Jill Robinson's annual "State of the Arts" essay
It's As Hard as Ever
Right before many of us left for a December holiday break, the National Center for Arts Research (NCAR) at Southern Methodist University (SMU) in Dallas, Texas published its latest report, evaluating the 2013 to 2017 financials of 4,800 US cultural organizations. Titled The Burden of Rising Expenses: The Bottom Line in the Arts, the report cited what we see regularly in our work at TRG Arts: sustainability continues to be hard work for arts and cultural organizations.
[Before I write further, a couple of disclaimers. First, TRG works with clients in four countries, and the economic and political realities can be quite different between the US, Canada, countries in the United Kingdom and Australia. That said, The Bottom Line report and associated analyses from it should be of interest, regardless of where your organization operates. I hope this will become clear. Second, TRG enjoys a partnership with NCAR and I teach at SMU, but this report caught my attention in general, wide-reaching terms.]
The central question The Bottom Line advances is this: “Are organizations bringing in enough revenue to cover their expenses?” It examines trends by organizational size, sector and geography, and the answer is depressing. Breaking even has become more difficult in the sector, even in this recent period of relative economic growth. From 2013 to 2016, the average US organization’s bottom line slid from surplus to deficit, period—regardless of whether or not the analysis includes depreciation (which accounts for the annual wear and tear of fixed assets like buildings).
The bright spot? Smaller, more nimble organizations, which can change more quickly if revenues fall short of plan, are thriving. “Only organizations in the smallest markets reported a net surplus across all bottom line measures,” said Dr. Zannie Voss, director of NCAR. Kate Barr at Propel Nonprofits wrote an easy-to-read synopsis of the report from her point of view and offered the wonderful metaphor that, “…small organizations are like an accordion that can shrink and grow with relative agility. Medium organizations are like a drum kit—more complexity and moving parts and pieces, but you can still do some dismantling and rearranging if need be. Big organizations are pipe organs; if you want to take that baby apart you’re going to have to deconstruct the whole building.”
The Bottom Line suggests a framework that we see assumed in the field regularly: “…breaking even requires nimbleness to adjust expenses to align with revenue realities. High fixed costs present obstacles” (emphasis mine). Further, Dr. Voss describes, “as we all know, the arts are heavily labor intensive and salaries rise naturally over time, but the technology-driven productivity increases that drive efficiencies in many industries just don’t apply, making the cost of doing business in the arts a challenge—a phenomenon recognized for decades as ‘Baumol’s cost disease.’”
I fear that the logic of cost-cutting as the path to sustainability fails arts and cultural organizations.
Investment is the Answer
Now, don’t misunderstand me. At TRG Arts, we’ve worked for 22 years on an in-depth basis with arts and cultural institutions, and every organization has potential productivity improvements possible via new technology, areas of expense investment that are outdated, and initiatives they’ve allowed their organizations to expand into that they simply can’t afford. Being clear-headed about these realities and making adjustments is not only required when times are lean, it’s good business—always.
And in the press release about The Bottom Line report, Dr. Voss states that NCAR’s next analysis on this subject will look at working capital and access to cash, acknowledging that some organizations may have reserves that support sustainability. She also asks readers, “Are there alternative ways of operating that can lead to opportunities for greater revenue generation or expense reduction without compromising mission fulfillment?”
Greater revenue generation is what we all want. A closer look at Baumol’s theory is interesting. I recently read his book, The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t . (For those of you who know me or have attended one of TRG’s Executive Summits, heads up: this one will be added to our book club soon.) It’s a terrific read and easy for the lay/non-economist to understand. After reading it, I’m more confident than ever in the sensibilities we’ve developed in our consulting practice. We see clearly that part of the answer to sustainability in the arts is investment in relationship-management with the people who participate in and value arts and culture.
In fact, Baumol posits that cost controls are not the answer in the services that suffer from cost disease. “…cost controls often create problems that are more serious than the disease itself,” he says.1 The private and public sector must work together, he suggests, to support education, health care, social services, arts and culture…those services that require human delivery, that don’t as easily get productivity gains from technology, but whose offerings are critical to society. He references the performing arts regularly as one of these services.
The successful case for public and private investment requires that we stay culturally to the people of our nations. While today we see varying degrees of that support in the countries in which our clients operate, the ability to break even annually is the requirement everywhere. And it’s clear: to make and sustain that case, arts and cultural organizations must creatively connect with their communities. They must have the time to listen, the ability to experiment, and the infrastructure to deliver the art and culture their communities support. All of this requires investment.
Dr. Voss is right: greater revenues than expenses are required to enable sustainability.
How that happens is our obsession at TRG Arts.
