Hi Gunnar,
Thanks for your message with some great analyses that give examples of
useful strategy for predicting the future of design businesses.
On the issue of 'costs', the way I see it is 'transaction cost analysis is a
tool used for forecasting organisational change. This can be useful in some
areas of design. Across the broader scheme of things, however, different
perspectives each use the idea of 'costs' in different ways for different
purposes and using different models and algorithms. Some examples:
1. For small businesses worried about cash flow, it's useful to view costs
in 'cash' terms, i.e. costs at the time they get paid out of the bank or
pocket.
2. For those wondering about the financial functioning of a small business,
it's useful to view costs in 'accrual' terms, i.e. on receipt of a bill
whether paid or not.
3. For those managing a small business, it's useful to look at costs in
terms of what in Australia are called 'cost of sales', 'running' expenses,
and capital expenses - which I think correlate to your 'fixed' and
'recurrent' costs.
4. For those managing budgets of larger businesses, costs are typically
segregated into cost silos on a basis of function (manufacturing, drafting
etc) or department (advertising, sales) - often very similar.
5. For someone assessing the value of a business, 'costs' typically are of
interest as a part of a ratio of measures, e.g. stock turnover ratio (Cost
of goods sold/average inventory)>
6. For investors, 'earnings yield' (reverse of Price/Earnings ratio) is
relevant as a measure of the 'cost' to a company for raising new capital.
7. The one that transaction cost is primarily relevant to, however, is the
perspective of entrepreneurs, futurists and designers wishing to predict
how industries and professions are likely to change. From this perspective,
looking at the pressures acting on transaction costs and the implications of
changes in transaction offers deep insights. This approach is often linked
to Schumpeter's theories about structural industrial change.
The examples you gave of changes in your business provide great insights
into using transaction cost-like analysis of the effects of structural
change in areas of the commercial design world in which such changes are
driven more by changes in transaction cost than other factors. For example,
if a typesetter found a cheaper way to set type, then this would initially
merely be a competitive factor in which typesetting would over time
competitively reduce in price. Typically, however, typesetting is a cost of
another transaction such as producing a graphic design. If the cost of
achieving that transaction by other means then structural change occurs in
the industry.
From the perspective of business management, one would typically cost the
'typesetting' as a 'cost of sales' (recurring cost) when one is managing
this business and the change to (say) in house software -based typesetting
would be a local decision. In this, the broader structural changes to the
graphic industry as many other businesses did the same are an effect that is
not captured by the local 'cost of sales' analysis. Viewing 'production of a
graphic design' in generic terms as a 'transaction' and seeing typesetting
in the abstract as a 'cost of doing that transaction' (transaction cost)
then enables one to see and predict more generally about structural
changes in the industry due to changes in such transaction costs - including
that the industry might become fully automated and graphic designers would
transition into another industry that required their skills. An example of
the latter, is the transition of post offices from 'transporters of
documents' (now replaced by email) to transporters of parcels for small
online businesses - both driven by changes in transaction costs resulting
from the Internet
Interesting idea of preferring to work for a fascist rather than a
democratic client because it reduces transaction costs. It's one I hadn't
heard before! It's an example that indicates at least a couple of trends:
there are pressures on graphic designers to avoid clients who do not have a
clear idea of what they are doing, and there are benefits for the client in
doing more preparation before they contact the graphic designer. Both of
these have implications for the trajectory of uptake of
participative/collaborative design methods in particular situations - there
would have to be some significant benefits to exceed the transaction costs.
Substitute 'research' for 'participative design method' and a similar
transaction cost-based analysis would align with and explain Don Norman's
recent observation that much design occurs without research in spite of the
potential benefits of doing the research before designing.
On the 'micro-payments' issue, as I understand it, the approach is stalled
due to multiple transaction cost issues. One is the personal value of the
micro-sliver of an individual's time spent making the micro-transaction,
or, much worse, the cost of an individuals' time in checking what are
potentially a large number of transactions and the time spent sorting things
out when things go wrong (more transactions = more risk of problems). This
is a bit like, the increasing time 'cost' of finding a music track on a
large iPod relative to the time spent listening to it.
I welcome your thoughts on how/whether transaction cost analysis might be
usefully taught to designers in Art and Design schools.
