Volume 137: Apex Scavenger.

1. Chilly Out There? Look After Yourself.

tl;dr: Some thoughts on tough times.

For the first time in a long time, I’ve had conversations with multiple people in the agency and consulting worlds about how tough it’s suddenly become out there. New business drying up, freelance opportunities going away, clients being super-hesitant to engage, and negotiating much harder on price when they do

Objectively, it’s not hard to see why. We’ve shifted from a zero-interest rate economic cycle, where growth was pursued at all costs, to a high-interest rate cycle, where growth is out, and profitability is in. As a result, entire categories like DTC have fallen off a cliff in just a few months. Again, objectively, the reason is simple. When interest rates are at zero, investors are willing to play a long game, subsidizing fast-growing loss-makers, potentially for years, because they aren’t making any money on their money anyway. However, when interest rates tick up as fast as they have, capital flows to safer sources of return instead. When you can get a 5% return at zero risk, the laws of compound interest place a much higher burden on the expected return from a risky investment that might take many years to pay off, if it pays off at all.

This is hitting design-led shops particularly hard, because two unrelated, yet negative, financial forces are now intersecting:

First, design as a commercial activity saw hockey-stick growth in the past ten to fifteen years. Over this period, it shifted from something rare and differentiating to something common, table stakes and commodified (sorry, designers, but it’s true). As a result, it’s hard to find any business out there that isn’t at least competent on the design front, which was previously far from true. This matters, because of the implications. In business, when something is perceived to be a value-adding differentiator, it gets investment dollars based on the anticipation of excess return. Then competition realizes what you’re doing, and they copy with their investment dollars, because they’re afraid of being left behind. Over time, what was an added value differentiator becomes a commodity - everyone now has it, so it’s no longer a source of competitive advantage. When this happens, the financial stance of the corporation shifts from an activity to be invested in to an activity to be managed for maximum efficiency. In other words, the priority shifts from maximising what’s possible, to minimizing what it costs to be “good enough.”

This is where design is today. It’s gone through a full 15 year cycle from an investment made to differentiate and create value, to a core activity that needs to be managed for maximum efficiency. This shift is also what makes design vulnerable to AI driven disruption, because machines are cheaper than people.

Second, a non-trivial chunk of the money flowing into tech, startups, and DTC brands (in particular) ended up in the pockets of design-led shops - branding, product design, digital design, experience design, advertising, etc. So, as these pools of client funds dried up, we’re left with less business to go round.

So, we have two downward financial forces intersecting. The first, is a shift from design as an investment activity with big budgets attached, to design as a business activity to be managed for maximum efficiency with constrained budgets (cost out, offshoring, automation, etc) The second, is a major drying up of the revenue pools external design agencies had become largely reliant upon.

The reason this all feels so painful, is that in the boom times, when the opposite forces were in play - corporate investment and VC dollars flooding into design - the number of design-led agencies and consultancies exploded. So many starting that it’s impossible to wrap your head around it. I’m more likely to say I’ve never heard of such and such an agency when asked about them than I ever was. And I don’t think that’s because I’m getting old; it’s just because there are now so many.

Because of the frothy nature of how the market was operating - I don’t know a design agency that hasn’t done a 7 figure exploratory design project for Google - it was easy to set these businesses up and be successful. Get your work out on Instagram, leverage a few connections, land a high-profile project or two, and you were in business.

For anyone who hasn’t been through an economic downturn before, and many of you haven’t, since the last one was 2008/9, the frothy market looked normal rather than abnormal, enticing many into thinking this would always be. Only it wasn’t. Now things are distinctly chilly.

Here’s the truth. As discombobulating as this change undoubtedly is, the sky isn’t falling. This isn’t the end of design or branding as a commercial activity. (Not yet anyway, a structural change driven by AI does look like it’ll be a fast follower, though) It does, however, look like a significant cyclical downturn that may lead to a smaller overall market on the other side. And in cyclical downturns, people lose their jobs, businesses fail, and things seem impossibly grim.

I’ve experienced this kind of arctic winter before, in 2008/9. It burned me out and pushed me toward some pretty significant life changes. And while I’ve previously provided advice to agencies about staying healthy as a business (Scroll to No.3), I’d like to take some time to focus on you. I want you to learn from all the crap I got wrong, so you don’t have to. Here goes:

It’s not your fault
It wasn’t my fault that my biggest client in 2008 was late to the sub-prime party and then decided to get the drunkest. But it sure felt that way after it collapsed and we had to lay people off. Unless you’re a sociopath, how can you not feel at fault when people who trust you and work for you are losing their jobs? I beat myself up every which way from Sunday about what I could or should have done differently. I blew a disc in my back, ate stuff I shouldn’t have eaten, drank waaaay too much booze, and was angry at everyone around me because I was even angrier at myself. But blaming yourself gets you nowhere. It just makes everything worse. Try to keep things in context. It’s not your fault if macroeconomic factors have changed. It’s not your fault if clients are taking forever to make decisions. And for those who might lose their jobs, it’s not your fault that your employer no longer has the revenue to pay your salary.

