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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.

Oh dear. Oh dear, oh dear, oh dear! It’s so easy to get caught up in a few data points and a good story. So, let’s take a step back and talk about what is really going on, and the implications it has for digital agencies.

To be clear, we are in the early stages of a down cycle for digital agencies. We’ve seen this ourselves at Involution, with a decline in good leads and an overall decrease in realized billable rates compared to 2011–2013. But we’ve been aware for some time that the agency business is punctuated by up and down cycles. Sometimes a decline is related to macroeconomics, such as after the dot-com crash and 9/11 one-two punch in 2000–2001, or during the great recession of 2007–2011. In such cases, agencies are usually the first to get hurt but are also the first to recover. However, since the U.S. economy continues performing well, it is unlikely that macroeconomics is behind the recent slowdown in the digital agency business.

Agency downturns can also result from shifts in technology, or from the evolution of professional fields of practice. Take computer engineering, for example. In the early 2000s a trend of  “offshoring” emerged. Large companies sent massive amounts of engineering work to India, China, and other far-flung places, to take advantage of compensation that was literally pennies on the dollar compared to what would be paid in the United States. Many engineering professionals suffered when this outsourcing trend was at its peak. Of course, the offshore solution was not the silver bullet that companies thought it would be. The lower cost was nice, but not-so-nice was slower work, lower quality, and periodic catastrophic project failures that cost companies years and many millions of dollars. Eventually, offshoring became near-shoring and re-shoring.

The explosion of software sparked by the rise of Web 2.0 and the ubiquity of social computing brought engineering back with a vengeance. Talent surpluses turned to shortages and there were entirely new technologies and platforms that agencies were in great demand to help fill. During the emergence and rise of offshoring this rebirth would have seemed unlikely.

So, this little historical jaunt brings us back to the current moment: UX and digital design agencies struggling. I’ve spoken with over a dozen design and UX leaders of both corporate-based internal design organizations as well as on the agency side. A variety of factors are conspiring to create the current malaise:

There is a trend toward companies building internal design and UX capabilities in lieu of outsourcing. Organizations have a natural, practical drive to build an internal core of employees as opposed to using more expensive external resources. Large software companies, particularly in Silicon Valley, have had their own internal teams for a long time. For example, Adobe built theirs back in the 1990s. We were part of the transition to McAfee building their own internal Silicon Valley design organization in support of their primary consumer suite in 2008. This trend is not limited to software companies—other  industries, such as banking and financial institutions, are shifting from using external resources to building internal teams.

Design and UX people are enjoying the ride. Fresh career and compensation opportunities are presenting themselves. There is upward mobility, along with an unprecedented number of positions at or just under the C-level in a variety of companies. So, not only are companies building up internal capabilities, they are doing so at a level of authority, compensation, and recognition that is pulling in the best and brightest. In some cases, such as with the Adaptive Path buyout, this is happening in the shadow of diminishing agency opportunities (that may have made the sellout seem more attractive). Regardless, when tentpole agencies and independent stars head into companies and start building internal organizations, they naturally pull in other good people and agencies.

There is an abundance of junior, inexperienced talent. There has been a severe talent shortage in UX, really ever since companies started caring about design and UX in the 1990s. Now, with the availability of professional education (read: not academic) programs, both young people as well as older professionals (transitioning from dying industries) are preparing to enter the market. For the first time, there are significant number of UX people who are not able to find a job. While this is understandable—most of these folks are trained but inexperienced—it creates the impression that UX talent is easy to come by. This impacts the value placed on those professionals and their services.

The combined effect of these factors puts a strain on UX and digital design agencies, despite the growing importance and need for these services.

So, given all of this, why shouldn’t these trends cause panic for UX and digital design agencies? It’s simple, really.

  1. Software will continue to become more important to companies in every industry. The need for the various skills that create great software will only be in greater demand.
  2. While we should assume that the supply of trained-but-inexperienced talent will often exceed the demand, it will be years before the supply of experienced and exceptional talent exceeds the demand. Meanwhile, there is a significant disparity between the number of people qualified to assemble and lead a substantial internal UX organization and the number of companies that need this type of leadership. Right now, many people are finding their way into those positions. However, before long, there won’t be enough skilled leaders and, like with offshored engineering, catastrophic failed initiatives that cost years of time and/or millions of dollars will lead to a renewed demand for fast, skilled, and effective external design support.
  3. The best creative people won’t want to be in corporations for very long. There’s a reason that, despite companies aspiring to create internal ad agencies for decades now, those efforts have largely failed and they have turned to external agencies for support. So it will go in our creative sectors. We might be seduced by the big salary, or the opportunity to really focus on just one meaty thing, or promises of enlightened and flexible cultures. But, particularly for creatives, money isn’t everything, working on one thing for years gets boring, and big company cultures will never accommodate creatives as well as working on their own or for sexy agencies.
  4. External agencies have inherent functional strengths: we work faster and we’re more tightly tied into bleeding-edge technological developments and creative cultures across all industries. That benefit is not clear to large corporations until they’ve established their gleaming new internal design team and let it run for a couple of years. The shine on the new infrastructure wears off, and the impact of a leaner, more creative resource is required. (Even if the internal-external difference is more a matter of perception than capabilities, the desire to go external will be there.)
  5. The total cost of agency engagements can be less, perhaps significantly, than internal resources. Agencies can be deployed in a highly focused way on large initiatives. Use the elite talent for a period of time to help solve big problems (albeit at a higher rate than paying internal people) and then keep a smaller maintenance team in-house. This blended approach has a far lower cost over its total life than a strictly internal team and the crucial knowledge gained from the work remains inside the company. It may take some time running internal teams year-over-year and seeing the impact of total loaded costs on the bottom line, but this dynamic will become particularly clear to companies who’ve chosen to build internal teams and seen the relationship between overall volume and quality of output, knowledge building, and cost.

So, fear not, intrepid agency owner or happy-to-be-there staff: while some of us may go away as this trend catches wind and the market changes, the future for digital design and UX agencies remains promising. We may end up calling ourselves something different, or positioning ourselves in a new way. But, at the end of it, external creative organizations are essential to businesses striving to be better. The work will be there.

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