Whenand his wife, Debre, moved to South Africa, they found a gap in the service market—very few companies were offering UX services. They started Flow Interactive’s Africa office, and after growing it, they sold it to Deloitte Digital.
Phil, tell me a little about how you ended up in South Africa running a design studio.
Flow Interactive was started in the UK in about 1999 by Meriel Lenfestey. I came to join her, and we grew to about 45 people. My wife is from South Africa, and around 2006—we had a daughter who was three—my wife said, “London is no place to raise a child. Let’s go to South Africa.” And I thought, “Well, I guess I’ll keep working remotely.” But then Meriel let me borrow the brand; I paid her one pound for the brand, and started up in South Africa.
We offered good user experience design services: usability testing, user research, ethnography, diary studies, and interviews; and detailed interaction design for organizations.
We grew that to about 15 people, and then sold it to Deloitte.
Why did you start thinking about selling the company?
My wife, who was our COO, was getting very bored. I was also getting a bit bored. We reached a ceiling where we kept having the same clients, and the same conversations. Design is always ultimately limited by the choices that organizational leadership is making. You end up in the situation where, as a designer getting direction from your clients, you say, “Why the hell do they want us to do that?”
I had been doing design for about 15 years, and I said, “I know all of these patterns. Now I want to go and see why they happen.” And I didn’t quite have the vocabulary, or the contacts, or the skills, or the positioning, to know how to do that.
I wanted to get access to the boardroom to see who the hell was making these various decisions, and why they were making them. Why don’t companies use design right? Why do companies make dumb decisions about the way they use design? I needed to break through to a different level to understand how those decisions were being made, and by whom, and what factors they were considering.
How did you end up speaking with Deloitte?
At the same time as I was feeling this frustration, it was an acquisition festival. The consultancies were all buying design shops; it was trendy. They were all buying design operations. We were getting a fair amount of interest; there were two consultancies who approached us, and one was Deloitte.
A contact of ours had gone to become a partner at Deloitte Digital, and he was the one who was driving Deloitte to think about acquiring us. He knew that we were a valuable asset, and that Deloitte had a gap, and he always admired the work that we did.
Deloitte was trying to invest in design. They were trying to build Deloitte Digital South Africa, and they were investing in acquiring all sorts of different bits and pieces to build. They were keen to acquire us, and we had somebody on the inside who was rooting for us all the way, and so the acquisition itself was not particularly difficult. I wasn’t surprised about their interest in us. We were sure that we were damn good at what we did, and their interest in design—that was a trend that was happening. We could see the trend, and we were understanding that we were part of that trend.
The risk to them for the acquisition was pretty damn low, because it wouldn’t take them long to earn back the money that they spent on the acquisition. Because it’s only a tiny acquisition, really, in the grand scheme of things. So it was a very low cost, or very low risk venture for them.
Were they only interested in the design talent, or also in your client base?
Oh, definitely the clients. We brought in about 20 million rand in existing contracts, which in those days would have been between $1 and $2 million US dollars. For Deloitte, especially in South Africa, they have many, many, many relationships, but they don’t necessarily have opportunities to sell. So we brought new opportunities to make deals, which they could then use to expand, and keep extending their involvement.
Let’s talk about the negotiation process. What was the structure of your compensation package?
There was a cash upfront payment, plus we were to pay out our cash reserve. We always used to run Flow in a very conservative way, with a very large cash reserve, because it just means you can sleep at night. If you don’t have a large cash reserve, then you don’t know if you’re going to make payroll at any given point. So we used to run flow with the big cash reserve, and that cash reserve would be paid out to us in cash payments up front.
And then there’d be an earnout period, which was based on performance. So if we sold a lot of business, we earned a lot of extra money, and if we didn’t sell a lot of business, then we didn’t earn a lot of extra money. There was a three year earnout period stipulated. But if you think about it, the earnout didn’t really have teeth, because if they’re saying, “Well, we’ll pay you the money on a yearly basis as you earn it,” you sell work, you make money, you take a proportion of that for yourself. Once that money’s paid, it ain’t getting paid back.
So if in year three you’re like, “Eh, I don’t want to do this anymore,” they’re like, “Fine.”
