Two months ago, I watched this TED talk by Dan Pallotta and I can’t stop thinking about it.
Dan Pallotta: The way we think about charity is dead wrong
The back story is this: Pallotta's AIDS and breast cancer walks raised $581 million dollars for those causes quickly, in large part because he used a sizable portion (40%) of their income to advertise for and invest in the event to make it an amazing experience for participants. Because of the percentage of the income he spent on these administrative costs, he was virtually crucified in the media. At the same time, investing in those things is what allowed him to raise so much money for those causes in the first place. In his TED talk and two books (here and here) on nonprofit administration, Pallotta questions the way we think about administration and overhead costs for nonprofits.
Pallotta’s experience was with health and human services organizations, but it parallels and exposes the way we in the arts think about spending and income. The attitudes we have about mission vs. administrative expenses are pervasive… among donors, nonprofit industry teachers and experts—even among the artists themselves.
And, Pallotta argues, those attitudes can undermine the causes these organizations stand for.
Scale requires infrastructure
Focusing on expense proportion instead of net outcomes and revenues is a classic economic fallacy, but it’s something that’s baked into how most people perceive nonprofit business models. In other words, people look negatively on a large percentage of overhead costs, regardless of a larger (and better) return for the organization.
A recent study by the charity watchdog group BBB Wise Giving Alliance confirmed this; 46% said that they would verify their trust in a charity by looking at its finances while only 11% said they would trust a charity based on its results.
The missions of nonprofit arts organizations are massive in ambition, and often massive in scale—providing art to our entire (often very large) communities. Yet, we focus to a fault on expense percentages and not enough on the total return on that expense investment to communities in terms of total amount of art or culture provided.
Pallotta makes the provocative assertion that, in the US, we expect and are comfortable with investment in businesses that return a profit, sometimes with questionable impact or effect on our society. But, he argues, we’re not at all comfortable with similar investments in (nonprofit) businesses that positively affect our communities. So interesting. PaIlotta argues that this bias is rooted in our country’s frugal Quaker heritage and our founders’ relationship between frugality and morality. Regardless of its provenance, I see this moral/ethical/political conflict play out in big and small ways, regularly, in arts and cultural organizations all over this country.
How does this conflict show up? In lack of alignment between an administrative team, its board, and artistic leaders about the business model and how it should operate. As I’ve written before, a “business model,” in the strictest sense of the word, simply defines where the money is coming from. That indicates how the mission is supported.
The consequence of equating frugality with morality, as Pallotta puts it, is not achieving the possible scale of our mission. He says, "Our generation does not want its epitaph to read, 'we kept charity overhead low.' We want it to read that we changed the world."
People who work at arts organizations want to help create art that changes the world... or, at least, their communities. Art on that scale has to have financial infrastructure. There is too much acceptance of too-low standards in our field when it comes to this point. The infrastructure within the traditional arts organization makes scale possible when those organizations generate the working capital needed.
When I say working capital, I mean surplus, extra revenue, and—that unspoken word in our sector—profit. If we’re a nonprofit, that’s a tax status, not a business plan. The fact that we’re “nonprofit” doesn’t mean our organization receives $0 in revenue. It doesn’t even mean we should budget to only break even each year. We need ongoing financial infrastructure to continue to serve our mission. And, sometimes we need to bootstrap our way to a surplus over that break-even point to build capacity and invest in mission-based initiatives.
Now, I’m aware that it might not sit right with some when I say that traditional arts organizations should have a surplus. Some organizations that have done this have developed a reputation in recent years as “commercial” or revenue-chasing at the expense of relevance and viability. Our industry no longer associates the traditional arts organization with being nimble and entrepreneurial, which is something that they absolutely can be. But the truth is…
If we want to change the world, we’re underinvesting.
Arts organizations consistently underinvest. We underinvest in marketing blockbusters and allow seats to go empty for The Nutcracker. We underinvest in subscriptions and then say that the model is dying. As TRG has written before, arts managers are often told to work harder and work smarter when the real problem truly is lack of resources.
In the nonprofit world, as Pallotta says, people don’t like to see our donations spent on advertising, but that’s some of what allows organizations to succeed.
Michael Kaiser, former CEO of the Kennedy Center, thinks this way too. He believes strongly in investing in the art form and marketing it, as he said in a recent Philadelphia Inquirer article:
"Cutting budgets in a crisis is a common mistake, [Kaiser] believes, creating a downward spiral, yet it is a common impulse.
'The first thing they cut is artistic initiatives, and the second is marketing, and those are the things that create interest and let people know about what's interesting,' he says."
I believe this too. Arts organizations must invest in those things that deliver and fuel revenue whether the organization is in crisis or not. We must spend more to market them and spend more making sure that the artistic and peripheral experience (parking, concessions, box office interactions) is excellent.
For example, in many arts organizations, repeated holiday productions like The Nutcracker and A Christmas Carol get a bad rap, either because familiarity breeds contempt or because there is an internal perception that these productions are “not really art.” Many organizations budget the same or only slightly more for these blockbusters, even if revenue expectations are substantially higher. Tickets practically sell themselves, so why not? Perhaps sets and costumes for these productions haven’t been updated in many years to save budget on production expenses. Why not be proud of, and invest in, productions like this that bring in the widest cross-section of your community and, for many organizations, the largest amount of single ticket revenue?
People matter. And not just the people in your audience. The people who create the art, the people behind the scenes, and yes, the people sitting at desks in your offices.
It’s not just the art and its marketing that we underinvest in. Staff turnover is consistently high in the arts as people must change jobs in order to be promoted or get raises. Professional development budgets are non-existent. This costs our organizations a lot, not just in terms of time and money, but in institutional memory. And, we lose some of the best and brightest to non-arts jobs where resource allocations are thought to be more realistic.
We want good people who are passionate about their jobs, but we ask them to sacrifice a lot. In his TED talk, Dan Pallotta says what many of us in the industry are afraid to, that people who work at nonprofits face “a choice between doing well for [themselves] and [their] family or doing good for the world.”
I’ve also noticed that the ways nonprofit arts organizations underinvest in staff can undercut revenue goals. Those who work in the ticket office, on the frontlines, often get paid the least. I regularly see organizations that don’t invest in systems or enough people to ensure that phones are answered at peak times! Yet, as we’ve found in our consulting, ticket office staff and systems have one of the most important roles in patron loyalty, satisfaction and in increasing revenues.
Fear of risk prevents failure and success
What keeps us from changing? Part of it is fear of risk. Business pundits love to pay lip service to the virtues of failure and how much we can learn from it. But in the end, we still fear it. We worry that investments won’t pay off, that data will lead us astray, and that we’re one low-selling event away from closing our doors. Some of these fears are rational, and some are not.
I would argue that we should be more afraid of stagnation than of reasonable risks. Risks are reasonable when undertaken for the good of the mission, the people, and advancing the cause of the arts. Risks are reasonable when they’re informed by data and the realities of your individual market, audience, and genre. They’re not reasonable simply because someone told us that our business model is dying and we must ambiguously “change.”
We’ve known for a long time that patrons invest because they are passionate about the arts. Let us, who work for these organizations, also invest in the art and the organizations that we’re passionate about.