Best wishes,
Terry
____________________
Dr. Terence Love, FDRS, AMIMechE, PMACM, MISI
Senior Lecturer, Dept of Design
Researcher, Social Program Evaluation Research Unit
Edith Cowan University, Perth, Western Australia
Mob: 0434 975 848, Fax +61(0)8 9305 7629, [log in to unmask]
Senior Lecturer, Dept of Design
Curtin University, Perth, Western Australia
Director, Design Out Crime Research Centre
Member of International Scientific Council UNIDCOM/ IADE, Lisbon, Portugal
Honorary Researcher, Institute of Entrepreneurship and Enterprise
Development
Lancaster University, Lancaster, UK
____________________
-----Original Message-----
From: PhD-Design - This list is for discussion of PhD studies and related
research in Design [mailto:[log in to unmask]] On Behalf Of Gunnar
Swanson
Sent: Friday, 5 August 2011 12:22 AM
To: Dr Terence Love
Subject: classifying costs
Some random thoughts about classifying costs (with a reminder that I never
got around to taking an econ class so I may be missing things that are
obvious to those with formal schooling in the subject):
(1) One obvious difference of types of costs when looking at design is
whether design activities are recurring or one-time costs. As a graphic
designer, I would, of course, rather have a client call me every time the
client needed anything produced. That would make my activity a recurring
cost. It might make more sense (and, BTW, I would actually be happier) if
they spent more money up front for me to devise systems where most graphic
design needs would be "pre packaged." An extreme version of this (that would
make me less happy) is them buying a package of templates. (I'll stick to
graphic design on this issue but I suspect that much of it applies to many
other design fields as well.)
The package-of-templates approach is part of what Terry seems to be
predicting (advocating?) as that future of graphic design. I don't think
it's such a bad idea from the client's perspective. One down side of using
some of the sorts of templates that have been available are
appropriateness/good fit. Another is brand distinction--the problem of
looking like everyone else who bought the template. Although Terry loses me
with what seems to be an advocacy of graphic designers all just quitting and
becoming computer programmers, I've long thought that much of the work that
graphic designers do can and will be automated and that prediction has
partially come true.
Craft and much of taste are areas that are ultimately algorithmic. Much of
traditional typography can and will be automated. (The optical spacing and
alignment and justification abilities in Adobe InDesign are evidence of this
starting to happen.) Many programs like corporate identity systems are rule
based. I've long thought that rather than producing an identity manual with
rules of which typefaces, colors, and arrangements to use, design firms
should hobble page layout software for their clients so only certain
typefaces, colors, and arrangements are available to the user. (To give you
an idea of how long I've been yammering about this, I was talking about
modifying Aldus PageMaker because QuarkXPress hadn't come out yet.)
Any such scheme would decrease the design client's recurring costs but
increase their fixed costs. (Although the design client might have larger
transaction cost for the initial project, their ongoing transaction costs
would be reduced. I'm not sure that this is significant in a general look at
costs, however.)
It would, of course, have a great impact on how graphic design firms do
business. Graphic design firms that do one-time projects (like identity
programs) rather than smaller projects that develop ongoing relationships
have much higher marketing costs. These greater transaction costs have to be
recouped (usually in the form of higher hourly rates) for the design firm to
remain viable.
(2) Back to the whole transaction cost thing, I have a couple of worries
about too much focus on this. One is that perhaps the best way to reduce
transaction costs in a design project is to eliminate the voices of
stakeholders. I often tell people that I'm a big supporter of democracy but
would always choose to work for a fascist. Having one person who can make
decisions is faster and easier.
A vaguely related concern is broader than design per se and regards a
particular notion of transaction cost reduction. Computer technology has
enabled a great reduction of transaction costs, allowing the "long tail"
phenomenon, greater selection, etc. One thing that we have not seen much of
is the "micro payments" idea that was much ballyhooed in the early '90s. The
idea was a free market nirvana of near zero transaction costs where I could
make money off of something that is only worth half a cent and people only
needed one at a time. With automatic micropayments, I only need two hundred
million transactions to make me into a millionaire. (Think stock photo taken
to absurd extremes.)
My worry about micropayments is twofold: The "intellectual property"
industries regularly extract payments and make demands that are not legally
justified. Given a chance to further that on a level where few people will
complain and legal recourse has an enormous transaction cost, they will
nickel and dime us (or half cent us) to death. Secondly, people now rely on
the air that flows through the cracks in the IP box. You like a video of a
kitten sword fighting a turtle so you send it to your friends, you're taken
with the dream of one day driving a Bugatti or a KIA so you pin the photo
from an ad above your computer monitor. . . Nobody charges you for using
"their" "property" because the transaction costs are much greater than the
potential market price. With automatic micropayments, that could change.
One way this might apply in a more positive way is looking at legitimate
licensing. Although I think the music industry has been regressive and
stupid, some low transaction cost models for some sorts of design may emerge
from music downloading schemes. One thing that comes to mind is type design.
If I design a typeface, a few people will pay a fairly high price to own and
use it. A bunch of collectors will find some way of getting it for free
because they love having 100,000 fonts on their computers but don't do
anything with type that makes any money. A bunch of other people will
"borrow" it (perhaps with good intentions) and then use it in commercial
work. If application software kept track of font licensing, designers could
get type for free pay a licensing fee when a face is actually used
commercially. (A crude version of this--minus the "free" part--is starting
to be used in the web fonts world.)
But I hope we don't get to the point where I pay a small fee to a doorknob
designer every time I walk into my house.
Gunnar
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