We also had conversations and negotiations around office space. Part of the recipe for happy, happy, happy designers is an environment that the designers enjoy being in. We went to the Deloitte offices in downtown Cape Town, and they’re in a nice location, but the offices themselves were incredibly awful. It was designed by accountants for accountants, or by consultants for consultants. So just nasty everything, nasty plastic desks, low ceilings, bad lighting, just an utterly joyless environment in every conceivable way. We said, “Deloitte Digital needs to be a bright, happy, exciting, funky, modern, joyful, true-to-materials, livable space.” And Deloitte demonstrated good faith there, because I think they believed in that as well, as best they could. So there were some constraints on what they could and couldn’t do, but they understood that Deloitte Digital needed to be a different beast from Deloitte Consulting, because it was a different pitch to the market, and a different ethos, and a modernization of their brand and so on.
There was also some negotiation about usability labs, because usability labs at that time were very important. These days, usability testing is mostly done via Zoom, so the concept of the lab is much less of a thing anymore. But in those days, usability labs were key. We’d have real fleshy humans wheeled in and we would test things on them.
And we also discussed workshop spaces. If you’re trying to have a fun and engaging workshop with clients, and you bring them into a sad gray room with no windows and dingy lighting, it’s not good. So there was a special lab and workshop space, which was part of the setup. They did their very best on that, as well.
Were the things related to the office space in writing—in the actual sale contract?
No, I don’t think so. The intention was so visible that it never crossed our mind to do that. There was enthusiasm on both sides to do this thing, and Deloitte was genuinely committed to it. One of the things that Deloitte has worldwide is this concept of the Deloitte Greenhouse, which is ideation spaces, big expensive ideation spaces that they rent out to clients for days, or a week, or whatever. And it’s part of their recipe. So they looked at our requests for improved spaces and they were like, “Oh, that’s nothing. You should see what we’ve got.” And they took us on a tour of their Johannesburg greenhouse and said, “And we’re building one of these in Cape Town as well,” which they were. So we were quite convinced that they understood the value of creating interesting spaces.
So how did it work out?
There are different kinds of acquisition, as I understand the landscape. There are companies like WPP who buy agencies and leave those agencies to operate. They try not to mess with the secret sauce; they just accumulate many, many agencies. Each agency has its own special recipe, and they try to extend those, and harvest the cash, and so on. Whereas Deloitte was about acquiring and digesting. The other company goes away and the staff become Deloitte Digital.
After the acquisition, I found myself as an Associate Director, which is one level down from a Director, which is a Partner. As an Associate Director, I was just a senior salaried employee. And I had that earnout I described before… I thought I had a two-year earnout clause, but it turned out I had a three year. It said in the contract, your presence is material to the value of this contract, etc. etc. And then at the beginning of year three, I thought, “I’ve done my two year earnout and there’s an opportunity that’s come up at Absa Bank, so I think I’ll go for it.” I went to them and I’m like, “Cool, so I’m going to quit and start working at Absa Bank.” And they’re like, “What do you mean? You’ve still got another year to go.” I said, “Oh, but I don’t want to.” And they had no actual hold over me at that point.
The whole venture was not generating much of a profit.
At first, nothing changed. We started off in our office while they were building out the office space at Deloitte. Then there was induction (laughs).
Deloitte is very, very entrepreneurial. There’s a central set of services, and you can make use of those services, but then the cost of those services is deducted from your P&L. They told me, “Yes, you can send all the employees on induction. It’s mandatory.”
We said, “But we don’t want to spend all this money. It seems terribly expensive. Can’t you just induct us for free?”
They said, “No.”
And we said, “Well, we don’t really want to pay.”
They responded that “It’s okay. It’s only mandatory.”
We said, “I thought mandatory meant that you had to do it.”
And then they said, “No, no, that’s compulsory.”
So we skipped it. I think what we did is we sent one guy on induction and he said it was the most godawful, meaningless week of his life; we thought we wouldn’t do any more of that.
There were all the associate director’s dinners and shindigs. My wife and I were invited to a dinner to celebrate the deal. We flew off to Johannesburg and we sat around the table and had dinner and drank champagne. My wife was already becoming fairly convinced these were not “her people.” Her approach was, “I’ll put up with this for a couple of years so we can finish the deal.”
