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You frame it not as things that are "bad", but rather elements that pose Opportunities for Improvement. Design is only a part of this job, the other half is communication and stakeholder management, so work on those areas, bc getting folks on board without hurting their egos is def a skill in itself
Ditto. Also do not hesitate to demonstrate your own approach/style in terms of how you tackle questions and problems such as this one. Being able to communicate, listen, and respond diplomatically is going to be key. Imagine if sugar coating made you feel weird and that had a negative affect on your interview. Go with your gut! Ideally they get to see more of you once hired so if they have any issue with your approach it’s better to get it out of the way now instead of later.
I would run a brainstorming exercise with the team first akin to a Google design sprint (check out the book "sprint" by Jake Knapp). That way you can collectively talk about the things that may need improvement and what you all collectively choose to focus on for the first iteration and do some quick prototyping and testing.
I would also dig into any analytics they have to see how they're measuring what is wrong with their product, and what are they fearing from their audience currently in potentially use those as a place to start if they're not looking to overhaul it entirely.
Unfortunately, this is a 1-1 meeting with an individual - usually a director or higher - and they ask you the question, "What do you think of our software" or "What would you fix with our software." In those cases, doing a whiteboard session or digging into the user feedback isn't really an option.