Data Driven Hard Work Works
If you’re familiar with our firm, you know that our data-driven and experienced-informed bias is that arts and cultural organizations can substantially and sustainably grow income from patrons. This assumption is surprisingly controversial in arts circles these days. We regularly hear about the on-going death of the subscription model for the performing arts (despite the fact that it’s now an “industry” that’s experienced 200% growth since 2011 across a myriad of consumer industries, according to the Harvard Business Review and others). We read articles about the benefit of free admission and membership for museums (two out of the three museums cited in this article have reversed this free position since the 2015 article was written, and the field is right now buzzing about recent changes in admission policies at the Met). We see dialogue about the community as “revenue stream” versus the community as “partner” and wonder: can’t they be both? We’re all searching, reaching for solutions to what can feel like an intractable problem of making ends meet.
Here's what we believe. We believe profoundly in investment: in experiments, new ideas, new ways. We believe in the power of people to experiment smartly, test new ideas, learn from the data in the results, and drive positive change in their organizations. Most importantly, we believe in the power of people to relate to people who love the arts. Relationships matter more than ever in 2018, and organizations that take up the challenge of deepening relationships within their organizations and with their patrons can make real progress in sustaining the arts and culture their communities love. It takes data-driven, hard work. But it works.
The Work Never Stops
At November’s NAMP conference, my colleague David Seals presented the scary truth that still, 75% of new ticket buyers come to the arts once and don’t return. He posted this blog about the retention study, which was based on TRG analysis of nearly 17 million arts patron household transactions over a five-year period from 2011 to 2016. It’s daunting stuff, and it should be on your reading/viewing list early in 2018.
But there is good news. At TRG, we feature case study after case study on our website of organizations that are doing the data-driven hard work of deepening relationships with patrons that yield results.
Consider the Guthrie Theatre in Minneapolis, who, with a charge from their board, have been building – and making more sustainable – their audiences and revenues.
And Alvin Ailey American Dance Theatre based in New York City, who’ve just increased by 25% the number of multi-ticket buyers to their recent 2017 City Center season. The frequency of ticket buyers is a key first step in patron loyalty development, and the Ailey team has been working as an integrated ensemble toward this end.
Indeed, it’s not just big organizations with large staffs who make these changes happen. It’s also organizations like the Lyric Theatre of Oklahoma whose operating revenues grew by 32% over a five-year period built on patron revenue growth. It's Hubbard Street Dance Chicago, whose nimble team redefined how they operate to support patron relationship growth.
Sustainable patron revenue growth is happening with organizations in Canada and the United Kingdom too. While the cultural and political realities are different than in the U.S., patrons can and are being engaged toward deeper relationship with:
- Arts Club Theatre Company in Vancouver, whose holistic patron focus has resulted in double-digit increases in patron revenues for more than a decade, and 15% growth in the number of loyalists (those patrons who both subscribe and donate) since 2013.
New Wolsey Theatre Company in Ipswich, England, who doubled-down on ticket booker retention as a way to grow the foundation for loyalty and has experienced subscription and philanthropic growth three years running. Before their work in this area, they retained one in 12 patrons booking tickets for the first time; now they retain one in six.
The Loyalty Effect
Growth matters, indeed. But the math in patron loyalty is the most important part of the sustainability story. Why? As the proportion of loyal patrons grows in an organization’s database, the relative cost of managing the relationships in the database declines. We regularly run a simple analysis that describes this phenomenon, which we call Net Revenue Analysis. The graphic below describes the differences between theatre company patrons in terms of their average investment, costs to the institution to secure those investments, and retention. It describes the loyalty effect: as a patron relationship deepens to an institution, the sustainability of the revenues from those patrons grows with it.
If you haven’t read Fredrick Reichheld’s iconic, The Loyalty Effect, about the impact of consumer loyalty on businesses (and the requirements for doing it successfully, including fostering employee loyalty), do it. I require this reading for my students in the M.A./M.B.A program at SMU; if you’re limited on time, focus on chapters 1, 2 and 8.
It's All About "The Why"
I was reminded recently of Ian David Moss’ late, great organization, Createquity, and a report his team wrote in 2016 entitled, Everything we Know About Whether and How the Arts Improves Lives. In it, they cited research on the educational, health, economic, and other positive effects that exposure to arts and culture provides. Things like:
- Participatory arts activities help to maintain the health and quality of life of older adults
- Arts therapies contribute to positive clinical outcomes, such as reduction in anxiety, stress, and pain for patients
- Arts participation in early childhood promotes social and emotional development
- Student participation in structured arts activities enhances cognitive abilities and social skills that support learning, such a memory, problem-solving, and communication
- And more. Read the blog here.
At TRG Arts, these reasons and more are why we do what we do. We love the arts, and we’re passionate about the people who create it. We believe that arts and culture makes communities stronger, citizens more engaged, fun and wiser, and it generally makes the world a better place.
For this, sustainability isn’t an option. It’s a requirement.
1 Baumol, “The Cost Disease” Chap. 4