She slowly uncovered the spectacular degree of sexism that existed within the organization. It was casual sexism. It wasn’t ill-intended… it was just thoughtless, unconsidered, old school, traditional sexism. They just hadn’t really thought about it. It was a man’s world.
I’ve got a higher tolerance for “not our people” than she has. But also I was not subjected to the sexism that she was, so it was easier for me. So I just tried to do business with them.
Perhaps it’s an understatement, but it doesn’t sound like it was a great fit.
I was excited about the money. I was bored of running the old organization. I figured I could handle whatever bullshit the next couple of years would bring, and that it probably would be a good learning opportunity. So I was mostly happy. Happy is a strong word. I was mostly able to cope with it.
But by the end of the two and a half years I was ready to go.
We marveled at the incredible inefficiency and illogical corporate silliness that we encountered. We knew that organizations could be pretty dumb, because we’d had plenty of big organizations as clients. But actually being inside one and witnessing the madness from the inside, it was definitely quite something to behold…
It was bureaucracy, old-school bureaucracy. All of the archaic SAP systems, and spreadsheets, and so on.
We brought Slack with us and we tried to get Deloitte Digital to accept Slack. All of the people who were from other parts of Deloitte Consulting burned out on Slack almost immediately. They just couldn’t understand how it worked; I found out that the Managing Director was trying to read every single message in the whole of every channel on Slack, which was why he thought it was impractical.
They had their old-school software tools. Just trying to log your expenses required an extensive training course and a lot of luck.
If you say to a designer, “Cool, well, I know you’ve just been on this trip to Johannesburg to see this customer, so now you need to log your expenses. And to do that, you have to dial in through a VPN, and then you have to use this arcane tool, which doesn’t really work on Safari or Chrome for Mac. And you have to know all of these extraordinary codes.” I don’t know, what’s the code for a glass of wine? And then if you do it wrong, then it’s like, “No, wrong, I’m not paying your expenses. Try again next month.” And so that kind of thing doesn’t make designers very happy.
Designers want the world to be a better place, and UX designers hate systems that are poorly designed, and the details matter to UX designers (which is why they’re UX designers). And so every time you make them use a system which is poorly designed to do a task which is tangential to the thing they like doing, which is design, then they get pretty flipping annoyed. And it doesn’t take much.
In fact, because of the systems being so difficult to use, and so not pleasant for designers, and then having a real impact on morale, we did the same thing that most people in Deloitte seemed to do, which was we hired an extra human whose job it was to use those systems. So we actually put an additional layer of abstraction on top of the systems by hiring Cindy, who was lovely and seemed to thrive on integrating herself with SAP and other things. The designers would fill in a simple form that said what their expenses were, and they would give it to Cindy, and Cindy would do the job for them. Which ate into the profits a little bit, but not that much.
Another thing that was “highly entertaining” was e-learning. Because Deloitte does a lot of work with banks, all Deloitte employees had to be compliant with certain regulations related to anti-money laundering, bribery, and corruption, that sort of thing. And so they had a mandatory, and by that I mean compulsory, process where Deloitte employees had to do e-learning modules to make sure that they understood about ethics and technicalities associated with above-board operation.
The e-learning was unspeakably bad videos and just dreadful things that you had to sit through hour after hour, clicking next, next, next, and it felt like an enormous waste of time.
In game testing, you can get bits of software that automatically click on various parts of the screen according to rules. So we set up a clicker to click on the next button every minute, and then we let it run overnight. Because you couldn’t click next too fast, because it had timers on everything to make sure that you attended sensibly to each piece of content. So we set it to click next every minute, two minutes or whatever it was, and they just let it run overnight very, very slowly to get to the end of the e-learning.
We tried to cheer up the designers who had to sit through it by saying, “Oh, as part of your initial induction, you had to do a lot of e-learning.” And so we bought a large Mexican sombrero and a lot of chocolate. When you were joining Deloitte Digital as a designer, and you had to do your e-learning stuff, you got to wear the sombrero of happiness and receive large amounts of chocolate.
It seems like the culture wasn’t a match. What about the business itself?
