Can independent design studios survive COVID-19?

2020 was supposed to be a victory lap. New Deal Design (NDD), one of Silicon Valley’s leading design firms known for hit products like the Fitbit and sci-fi moonshots like Google’s modular Ara phone, planned to enjoy its 20th year of operations, hot off a successful 2019. Then COVID-19 struck. “I should have been very happy and proud. The team should have been happy and proud,” says founder Gadi Amit. “Instead, we’re dealing with survival.”

Founded in 2000, NDD is one of Silicon Valley’s last standing independent design studios from that era. Large companies acquired the firms of many of his peers. Other studios couldn’t make their business plans work. But NDD stayed afloat and managed to weather the fallout from two major economic crises—first the dotcom crash, then the recession of 2008-2009.

COVID-19 has been different. The worst financial crash since the Great Depression, it has left nearly half of all Americans out of work, and corporate clients have slashed budgets and canceled projects. “This is probably the toughest year I’ve had since starting the business 20 years ago. It’s been really precarious,” Amit says. “We’re set more or less for the next two months, but beyond that, I have no idea what things are going to happen.” NDD’s struggles point to a precarious future for other independent design studios—and for the future of independent design itself.

A challenging business model to begin with

The core problem is that design consultancies, even those as storied as NDD, get most of their revenue on a per-project basis. So a client commissions the studio to design a speaker or a phone, and NDD gets a flat fee for it, no matter how successful the product eventually is on the market. At times, they are so strapped for cash that they only have a quarter of runway, which means they’re constantly on the hunt for new work to keep the operation afloat. What’s tricky is that the business of a consultancy doesn’t necessarily scale its returns as many businesses do. The more clients you sign at any one time, the more designers you need on staff to accommodate them. The ratio of expenses to revenue doesn’t dramatically shift.

For two decades, Amit handled this in stride. The firm’s 2019 was a particularly good year in terms of projects and revenue. “Everything was hunky dory,” says Amit. “The climate started changing in February.” Amit closed out 2019 having worked on everything from real estate branding to gelato makers to a robot for the delivery company Postmates. Into 2020, he had a mix of scrappy startups and big clients to start the year—including one in automative. He was ready to go.

Early warning signs

NDD felt the impact of COVID-19 earlier than some companies in the U.S. because it has clients in China and Korea, where the pandemic hit first. Then Europe began to close down, drying up more projects NDD had lined up. “So when it finally hit the states in mid-March, and things closed here, we were already feeling it very badly,” says Amit. “March was really, really bad, and early April. There was very little that happened. And I had to furlough part of the team, cutting back their paid hours.”

The challenges of remote design

Those who were left had to work from home with the studio closed. Much of NDD’s work is within industrial design, creating physical items and convening small teams to brainstorm and critique. That made the transition to teleconferencing particularly tough. “We spend a lot more time on tools like Figma (collaborative creation software) to try to mimic this whiteboard in virtual space,” says Amit. “But I’ve gotta say, it never got 100% there. You get 70% to 80% okay, but not really brilliant.”

Eventually, NDD’s San Francisco office opened back up in a very limited capacity, allowing people to convene in person a couple days a week. But Amit is still spending 10 hours a day teleconferencing, adjusting to the process of designing from afar. “For me, it’s always been the case that the outlier design ideas, the sketches in the corner, are potentially the most important ones,” he says. “And that’s something that can be lost in the work-from-home Zooming and so on,” says Amit. “A meeting that could have been 10 to 15 minutes in the studio takes an hour. So that’s the story, I guess. The new reality.”

A pandemic “afterglow”

The past two months have been better for NDD financially, as the firm has picked up some COVID-19-related design projects in food, sanitation, and remote work, while companies restructure and retrofit for the era. Amit was able to take his entire team off furlough with a PPP loan, and then even hire two additional designers along the way as he picked up new work. But Amit is a realist. He knows a lot of the projects he’s been brought on to tackle are reactionary to the pandemic—a short-term financial boon he dubs an “afterglow” of the initial crisis. And to sign these projects, he’s also reduced the firm’s fees, tightening its margins.

“Obviously, there’s very little stability [in this strategy]. We’re trying to sell our worth [to companies] in a very basic manner: ‘Hey, we’ve got an amazing design team that has a broad spectrum of experiences, and we’re willing to give you this for a lot less than previously,’” says Amit. “And even that is not easy because they tell me, ‘We have an internal [design] team,’ or ‘Budgets are cut,’ or whatever. So that’s how it goes.”

A hazy road ahead

As he looks toward the next year, Amit doesn’t imagine that COVID-19 will magically disappear, or that the economy is going to improve. Rather, he anticipates it getting worse. While he acknowledges that small business owners such as himself have taken an early hit, he’s worried about the larger, compounding effect of so many Americans out of work for so long.

“The other shoe is still to drop. When you think about it, eventually people won’t have money. It will spread around to all aspects of the economy. The sound bite is, ‘Who is going to buy an iPhone 12?’” says Amit. “Fundamentally, there’s going to be a lot less money in the economy. People will be concerned about what they spend and how they spend it.”

As for the design industry: The last decade has been something of a mass extinction event for independent design studios. Large companies have acquired, or partially acquired, nearly a dozen major design firms in less than a decade to bring their talents in-house—in a list that includes Astro Studios, Fuseproject, Lunar, Fjord, Matter, Adaptive Path, Argodesign, and Map.

Why does this matter? Independent designers are usually unburdened by office politics and other problems that can hamper a company’s innovation. As such, they might come up with more out-of-the-box solutions than an in-house design team. “I’m worried about the quality of design POVs in general, in the design community,” says Amit. Case in point: Take a look at HP, which scaled back on the 98 external design firms it hired in the mid-aughts to invest in in-house talent. I cannot name 98 design firms to this day; I also can’t name anything exceptionally exciting that HP has produced recently.

I ask if Amit has considered selling his own design firm in the light of the financial downturn. “That’s a big question—I’ve been approached before and it didn’t happen. I would not say it’s ‘off the table’ yet, but the fit must be there,” he says. “I don’t see ‘independence’ as a goal but as a means to a goal: creating better, more impactful design.”