Be hard on yourself, sure. But don’t be so brutally hard on yourself when things outwith your control happen. Mourn, sure. But you need to move forward, and blaming yourself just acts like a ball and chain, dragging you ever backward. You can’t change the past, only your future.

Work isn’t the only thing that matters
If you’re like me, you suffer an addiction to client attention. My wife refers to it as “client crack.” It’s that feeling you get when you win a pitch, and they tell you how brilliant you are, or you crack a problem, and they laud you for it, or when you have a great meeting and walk out feeling ten feet tall. I probably didn’t get enough attention as a child.

The opposite of client attention is what happens in tough times. You stop winning pitches, often for the funkiest of reasons. (I once lost a pitch, which we desperately needed, to Landor, of all agencies, because we didn’t demonstrate how to embroider a logo on a hat. It was cold comfort when the CEO emailed me to say he’d rather have worked with us but felt obliged to follow his team’s lead), clients stop telling you how brilliant you are because they’re dealing with their own crap, and what used to be easy conversations about follow-on projects become tense negotiations over money.

Tough times, more than any other time, are when you need other outlets and other sources of self-worth. So focus on your family, start a hobby, walk and enjoy the flowers, exercise, start a book club, go to poker night. It doesn’t matter. All that matters is that when work feels unfair, everything else puts life in perspective.

It’s OK not to want to get out of bed in the morning
There are some days when the last thing I want to do is get out of bed. It all just seems too much. Too overwhelming. Even the most trivial of tasks are a massive cliff looming over me, impossible to scale. It’s at these times that I go dark and stop responding to emails (sorry, you all know who you are. It’s not you, it’s me), phone in Off Kilter, and find it impossible to find the necessary focus to do even the smallest amount of work, taking days to do things I know can be done in hours, which makes it all worse. And if this can happen out of the blue when things are going well, it gets infinitely worse when things aren’t.

But, even if I don’t want to get out of bed, I still do. And I’ve learned to accept that feeling that way is OK. Just knowing that it will pass and being OK with it when it happens is the one thing that makes it pass more quickly.

However, if you’re under deadline and have to get stuff done, you can sometimes trick yourself into a different mode. For example, during the financial crisis, I had a client who was far from OK. Thin, haggard, haunted-looking even. But when asked if he had time to talk or to think about an idea someone had, he had a single response. “For you, I have infinite energy.” This statement's impact on people always struck me, so I use it myself and on myself. If you tell yourself you have infinite energy, even when you don’t, it makes you feel like you at least have some energy. And sometimes, that’s all you need.

Sometimes assholes aren’t
There are genuine assholes in all walks of life. There’s the aggressive asshole who turns everything into a fight. There’s the Machiavellian asshole that’s always playing an angle. There’s the I’m-so-brilliant asshole that always has to be the smartest person in the room. There’s the sociopathic asshole who has no limits or boundaries. There’s the arrogant asshole that’s always right, even when patently wrong. Unfortunately, agencies attract more than their fair share, and if you find yourself surrounded by such people, I’d advise you to do everything in your power to get out. They won’t change; it’ll just be hell for you.

However, there are also people where the stress of tough times makes them act like assholes, even when they aren’t. Respond with empathy if someone treats you in a manner that seems out of character. Ask them if things are OK. Find out what’s going on, and accept that just because someone blew up at you doesn’t necessarily mean they’re upset with you. In tough times, when nerves are frayed, we need to be more open with each other and not less. And if you’re the one doing the blowing up, remember that sorry is a powerful word, and be ready to wield it. And be unafraid to reflect and explain honestly why you acted the way you did, even if it’s embarrassing. It doesn’t make you look weak; it makes you strong. You can’t change the past, but I’ve found that you can put credit back into the bank.

Focus on what you’re really good at, and don’t be precious
Boom times are full of blaggers. Agencies, consultancies, you name it, who think they can blag their way through selling stuff they aren’t very good at and everything will be fine. And, yeah, sure, that can be true for a while, but when things take a turn for the worse, the market tends to bifurcate along pretty clear lines - those that have real perceived quality and those that are cheap. Of course, clients ideally want both but are generally happy to choose one or the other, depending on their situation. The blaggers, on the other hand, tend to be found out.

This goes for people too. When tough times happen, it’s essential to be clear about what you’re good at and why it’s valuable and to knuckle down and work hard at it. Are you good at new business? Great. Be the best new business person. This is your moment because tough times sort the wheat from the new business chaff. Don’t be the chaff. Good at arranging meetings? Arrange better meetings than anyone else. Good at client management? Manage the crap out of those relationships. You get the gist.

