN
JR.
DESI...

33
SENIOR
DESIGNER
ACCOUNT
MANAGER
ART
DIRECTOR
DESIGN
INTERN
JR.
DESIGNER
PRINCIPAL
ART
DIRECTOR
ACCOUNT
MANAGER
PRO-
GRA...

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Creating a Studio Model

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CREATING A STUDIO MODEL
Determine what your design
studio experience should be:
1. Identify your design philosophy. Kno...

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CREATING A STUDIO MODEL
The elements of
design studio experience:
TANGIBLE
INTANGIBLE
FULFILLMENT
PORTFOLIO
CLIENTS STA...

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CREATING A STUDIO MODEL
The elements of
design studio experience:
TANGIBLE
INTANGIBLE
PORTFOLIO What impact will
our wo...

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CREATING A STUDIO MODEL
It all starts with your
design philosophy.
TANGIBLE
INTANGIBLE
FULFILLMENT
PORTFOLIO
CLIENTS ST...

39
CREATING A STUDIO MODEL
It all starts with your
design philosophy.*
Write down on sticky notes what you’re doing right ...

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CREATING A STUDIO MODEL
Now, organize your thoughts.
Cluster your loves and hates.
Identify big-picture themes and valu...

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CREATING A STUDIO MODEL
Next, determine your capabilities
and identify your market needs…
TANGIBLE
INTANGIBLE
FULFILLME...

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CREATING A STUDIO MODEL
Understand your capabilities.
Write all the tasks you can fulfill with your current skill set.
...

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CREATING A STUDIO MODEL
Compare to your market demand.
Here’s how Design Commission forecasted—based on
their current s...

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CREATING A STUDIO MODEL
Once we get to process
and culture, things start
to get complicated…
So let’s look at a
real-wo...

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Hello, Design Commission

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Design Commission
in a nutshell:
Founded in 2004 by
David Conrad and Jay Dokken
Currently 8 full-time employees
Special...

47
The world
as Jay
and Dave
see it…

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We are fascinated by technology
and the way it disrupts
existing economies.
Our philosophy from
a studio perspective......

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Be as resourceful as humanly
possible in the name of solving
problems for our clients.
This guides our
daily financial ...

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• Start-up costs
• On-going overhead
• Utilization
• Clients
• Quality of work
• Culture
• Resource composition
...

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Common startup costs:
• Rent
• Office Furniture
• Computers
• Phones
• Internet
• Sharpies
• Office Snacks
• Property I...

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What we actually had:
• Property Insurance
• Health Insurance
• Dental
• Retirement Plan
• New shirt for meetings
...

53
Our
space...

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Cultural
overhead
to boot...

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Our gallery...
This isn’t about maximizing
money earned per sq. ft.
It’s about designing our
studio’s culture as part
o...

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We make money based on the
value of the problem we are solving.
Find more valuable problems,
make more money.
Time is a...

57
Resource composition
Plan your finances around the intersection
between need and opportunity.
Project
Commission
Resour...

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Weekly Utilization
DC 93%
JD 150%
ZZ 90%
SH 100%
AE 48%
JO 58%
89%
We target a blended
utilization rate at 70%.
This in...

59
There is such
a thing as
“GOOD
ENOUGH.”
Quality is always important,
but budget is often a
constraint any design
studio...

60
Process
We’re always optimizing and refining what we do.
• Reducing the number of creative concepts to one
• Fewer, sho...

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Now, Let’s Talk About Money

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“I’m not a businessman.
I’m a business. Man!”
—Jay-Z
1. Weekly management
2. Monthly management
3. Yearly management
4....

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1. Weekly financial management
Individual project reports: Comparing budget
to actual expenses on a project-by-project ...

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Project reports
1. WEEKLY FINANCIAL MANAGEMENT
Following the Green | ©2015 David Sherwin David Conrad

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Client Name 0–30 Days 31–60 Days 61–90 Days Over 90 Days
MegaCo $100 $500 $1,000
LittleCo, LLC $50 $50
Mom-n-Pop $25 $2...

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Cashflow projections
1. WEEKLY FINANCIAL MANAGEMENT
Take a look at the example spreadsheet:
http://bit.ly/FollowtheGree...

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Work in progress
1. WEEKLY FINANCIAL MANAGEMENT
Following the Green | ©2015 David Sherwin David Conrad
Take a look at ...

