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The Rant

Are UX Agencies Dead?

November 6, 2014          

Episode Summary

In this episode of The Digital Life, we talk about the state of the UX economy, and the implications it has for digital agencies.

Like wildfire, word of the demise of UX agencies is spreading through the community. Sparked by the acquisition of Adaptive Path, the closing of Smart Design in San Francisco, and an analysis by UX influential Peter Merholz, the intelligentsia are hailing the decline of UX and design agency work in technology. Exacerbating the situation are rumors that a variety of other agencies are in trouble, trying desperately to get bought as they prepare for a shutdown.

It’s so easy to get caught up in a few data points and a good story. But what’s really going on?

Jon:
Welcome to episode 76 of The Digital Life, a show about our adventures in the world of design and technology. I’m your host, Jon Follett, and with me is founder and co-host Dirk Knemeyer.

Dirk:
Hey, Jon.

Jon:
Dirk, there are a lot of trends happening right now related to user experience agencies that are affecting the market for services in possibly a negative way. We wanted to talk to that topic today on the show. Dirk, could you give us a brief overview of some of the trends that are percolating right now?

Dirk:
Yeah, the big “story” over the last couple of weeks is that UX agencies are dead. That’s been spouted out there by a number of people some of them very smart, some of them very well informed in different ways. As is the problem when people are looking into the future they don’t necessarily put the pieces together well to understand how things will all net out. You asked what the trends are, so there are some trends that are coming together to create this moment where people are saying these really ridiculous things. The big one is that companies are increasingly building internal design and UX capabilities, as opposed to hiring agencies. That’s a natural step in the lifecycle and the maturity model of design and user experience inside of organizations. It’s certainly no surprise that companies are trying to do that. Now, there is problems with that, especially on a big scale, that maybe we will talk about later, but that’s a big one. A lot of dollars that used to go to outsourcing now are going to internal team building.

The second is that, for the first time I think ever, we now have an abundance of junior inexperienced talent in UX related design fields. That’s a product of over the last few years there has been a huge rise in educational programs, not university programs, but the sort of 10-week or weekend or multi-month programs that are minting people who now have skills that were once, and at a high level quality still are, in high demand. Most specifically and most prolifically in front end engineering, but certainly also in more core design stuff as well.

Now, whereas before there was really near zero people on the open market, now there is lots of people on the open market and there’s lots of people who can’t get jobs on the open market. That really has a destabilizing effect on supply and demand. Now, unfortunately, for people who are hiring or engaging as consultants those people as opposed to more experienced professionals there is also a quality gap because at this point those folks just don’t have the experience, but again maybe we’ll talk about that later on the show.

The third thing is that design and UX people are really enjoying the ride, so one of the big stories that started this whole conversation about how UX agency is dead was the purchase of Adaptive Path by Capital One Bank. Adaptive Path folks I don’t know how much money they made what kind of multiples, but I’m sure that they did pretty well. There is something very sexy about wanting to be bought out and be this key strategic acquisition for a large corporation.

I was really surprised to read from the head of Adaptive Path to the only of the original partners who was left there Jessie James Garret writing about how honored he is to be going to Capital One and how they have the one of the best innovation cultures in the world and I’m thinking, “Holy crap! You are talking about a massive bank, dude. You must really want that money bad to be talking this bullshit like it was something authentic.”

For the moment creatives, and this is a good example of it, are just enjoying the ride. They are enjoying getting a lot of money, they are enjoying … Now I’m not talking about adaptive path I’m talking at a broader level. They are enjoying the big titles that have been brought into to build organizations, so it’s new and fresh and exciting for people in our field. We haven’t, for the most part, had these opportunities before. We haven’t been positioned in these ways before, so that is increasing the momentum towards people on the agency side looking to go corporate, looking for a buyout, and Adaptive Path isn’t the only buyout right now. Those are a few of the factors that are contributing to this moment in time.