It’s easy to think that utilization dictates the lion’s share of who stays and who goes when layoffs happen, but let’s be honest. That’s only a fraction of the equation. When things are lean, everyone’s utilization is down. It won’t dictate why one person stays and another goes. Here’s what’s more important:

• Are you really good at something, and is it so valuable that your employer doesn’t want to lose it?

• Are you cheap, keen, smart, and have the energy to get on with stuff so your employer doesn’t want to let you go?

• For more senior people, are you good at winning and running client projects without hand-holding? Because let’s be clear, agencies have to pitch their way out of lean times.

• Are you low maintenance? When times are tough, it’s all hands to the new business pumps. There’s no time for high maintenance, no time for people who aren’t flexible, and no time for people who moan about working on, say, a boring plumbing company when that boring plumber is the only thing keeping the doors open. So be smart.

• Do you have a good relationship with your boss and your colleagues? Yeah, I know it shouldn’t matter, but it does. So make sure you do. You don’t have to be buddies, but you need to be viewed as someone who can be trusted to get stuff done and take the weight off others’ shoulders.

• Are you up for it? Yeah, it might sound silly, but in lean times you need people who have the energy to move forward, and that need runs across the whole business from top to bottom. It doesn’t matter how junior you are; keep your energy up. Be there to get stuff done, and don’t get sucked into the doom-mongering, even if the decisions you see around you don’t make much sense. (Do, however, get your resume out there if decisions that make no sense are being made. Better to be in charge of your destiny than not). Energy vampires might not be the first on the chopping block, but they invariably get chopped. Don’t be one.

• Finally, if you are let go, try not to burn bridges on the way out. Yes, it might be unfair. Yes, it might be capricious, and perhaps you hated working there anyway. But you never know where people will end up, what will happen next, and when you might need a reference. No point burning bridges for no gain just because it makes you feel better for a fleeting moment. (Not to say you shouldn’t pursue legal avenues if something egregiously wrong went down. I’m talking in general).

Anyway, tough times are tough. Often things happen that seem arbitrary, capricious, and unfair. And often, that’s because they are. Don’t let it get you down. Move on. Remember that not everything is your fault and that much of what happens is outwith your control. And it will get better. Usually within a year of a downturn beginning economic growth trends back upward.

2. Apex Scavenger…and Prime Bank?

tl;dr: JPM Chase swallows corpse of First Republic.

Over the years, I’ve found American corporate leaders at the top of the food chain to hold a self-image as the apex predators of the business world. Help them with a presentation, and before you can gently redirect them, they’ll invariably demand imagery of rampaging tigers, roaring lions, fighter jets, missiles in flight, aircraft carriers, explosions, and occasionally, in a feat of total non-irony, a gorilla. As an aside, I always find that funny because while we like to talk about 800lb gorillas in business, real gorillas are basically vegan pacifists. So, while a warplane breaking the sound barrier isn’t exactly subtle, at least it isn’t unintentionally amusing.

However, if you’re a banking behemoth called JP Morgan Chase, you look more like an apex scavenger than an apex predator. The reason is simple. Once a US bank reaches 10% of national deposits, it’s not allowed to grow beyond that by acquisition. It can still seek to win customers the old-fashioned way - you know, through smart marketing, superior products, stronger brand, better pricing - that kind of thing. But they’re forbidden from engaging in the dopamine hit of buying a competitor and absorbing its customer deposits…except under some very specific circumstances.

Namely, that the bank you’re absorbing has failed, and the alternative is for the FDIC to take it over, break it up, and sell off the piece parts. Which is what happened to Silicon Valley Bank.

However, unlike Silicon Valley Bank, the FDIC hawking the still-warm corpse of First Republic represented a tasty bite for JP Morgan Chase, strong as First Republic was among wealthy customers in New York and San Francisco and fattened up with FDIC enticements. So, instead of being broken into pieces or swallowed by another behemoth, it was fed, like a dainty little canape, into the gaping maw of the nation’s largest hyena. (Although I’m pretty sure Jamie Dimon is more of a lion than a hyena guy in the self-image front, even if hyena might be more accurate, all things said).

It’s unclear whether we’re yet out of the woods on the banking crisis front. The markets think not, and my gut tells me it might be the beginning rather than the end of what’s to come - commercial real estate being a bomb still waiting to go off. But one thing is for sure, the bailout of the financial system in 2008/9 created a long-term structural advantage for the so-called “systemically important financial institutions,” also known as “too big to fail” banks, that is now becoming very apparent.