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Opportunities
1. WEEKLY FINANCIAL MANAGEMENT
Client Name Projected Revenue
New Project for MegaCo $2,000
Updates to las...

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2. Monthly financial management
Review and send client statements: All clients with
active billings and/or work showing...

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Dear MegaCo,
For your records, below you will find a current account statement.
Current Account Balance Invoice Project...

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Profit and loss statement
2. MONTHLY FINANCIAL MANAGEMENT
Following the Green | ©2015 David Sherwin David Conrad
Take ...

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Balance sheet
2. MONTHLY FINANCIAL MANAGEMENT
Following the Green | ©2015 David Sherwin David Conrad
Take a look at th...

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Budget
2. MONTHLY FINANCIAL MANAGEMENT
Following the Green | ©2015 David Sherwin David Conrad
Take a look at the examp...

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3. Yearly financial management
Set goals: Write them down. Be realistic. Don’t overreach
what your staff is realistical...

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Financial
• Income distribution
• Client mix
• Utilization
• Calculating rates
• Other things to watch
Operational
• B...

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55% Payroll/Benefits
15% Marketing
10% General Overhead
10% Facilities
10% Profit
Industry-standard income distri...

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Memorize this. Pin it up to your wall:
No single client should account for
more than 25% of a studio’s business.
When i...

78
Typical studio utilization rates:
Calculating Utilization
52 WEEKS PER YEAR
– 2 WEEKS SICK-LEAVE
– 3 WEEKS OF HOLID...

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Labor cost
Fixed overhead
Debt
Taxes
$50,000 PER YEAR
+ $90,000 ($270,000 / 3 PEOPLE)
+ 0 (WOW, YOU’RE LUCKY!)
+ $...

80
Calculating rates
4. FINANCIAL METRICS
Targeting 15%–25% profit across 3 employees
Total labor cost
Fixed overhead
Debt...

81
Mark-ups: Should always be at least 15-25%. At DC,
they charge 20%.
Minimum fees: At least 2 days for any project.
For ...

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Backlog
4. OPERATIONAL METRICS
DC maintains
a 3 week backlog.
This is the amount of time that the studio is booked for,...

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Staff composition
4. OPERATIONAL METRICS
Staff composition at most design studios is:
70% Creative/billable
30% Admin...

84
Keep your records for 6 years.
Don’t include the current year when you count to six.
Audits often don’t happen until 3 ...

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Do your employee reviews
every 6 months.
Make sure that you clearly document them.
Employee reviews
4. OPERATIONAL METR...

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How much to save
4. OPERATIONAL METRICS
Target 2–3 months of your
operating expenses.
But you should really save as muc...

87
Bid/win rate
4. MARKETING METRICS
Your bid/win rate should be
at least 50%.
DC captures about 55% for new clients, but ...

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Lowering your rates
4. MARKETING METRICS
Use line-item costs
to show a discount.
Don’t reflect a discount in lower hour...

89
Estimates and proposals
shouldn’t take more than
1–2% of a project budget.
David C. spends 3–5 hours on a proposal
once...

90
5. When things go sideways (with money)
Client challenges value of work
Late or non-payment
Following the Green | ©2015...

91
If you hear from a client after a project has been
delivered that they are not satisfied with your work,
you have two i...

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Communicate before you litigate.
You have options:
• Always include a mediation clause
in your contracts
• Discuss paym...

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Parting Thoughts

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“Your budget is a
reflection of your
philosophy.”
Following the Green | ©2015 David Sherwin David Conrad

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Know how big you want
your studio to be
when it grows up.
SENIOR
DESIGNER
ACCOUNT
MANAGER
ART
DIRECTOR
DESIGN
INTERN
JR...

96
To create a sustainable business,
never depend solely on organic growth.
Bill for
time
Resell
services
License IP Sell ...

97
Be proactive, not reactive.
Clients will respect you for it.
“TWO PM!”
“I’LL CALL YOU IN
TWO DAYS TO DISCUSS
THE WEBSIT...

98
Be paid well to be creative.
Know where money truly fits
in creating a sustainable future
for your business.
Following ...

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Tools and resources
• Konigi Cost Estimator:
http://konigi.com/tools/schedule-and-cost-summary-calculator
• Harvest Tim...

100
David Sherwin
david@changeorderblog.com
davidsherwin.com/success
@changeorder
David Conrad
david@designcommission.com
...

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