Jon:
I think those are, or that’s a really good analysis of what’s happening right now in the industry. I think it would also be worth mentioning some of the ups and downs that we have experienced over the past 10 to 15 years in regards to both macro and micro economic factors. In particular, I’m thinking about the various waves that we had to ride especially at the beginning of the internet technology boom. I can remember it was a very personal thing for me watching lots of start-ups go under during the dot bomb around 2000. Then, of course, that was quickly followed by the exodus of quite a few designers as a result of the 9/11 attacks that just decimated the economy and additionally this industry. What are your reflections on the different sea changes that user experience has undergone so far?

Dirk:
On the agency side and tying into macroeconomics you mentioned the dot bomb; at that point UX agencies were just coming into being. Involution, ourselves, was established in 2004 coming out of the ashes of that stuff. That had a huge impact on advertising agencies. It had a huge impact on other types of external service providers and agencies. A lot of companies were killed by that, but UX agencies as a concept were just emerging. There was a few and they didn’t call themselves UX, but one of the victims of it was a company called Argus Associates that our younger listeners may not be familiar with. That was the company started in the earlier mid 1990s by Peter Morville and Lou Rosenfeld as an IA consultancy that, depending on how you define the user experience, you could argue that they were the first UX consultancy going. The dot bomb certainly killed them and there just weren’t many UX consultancies, certainly none that called themselves UX when all of that was burning down.

In the more recent recession from … I never know the years to put on it. Let’s call it 2007 to 2010, that had a huge impact as well. By that point there are a lot of UX agencies, some of them certainly died and it certainly almost killed Involution. We barely made it through that period, but we did, and then things came back very strong. What’s interesting about this moment in time, when people are bemoaning the so-called death of UX agencies, is that the macroeconomics are strong. I don’t think they are strong from a theoretical perspective. That is, I think, I don’t even think, I know, most of the smart economists that I read and I’m familiar with are scratching their heads like, “Why isn’t our economy totally going in the toilet? It’s so over performing what fundamentally it should be doing.”

However, it is over performing. It continues; the stock market is blasting way up. The Dow was under 10,000 just a few years ago and now I don’t know is it 17,000? I don’t pay close enough attention. It’s almost doubled in a really short period of time, which is just nutty. It’s crazy. The point being when things are good in the macro agencies tend to keep doing well as a group, but UX agencies are eating it right now and that just comes back to design maturity, and UX maturity, and how companies are shifting from the outsource model to more of the in-house team model.

Jon:
I know that you are somewhat of an optimist about the eventual outcome of this particular downturn in the market for UX services. What are the factors that you think will help UX agencies survive this particular downturn and continue to thrive as years go by?

Dirk:
Yeah, I think there is a few. Again, this is just nutty that people are saying that UX agencies are dead and the whole model of outsourcing design and digital design is dead. It couldn’t be further from the truth. Perhaps the first and the biggest one is that software is only becoming more important, more mission critical to companies and every industry every day. We are already in a period that really was started by the success of the iPhone and the iPad, which took computing from something that was more work and geek based into every moment of every day of every middle class and above consumer in the United States at least based. The need for design UX anything pertaining to software has just been growing really quickly, and it’s only going to continue to grow. That is certainly a big factor.

Another is, which is one of the things I talked about a little bit earlier, the fact that a lot of these people who are creating a glut in the market place are newly mentored, perhaps skilled, but untested professionals. They are going to get into positions and they are not going to do very well. With Involution we are bringing people with a lot of years of experience who are just the very best at the things that they do. Companies that have worked with strong agencies like ourselves in the past bringing in these folks who are at this point in their career lower level there is a big delta there. Very quickly, in terms of bottom-line impact, quality of results, that’s going to be noticed and there will be, in a number of cases people say, “Look, let’s just outsource this. This needs to be right; it needs to be what it needs to be, so let’s go in a different direction.”

Another factor is that the really top creative people, they don’t want to be in corporations. Right now it’s sexy, it’s exciting, there is a lot of money being thrown around, big titles, it’s new, there is something sort of pioneering about it for those folks who are coming in and building these big teams and these important “companies”, but the rose is going to lose its bloom pretty quickly. Big companies are not the same as external creative agencies. You don’t get the same culture; you don’t get, no matter how progressive they try to be, they just can’t be as responsive to the needs of employees, the very idiosyncratic desirements of creatives. While right now there is an influx of top talent into corporations, that’s not going to be the case longer-term. That pendulum is going to swing the other way, which is going to create even more scarcity in top talent in large organizations, which will really put pressure on their ability to create internal teams.