Essentially, we created a two-speed system. Nineteen behemoths are held to slightly higher regulatory standards in return for an explicit government guarantee that they’ll never fail. And 4,000+ others where only $250,000 worth of depositor funds are guaranteed. And even if the vast majority of deposits are below that number, it hasn’t stopped a mass outflow of deposits from smaller, riskier banks to those explicitly backstopped by the power of the US federal government. My guess is that in the chaos of the 2008/9 financial crisis, nobody considered a future where a combination of social media rumor mill on steroids and the frictionless movement of money via apps on your smartphone would lead to multi-billion dollar bank runs occurring at breathtaking speed, upon only the merest hint of weakness.

In case you’re wondering, the price we pay for a bank being too big to fail is that none of them - JPM Chase, Wells Fargo, Citi, BofA - pay us a dime in interest on our deposits, even as interest rates have spiked, while their loan rates get ever more expensive. So in return for government-guaranteed safety, we get…less than nothing while they bank superprofits. Meanwhile, smaller competitors have to use higher interest rates on deposits and lower interest on loans as an enticement just to keep their existing customers, crippling small bank profitability and growth in the process. This likely isn’t sustainable. So look for either an explicit guarantee of all deposits if the government wants a thriving system of regional banks or a chaotic and continued roll-up of failed institutions into the behemoths if it does not. (And don’t forget that for all their public pronouncements, it’s in the best interests of behemoths like JPM Chase that a few more of the tastier regional banks fail so they can gobble them up and get even fatter. So that’s what they’ll secretly be lobbying for in darkened, cigar-smoke-filled rooms where nobody can see).

The problem for the economy as a whole, when we see mass outflows of deposits from smaller regional banks into the behemoths, is that dropping deposits puts a hard crimp on lending, especially in the communities these smaller banks tend to serve, with the possibility that we may see a major credit crunch. Some say it’s already started, especially in risky areas like car loans.

Why is this concerning? Well, if you’re the Federal Reserve and only care about inflation and damn the other economic costs, it isn’t. Well, not yet, anyway. But for everyone else: when the financial system catches a cold, the rest of the economy tends to get sick, sometimes very sick indeed. And things tend to go badly when businesses, particularly small businesses, find it hard or impossible to access credit. So, if you’re in an agency worried about a distinctly chilly wind blowing on the new business front, look to the financial system for how much worse it might get and when things might start improving.

The other story that’s beginning to play out, which is somewhat interesting, is that every bank that’s collapsed so far has had KPMG as its auditor. Oops. This certainly isn’t a good look if your job is to guarantee the state of your client’s financial picture to investors, and follows a pattern of so-called “big 4” auditors being found wanting recently (Wirecard, anyone?). It’s unclear right now whether this is just happenstance, incompetence, or perhaps a conflict of interest between the audit side of the business and the faster-growing and much more profitable tax and advisory sides. After the embarrassing EY split that wasn’t (very fast primer: at the height of stimulus-funded exuberance, EY planned to split its advisory and audit businesses in a greed-fueled orgy that would’ve made the advisory partners extremely wealthy; however, the split collapsed as the economic environment changed, and the audit partners realized they’d be left holding nothing but an empty bag). So, KPMG specifically, and the big four more generally, is a story to watch if you’re so inclined.

However, it isn’t all doom and gloom out there. Big moves are being initiated. In partnership with Goldman Sachs, Apple is now offering a high-interest savings product. (Unfortunately, being mainly used to promote its failing credit card, which is…dumb) Anyway, Apple getting into the banking business is a no-brainer. Apple owns the most profitable channel in business history, the iPhone, and it’s trivially easy for them to add savings products atop the existing convenience of Apply Pay. Even better, Apple is vastly more trusted than any bank. Add in the fact that banking is a vast category and that Apple is already so big that only the largest categories it isn’t already in can make a dent growth-wise, and you can see what’s going on here. Look for them to get much more aggressive as the banking world suffers more pain. As for Goldman Sachs, it’s on trickier turf. Based on recent organizational changes, it’s pretty clear Goldman has given up on continuing to subsidize its direct-to-consumer bank, Marcus, in any meaningful way. Instead, doubling down on a white-label relationship with Apple for growth. The problem, however, is that white labeling anything tends to put you at a disadvantage. If this banking endeavor is successful for Apple, look for it to aggressively re-negotiate the contract, put the back office servicing up for competitive bid, and potentially buy a bank and take the whole thing in-house. The power is in owning the customer relationship, not the back-office administration. That’s a commodity, and plenty of banks would happily undercut Goldman to become a preferred partner to Apple.

I’m only surprised that Amazon hasn’t moved aggressively into the banking game…yet, anyway. Combine regional bank weaknesses and big bank lack of competitiveness on the interest rate front with Amazon’s scale, vast trove of consumer data, technology chops, deep well of trust, and history of price competitiveness…and Prime Bank has got to be imminent.