People will pay a certain amount for design, people will pay a different amount for strategy consulting, or auditing, or so on. But Deloitte wanted to have a single rate card, and so they wanted us to sell design services at the same price as you’d sell C-level strategy, and auditing, and whatever.
It was very hard to sell. But part of the reason why you needed to charge so much was because the overheads were very high. In the P&L you’re running, you have to pay lots of fees to other parts of the business for use of central admin services, e-learning, and whatever else. That pushes your fees up. So we were paying costs for things that we didn’t value, and being told to put our fees up and make a certain amount of margin. In fact, there were complex margin calculator spreadsheets that you were supposed to use in order to work out what you could and couldn’t charge for any given thing. And they were wildly arcane. Because it was basically an organization fundamentally founded by accountants. So the way that everything worked was in a very accountanty kind of way.
If you actually think about it and ask, “What’s the matter here?” The matter is, if you’ve got an organization created by accountants, for accountants, operated by accountants, and you take those systems and try to apply them to design, they don’t work very well. That’s the truth of it.
How did it impact your finances?
The rate increase was astronomical. I don’t know, I feel like it could have been a doubling or a tripling of our rates. Our rich clients, which would be the banks and the insurance companies, could still usually carry on paying. The rich clients could afford it, and the poor clients couldn’t.
This wasn’t malicious on Deloitte’s part. They didn’t know. They simply just had no idea. They’d never sold design in their lives before, and they didn’t know what fees could or could not be commanded for design. They assumed that the Deloitte badge would easily open a whole bunch of new doors to new opportunities within clients for us, where we could charge all sorts of fabulous money. And there were some situations in which that was true, but not many.
Deloitte has lots of different units. You might have a strategy unit, and then the Deloitte Digital Software Development Team, and the Deloitte Digital Experience Design Team, which was us. And then you might have the salesforce.com experts and all these different units, each of whom has their own P&L, their own accounts. And then you’d have the partners, the senior directors, who would be pulling together a pitch and would want to sell something wondrous to a big client.
They would ask for services from all these different units and say, “Okay guys, I think there’s an opportunity to sell some UX. It’ll make us look really good. Can you guys bid for this UX, or tell us how we should bid for this UX component of the job, or where we can put design into the job?” You would participate in those bids and occasionally, very occasionally, they would come off. Otherwise, you’d be selling your own work. And so you’d get credit for selling your own work, because you sold it and you billed for it, and it appeared on your accounts, and at the end of every quarter, you were supposed to be showing that you turned a profit for the business.
Are you glad you sold Flow Interactive and had this experience?
Have you ever read Stumbling on Happiness, by Daniel Gilbert?
No, I haven’t.
It’s truly a great book. Gilbert points out that the only way you can measure happiness is through self-report. The only way you can tell if somebody’s happy is by asking them. And all the research into happiness shows that you can pretty much do whatever you like to a human, and provided they’re still alive, if you ask them, “Are you pleased that such and such a thing happened?” they’ll almost always say, “Yes.”
They’ll post-rationalize to identify that the thing that happened to them was for the best and that it was the course of life and so on. There are athletes who lost the use of their legs saying that it was the best thing that ever happened to them, that it was a really important change in their life.
So if you ask me, am I happy that it happened? My default answer as a human will be like, “It was the best thing. It was a real learning experience, and I’m sure that this was the true course of my life,” and so on. And now here I am in my life in the Netherlands. Am I happy? I should be happy if I know what’s good for me. Because I wasn’t enjoying running the old company. We liberated a whole bunch of cash. I’m fucking lucky. The things I learned, and the things I witnessed were hilarious and fascinating, and I did learn things.
I learned that if you’re sure that you want the money, and you are happy to let go of the asset, and you don’t want the asset anymore… it’s like, “I have had enough of running this fucking agency, I don’t want to do it anymore, and I definitely am prepared to exchange all of that for some money and some heartache,” then fine. But if secretly, actually, you love what you do, then chances are you’ll sell it to somebody else who doesn’t get it. Because almost by definition, if they’re trying to buy it off you, they don’t get it, because they couldn’t do it themselves. And if you love what you do, then you probably should carry on doing what you love.