GOOD CEOs: Issue 6

Conversations
with Leland Maschmeyer
are wide-ranging.

The co-founder and CEO of Collins has the sort of brain that moves seamlessly between philosophy and finance, design and economics – treating them less as separate disciplines and more as parts of the same system.

When we sat down last week for a discussion about branding, it quickly evolved into something broader. That is, a critique of how the creative industries thinks about value, and why companies sometimes struggle to capture it.

At the centre of his thinking, there’s a provocation: most design companies have an opportunity to sell their services in a better way. Leaders in this space “proselytize a belief system,” he explains. While clients are just looking for is a solution to a problem. And this mismatch causes a lot of trouble – from broken pricing models to an industry that seems to grapple with its own sense of identity and purpose.

Read below for an edited version of our interview. Where Leland lifts the lid on this further, as well as why we’re heading towards a K-shaped economy, and how pricing is a deeply imaginative act.

Let’s get into it.

Ollie Scott: I was going to start with a softball question, but let’s start with something brutal instead. Why haven't we built a business model for design that captures its real value?

Leland Maschmeyer: The answer to that question could fill a whole year class at a graduate school. There is a market mismatch in what is being sold and bought. The design industry sees itself as proselytizers of a philosophy. When you go to design school, you are taught a worldview, a moral role that you play in the world. What ends up happening is you sell a philosophy, you sell a belief in a discipline, because that's what you trained on. That's what you believe in. And you know it's inherent goodness. The problem is: nobody's buying that.

OS: Clients don’t pay for a philosophy, right?

LM: The demand side of the market has dollars, it has problems, it has things it needs to do for its commercial endeavour. And it says: ‘can you help me do that or not?’ And designers, meanwhile, oftentimes spend a lot of time talking about the value of design, The demand side is like, ‘yeah, but I got this business problem’. And that inherently is the crux of the problem. One side is selling philosophy. The other side is buying solutions – and they're talking past each other.

OS: There’s a phrase about creative work that I find interesting. Anything that doesn’t have a commercial brief is art. Anything that does is craft. Creatives in a business setting can lack an awareness of the value in their craft. Why do you think this is? 

LM: In regard to this, I think about pricing. So pricing is not math. Pricing is not finance. Pricing is a creative act. It is a creative discipline. It’s fundamentally the understanding of value and an exchange so value can be captured. So it’s about value communication, delivery and capture. Value communication is what a lot of creative industries have traditionally been tied to because of the nature of distribution and the nature of media. But it's ultimately communicating the value of something. 

OS: So it’s not maths, it’s landing a message?

LM: A client’s willingness to pay is anchored on the perceived value of what you're going to buy. So, what's the difference between stretching and yoga, for example?

OS: The setting, the culture, the experience, I think. What’s your take?

LM: It’s basically the same thing. It’s a heated room, some exotic language around it, maybe some incense burning in the corner, but you're basically stretching. Fundamentally, it's the same thing, but yet people pay a ton of money to go to yoga. The history that you're connected to is different. Stretching is just stretching. Stretching is technical, transactional, boring, but yoga I got to start my day every day with yoga and I'll pay $80 a session for it and people will line up at the door. If you change the context, you change the set of the price – you change the understanding of what something costs.

OS: Let’s dive into this a bit further. How does it apply in an agency context?

LM: When you don't understand how to measure the value of what you do, it becomes impossible to price it. A lot design companies default to charging hours or doing cost plus pricing, things that feel familiar, things that feel defensible. But there’s a problem with charging for time: clients say ‘I don't want you to take a long time to make this. So why are you selling me hours?’. There’s a misalignment.

OS: Who is doing pricing well right now?

LM: The best examples of pricing aren’t found in the creative services or design industry. For example, the airline and hotel industries – both are extremely good at pricing and have pioneered some of the most advanced pricing techniques out there. There is no monolithic approach to pricing – just like there’s no one way to build a brand. It’s more of an art than a science.  

OS: Collins has gone through a transformation in recent years, evolving from a design company and heading upstream to become a more consultancy-style service. How does all this apply to you there?

LM: Firstly, consultancy and agency are fundamentally different businesses, even though they are sometimes superficially seen as the same – smart, highly skilled practitioners coming in to solve business problems. One does it through creativity. The other one does it through management advisory. But when you really dig into it, it's apples and oranges. Or even apples and car tires.

OS: How are they so different in your view?