Some other factors; external agencies, we are always going to be able to work faster and be more tightly tied into bleeding edge technology and creative cultures than larger companies. Even if they invest in it, even if they try really hard the nature of agencies, the very reason why we exist, is to excel in those things, so there is going to be a loss for companies that worked with top agencies in the past that now are shifting to in-house. There is a delta there, and that delta will, in some cases, definitely in some cases result in their going back to outsource.

One of the other key factors is that there are just not that many top people in user experience, in digital design. How many people do I think are qualified to build an entire UX design organization inside a large corporation in the world? It’s a hell a lot lower than 1000, and so how many companies are trying to build those type of organizations? Well, it’s in the thousands. There is this huge disparity between the people who can do it properly and correctly and the companies who want it to be done. Real quickly, companies are going to make bad investments, build crummy teams, and come out of that failed process looking to go back. Companies are going to get burnt just like companies were burnt when offshoring development to India and China. Some did great with it; others, after five years and millions of dollars down the tubes, brought it back in-house or brought it to the United States in an outsource form because the delta was just too great despite it seeming like such a good idea.

I think there is a lot of different factors. Another one, and perhaps the one of the most important ones, is ROI. We often see this in other agency work I’ve seen before starting Involution as clients look at the bill and they are saying, “Holy crap! The amount we are paying for one head count on your team I could pay for a couple of people if we just hired them in-house.” There is a couple things with that. One is that the loaded cost of people in-house, once you add up all of the plus, plus, plus, first of all it’s not true. It superficially seems true when you are looking at the salary, but that’s not even true to begin with. The second thing, and perhaps more important thing, is when you are working with an external service provider you can scale for a short periods of time and then have zero cost going forward.

If I think of some our bigger engagements where we’ll gear up with a client, not even a big engagement sort of a medium or large. We might have a team of four/five people who are going full out flat out during that time then once you get over the hump and get to a certain point then you scale back on our team to one person, maybe two. That throttling is savings that is immediate and long-term. If you’re trying to do it all in-house are going to end up with a lot of resources that don’t have a whole lot to do. If you have dreams of them being in R&D and new product development you can spin them off on a lot of shiny, gleamy, things. In my long experience I don’t find that the kind of people who want to work inside big organizations are the same kind of people who are really good at skunkworks and that kind of stuff.

I think there is just a bazillion reasons why UX agencies aren’t dead. It’s just a tough moment right now and, as it has always has, if we look over the history of management consulting firms, advertising agencies. All of these external firms we could Google and find articles that this is dead and that’s dead over the past, but they all come back, they all wax and they wane. We are waning at the moment but the waxing is sure to come.

Jon:
Thanks for going over all of that, Dirk. I think there is a lot of things to chew on there if you are working for a UX agency or if you are recently going into an internal UX department at a large company. Lots of stuff to think about. Listeners remember that whole you are listening to show you can follow along with the things that we are mentioning here in real time. Just head over to thedigitalife.com, that’s just one ‘L’ in the digitalife, and go to the page for this episode. We’ve included links to pretty much everything mentioned by everybody so it’s a rich information resource to take advantage of while you are listening or afterward if you are trying to make something that you liked. If you want to follow us outside of the show you can follow me on twitter, @jonfollett. That’s J-O-N F-O-L-L-E-T-T. Of course the whole show is brought to you by Involution studios, which you can check out at goinvo.com. That’s G-O-I-N-V-O.com. Dirk?

Dirk:
You can follow me on twitter @dknemeyer, that’s @D-K-N-E-M-E-Y-E-R, or email me dirk@goinvo.com.

Jon:
That’s it for episode 76 of The Digital Life. For Dirk Knemeyer, I am Jon Follett, and we’ll see you next time.

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