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Typically, designing and pre-producing a game takes about 3-4 months. During that period, the game designer is the busiest person on the premises. He must write the preliminary design document, discuss it with marketing and production staff to revise and prioritize the list of features, write a detailed architecture of the product into a final design document which may take up 200 pages or more, direct the level designers and help the producer come up with a list of materials, a preliminary schedule and a production budget.
However, once the game goes into production, it is likely to stay there for two years. Just about everyone agrees that the designer should stay involved with the project until completion (if only to resolve issues that appear late in the process, and/or to "uphold the vision"), but that does not really constitute a full-time job.
So, what do you do with your full-time designer?
You make him the producer.
You make him the lead artist/programmer.
You get him started on the next design project.
You leave him on the project as a full-time designer.
Most of these are workable, at least in some circumstances, if the designer has the appropriate skills or the company can afford it. However, in many cases, none of the above provide an ideal solution, in which case you should consider hiring a freelance game design specialist.
The Producer Alternative
In some respects, the producer and the designer have opposite roles in development. The designer is "supposed" to push for more, better features; the producer, on the other hand, is in charge of cutting down when deadlines slip unmet. This natural opposition can lead to conflict, which can quickly escalate to open warfare if egos go unchecked and if one or both have insufficient understanding of the others role. The dilemma disappears when they happen to be the same person.
I believe that a good designer/producer is the single most effective asset a game company can have. Having a real grasp on the time/money/staffing constraints helps design something feasible right from the start, and if things go wrong, no one else will be in a better position to decide what to shave off.
When I design a game, I like to put "plan B" scenarios right in the design doc (although I won't let the programmers or the artists see _that_, for obvious reasons ;) and as the producer, I can schedule the work so that features that risk being left out are not worked on until everything else is more or less secure. This way, the deadline is more likely to be met without forcing everyone to suffer through 90-hour work weeks.
There are two other reasons why a designer/producer is effective:
Most of the design work takes place before production starts, so there are few timing conflicts. (Besides, designing the next project while producing the current one allows to keep the juices flowing: working on a design 50 hours a week does not achieve much more than working on it 20 hours a week, in my experience, so you might as well put the rest of your time to different use.)
The clashes between a producer striving for less and a designer striving for more can cause serious personal conflicts, which is never good for any project (or anyone, for that matter). The working environment is likely to be much more enjoyable without these shouting matches.
Unfortunately, design and production require very different skill sets, and finding both in the same person is unusual. But if you do, count your blessings!
The Lead Programmer (or Lead Artist) Alternative
Another way to keep the designer involved in the project is to have him take on a leadership role in either software engineering or artwork development. This is actually quite common, as most people "rise through the ranks" of programmers or artists to become designers.
This can work very well, but there are risks. A programmer with no artistic sense will tend to design techno-heavy games, while an artist may design stuff that looks really good on paper but can't be implemented. In both cases, gameplay may suffer, and the conflict with the producer is not avoided. Again, versatility is key: some people can do it well, others can't.
The Full-Time Designer Alternative
This one is really a stretch. Not many companies have enough projects going at any given time to keep a designer busy exclusively on design, full time. (If production lasts two years on average, and design 3-4 months, you would need 6-8 product teams per designer.)
There are several reasons why this approach is risky even when possible:
It is a fact of life that a new project in the early stages of design will always be more exciting than maintenance work on the game in production. The designer may not devote enough effort to this "old" project, leaving it without sufficient creative direction.
Despite common misconceptions, design work can be quite exacting. Unless you are unusually versatile and resourceful, you will need some time to recharge your creative batteries after a large project. Otherwise, you may burn out, and turn out a Project N+1 which looks surprisingly like Project N.
If only one person gets the coveted design work, the rest of the team may resent the situation.
Sometimes, having a full-time designer on a project in production is a catastrophe waiting to happen, because if there are not enough new projects to work on, he may get bored, and if so, he'll keep designing the existing games. He'll keep thinking of really cool new traps for the next level (which requires the level designers to re-write their floor plans and 3D models), or he'll have this great new idea for a monster's attack (which requires re-writing the character animations and changing the sound effects, and maybe adding a new feature to the level editor), etc.
At a rate of 2-3 full designs a year, plus however many dozens of failed treatments would be required to hit the 2-3 good ideas, you could justify a full-time designer easily; with an average product budget of 2 million bucks, the 25-50K the design will cost is insignificant from a financial standpoint. But to be a good full-time designer, you need to be very versatile, have lots of energy, be able to focus on several projects in parallel, and to know when to *let go* and stop tinkering with a product. Not many people I have met can do that.
The Freelance Alternative
Bringing in a freelancer as part of your design team can solve many problems at the same time:
The freelancer does not have to be paid full-time during production. Design and creative direction may require only one day of work each week for much of the product's life cycle; freelancers provide you with flexibility.
It is easier to set boundaries on the responsibilities of a freelancer, which helps avoid conflicts.
A freelancer is a design specialist; you get what you need, and you do not have to assign him to another job for which he may not be as qualified during production, just so he'll be around next time.
If your team lacks design experience, a freelancer can guide your staff through the process.
Of course, given your situation, all of these advantages can turn to inconveniences. It's up to you to decide whether hiring a freelancer as lead or co-designer is worthwhile. However, it is definitely an option you should consider.