LM: So management consultancies came up in an era when strategy was not a practice of companies. In the old days, you basically built a factory, sold stuff out of that factory, and tried to sell it to as many people as possible in the general population. But then it got more complicated. Companies expanded, diversified, became conglomerates. Markets started fragmenting. Leaders had to think strategically about how they’re deploying capital. Waste became a concern. So a management consultant would say: ‘I can cut $110 million from your business losses. Give me 10% of what I’m going to save you.’ That is an easy sale. I’ve done it.

OS: So it’s about clear metrics, attribution and a number on a balance sheet that is impossible to argue against. What about the agency model is different in your view? 

LM: Creative agencies can't do that. They can't do outcome-based pricing. And by nature, creative agencies cannot say, well, this is a best practice in the industry, therefore do it here, and do the same thing on repeat, the way consultancies do. Because creative agencies thrive on differentiation and being unique and doing something new.  

OS: Which is where you get into the business of non-competes.

LM: Exactly. Management consultancies can work with a lot of companies in the same industry because they claim industry expertise. The number of non-competes that agencies have is enormous because they compete on uniqueness and differentiation and creating a surprising edge over the competition. And companies don't want anyone else to know what the agency is brewing. 

OS: So the advantage becomes the thing that stymies growth?

LM: Right, and it's hard to price something that is unproven, new, different, never done before. That's hard to price. And companies are inherently risk adverse. Companies like predictability. They like certainty. They like security. They like repeatability. That's what they pay for. A company will more likely pay more money for less stuff if it's certain then less money for more stuff if it's uncertain. And so this idea that agencies can become consultancies is a real uphill climb. That consultancies can become agencies is more feasible – you can add agencies as a downstream appendage to the more operational, financial strategy work.

OS: Tell us about your idea of the K-shaped economy. What’s it all about?

LM: The K-shaped economy has been happening since the 1990s in the US. I'm pretty positive it's happening elsewhere in the world, but it's a bifurcation of the economy that really came into the foreground during COVID, and accelerated. The middle of economies globally is hollowing out. And that's driven by a lot of different things, everything from technology to policy to where capital assets are held and how wealth is being created and so on. But regardless of the reasons for it, the outcome and the ongoing trend is a K-shaped economy.

OS: Give us an example of how this is showing up.

LM: As of right now, the top 10% of the US economy in wealth distribution drives 50% of all consumer spending. That is an enormous number. And it will affect how budgets are spent by companies. You cannot exist in the middle anymore. And so do you evolve to better appeal to the top of the K curve – or aim for the bottom? Both are perfectly good strategies.

OS: And is this impacting which brands grow or die? 

LM: Yes, it’s why you’re seeing Bed Bath & Beyond collapse or Macy's struggle and all these companies that built giant multi-billion dollar brands when the middle market was huge for a century or more. And you see it with big box retail stores. Big box retail stores used to dominate, but now their market share is being chipped away by share chipped away by specialised retailers offering better products, better experiences.

OS: What’s the role of a design or transformation consultancy in a K-shaped economy?

LM: We help companies become more valuable. That means products becoming more valuable in perception and reality because we layer new types of value onto it. And historically, we've always seen it as what we need to communicate. How do you make the company more valuable so that there's a higher willingness to pay, a stronger preference so the companies become less dependent on discounting? And competitively, it's harder for other companies to copy the intangible value that has been built on top of the product. 

OS: Taking all this into account, what are your three predictions for the next three to five years?

LM: Prediction one is: agencies will become managed services businesses. They will sell workflows, not time, not deliverables. Usually not solutions, usually not outcomes. Predominantly, they will sell workflow ownership with service level agreements to them because they will evolve into software businesses with a service front end. But fundamentally, the model, the profit, the price point will be attached to workflows that are outsourced to them.

OS: What about prediction number two?

LM: The world of finance and design will become bedfellows. There is far too much money floating around in the global economy with few two companies to put it in. The traditional forms of increasing the value of a company among private equity firms or VC firms is running out of steam. And design is the best way to increase the value of something. Not just financially, but emotionally, socially, culturally. And the world of finance will understand that and bring design in closer to itself.

OS: And finally, prediction number three?

LM: Pricing will become a much bigger topic for companies. Across the board, pricing it is a growth industry. There are four ways that you can increase net revenue. One: sell more. Two: convert variable cost to fixed costs. Three: cut costs. Or four: increase price. The easiest one, cut costs. The most expensive one, sell more. The most confusing one to do, convert variable cost to fixed costs. The hardest one to do, price. And the most overlooked one is price. The best way to increase net profit is through increasing price. But price is the scariest one to do because you always think it's going to turn off demand, you always think it's going to piss off your retailers, and you don't really know how to increase it.

 
For the full audio excerpt of the conversation between Leland and Ollie, tune into our Podcast episode, released yesterday.