Redesigning the Design Business

Sure, Palo Alto Design Group designs winning products. But it's also winning the design game — by reinventing the rules.

When it comes to designing products that are both funky and functional, few firms can match the record of Palo Alto Design Group (PADG). It helped create the Pilot, one of the fastest-growing consumer-electronics products in history. In the early 1990s, it unveiled a design for the plastic enclosures that house personal computers — and since then, it has sold 5 million of them to giants such as Dell and Gateway.

But PADG isn't just designing hot products. It's also challenging its industry's stagnant economic model and developing new strategies to increase its business. In short, it's redesigning how to be a design company — and generating lots of useful lessons for other kinds of companies as well.

"The whole 'consulting' arena is set up for failure," argues CEO Jim Sacherman, 41, who founded the company in 1983, after graduating from the prestigious Stanford Product Design Program in 1981. "The lousier your work is, the more you get paid — because the client will keep paying you to fix it. That's backward. We want to align our success with that of our clients."

That approach is working. According to I.D. magazine, the bible of the design business, even the most successful design firms rarely generate more than $150,000 of annual revenue per employee. PADG, with 129 people, generated an astonishing $585,000 per person in 1996. Its total revenues exceeded $75 million — more than double those of its closest competitor, which had more than twice as many employees.

What's the secret of PADG's success? Three principles are at the core of the company's business design.

Don't design for fees — design for equity.

Most industrial design firms sell time. They accept fees in return for services that range from high-concept brainstorming to developing nitty-gritty specs. Which means that the only way to expand a business is to hire more designers. PADG designed a different strategy. Go beyond fee-for-service, argued Sacherman: The way to grow is to design for equity. The firm looked for clients that were willing to exchange stock options, warrants, or royalties for its services.

The Pilot, from Palm Computing, is a case in point. In 1995, Palm's Jeff Hawkins knocked on PADG's door. He had an idea for a handheld computer that would sell for less than $300 and fit inside a shirt pocket. The device presented an awesome design challenge. PADG agreed to commit four people to the project and to put up money to buy injection molding for the Pilot's enclosure. In return, Hawkins offered PADG a small fee and warrants for Palm stock.

PADG hit pay dirt just four months after the deal. In August 1995, U.S. Robotics bought Palm Computing, and PADG cashed in its warrants. But in the meantime, its willingness to share risk helped forge a close relationship with Hawkins. PADG did all the mechanical engineering for the Pilot's plastic parts and even manufactured the first 500,000 units of the enclosure — which it had also designed.

Don't just design — build.

The Pilot project also confirmed a second design principle: Extend your activities "from art to part." PADG's most lucrative projects have been those in which it shared a financial risk with its clients — and built products as well as designed them. "It's the dream of every design group: 'Let's design our own stuff and sell it,'" says Malcolm Smith, 38, a PADG principal who joined the firm in 1986. "But designers are good at designing things. They're not very good at manufacturing, marketing, and distribution. So most give up. Not us. We want to control our own destiny."

Indeed, PADG has spent 15 years creating the infrastructure to go from art to part. Back in 1983, the firm struck its first equity deal — with Wyse Technology, a computer manufacturer. Later PADG received founders' shares in a startup called Network Computer Devices. When NCD went public, PADG struck it big again — and used the proceeds to beef up its manufacturing prowess. Then, in late 1996, PADG merged with its Taiwanese manufacturing partner, A-TCH, and formed Palo Alto Products International.

"Vertical integration lets us leverage our design talents into long-term dollars," says Sacherman. "It also helps us close the loop between design and engineering. We've internalized the dilemmas that customers usually have to sort out on their own."

Never stop redesigning.

Great product designers always push themselves to explore new avenues of creativity. Likewise, as business strategists, Sacherman and his colleagues always push themselves to reexamine their business model.

"We're looking at models that borrow more from advertising than from consulting," explains Sacherman. "We're willing to do creative work up front — and then to figure out ways to capitalize on it."

Recently, for example, PADG designed an enclosure to showcase the "On Now" technology (essentially, an instant-boot button) that Microsoft and Intel are developing. PADG's initial bid for the work? Zero. "Because of our business model," says Smith, "we can basically price ourselves at free — which gives us a lot more flexibility than some of our competitors have."

And being flexible is the ultimate design edge. Says Sacherman: "We're changing the rules. This is where the industry is heading — the writing is on the wall. We're just way ahead of the game."

Eric Ransdell ransdell@well.com , a Fast Company contributing editor, is based in San Francisco.

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