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Fund Making Long Term Investment In Performing Arts Orgs

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For a few years now people have been calling for foundations and other funders to provide more long term capital investment in non-profit organizations. The Social Velocity blog has an interview with Rebecca Thomas, Vice President of Strategy and Innovation at the Nonprofit Finance Fund. (NFF) (h/t National Endowment for the Arts) The NonProfit Finance Fund is in the fourth year of a decade long effort to provide $1 million of what they term change capital in each of 10 performing arts organizations they selected.

One thing Thomas talks about is how many non-profits are mis-captialized in that they have sufficient capital, but that most of it is in the form of restricted funds. She touches upon this in a separate publication, Case for Change Capital in the Arts and Financial Reporting Done Right, which I have briefly looked at and hope to blog on in the near future.

The thing that caught my eye was her discussion of how capital and revenue are reported on non-profit financial reports.

One of the things we learned early on in this work is that changing the financial reporting—to separate capital flows from recurring revenue—would not be an easy sell, for understandable reasons. Executive directors are reluctant to take a chance presenting new formats to donors who don’t understand the technique, and many board members aren’t inclined to re-learn nonprofit accounting principles. Moreover, NFF’s suggested methodology is not required by the Financial Accounting Standards Board, and auditors don’t always feel comfortable suggesting novel formats, even when they provide heightened clarity.

[…] suffice it to say that when capital and revenue are conflated, an organization’s reports do not present a realistic view of operating performance. Unintentionally misleading information can lead to poor planning and decision making by nonprofit leaders, boards and funders.

Longer term, it will take aggressive education and advocacy efforts to convince nonprofit executives, board members and funders of the value of producing transparent financial reports and audits that reveal business model economics separate from capital infusions. Nonprofits will need to be convinced that they won’t be penalized for producing statements that may, at times, show temporary weakness in operating results during a change or growth period.

Since NFF is in it for the long haul to help the 10 organizations in their pilot program institute substantial change, my guess is that they are trying to develop a way to effectively educate and communicate the validity of this different approach in financial reporting to boards and funders.

The first thing that came to mind when Thomas talks about mis-capitalization is how the Philadelphia Orchestra declared bankruptcy while possessing a substantial, but apparently restricted endowment. I couldn’t help but wonder if implementing the type of reporting discussed here would have made the real financial situation clearer earlier on.

I also wonder if they may not be the perfect candidate for using this reporting going forward. Even with the bankruptcy, they probably have the wherewithal to alter their accounting method where most arts organizations wouldn’t. Given their prominence, they could serve as an exemplar to non-profits, their boards and funders as to why these reporting methods should be adopted and properly understood.

One thing to note if you are hoping NFF’s pilot program becomes a trend, according to Thomas not all organizations are good candidates for change capital. They have to already possess strong management and self-evaluative processes which include data informed decision making.

Stuff To Ponder: Ticket Office Openness Vs. Security

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Currently I am involved in talking with architects to plan a renovation for our theatre. Part of this will involve razing and moving our ticket office. In the course of other theatre design projects with which I have been involved, as well as those related to me by colleagues, there seems to be a desire to have a more open and friendly ticket acquisition experience for audiences.

Since people are purchasing online and using credit cards to purchase tickets, the thought is that the reinforced bank teller window (an image recently invoked by Rocco Landesman) can give way to a more open concierge desk set up with an aperture to a secure backroom available for deposit of cash receipts.

Thinking this might be an option we should consider, I emailed the theatrical architect with whom the lead architect is working. The fact our ticket office is located outside rather than in our lobby adds a little twist to the concept. My concern was mostly with how to secure the desk area and keep it clean when we aren’t using it without resorting to bulky contraptions or unattractive steel roll up doors. Though sheltered from the rain, we would have to figure a way to avoid having money fly away in a breeze. I thought with some good design and procedures, we could overcome these hurdles and provide a more welcoming atmosphere for our patrons.

The problem is that while the move toward cash-less transactions enables us to move toward a more open and friendly experience, thieves are making corresponding changes in the tactics they use to exploit the new transaction formats. We may end up right back behind the reinforced teller windows again before too long.

With his permission, I am sharing part of the response I received from architect Paul Luntsford of PLA Designs.

“Due to the increasing problem with skimmers and RFID scanners, debit and credit card transactions are moving to the secure and controlled window. By the way, this skimmer/RFID scanner thing is really getting bad. We went to see Les Mis tour show last Friday at our huge, union run, city-owned 3000 seat theater. I used the ATM in the lobby to get some dough to buy junk during intermission. That night, or technically the next morning at 3AM, my debit card was used online at the Apple store to attempt a $1 test purchase by some unsavory character who had managed to compromise my RFID data from my card when I used the ATM in the lobby! So, you need to consider that all electronic transactions happen behind a window, and that window has an embedded wire mesh that is bonded to ground and acts like a Faraday shield to prevent capture of RFID data when the card is processed by one of YOUR people.”

While the credit card company may be at fault for not properly encrypting information, that fact will be of little comfort if people start to associate your brightly lit lobby with a dimly lit alleyway in a bad neighborhood where they may be preyed upon. As security of the cards improves, (and hopefully theft techniques lag), we can hopefully look to maintaining a more open transaction environment. If not, along with good cash handling procedures, you may end up having to train employees on safe credit card handling procedures like not passing the card back out side the Faraday cage without replacing it in a protective sleeve.

Info You Can Use: Variety of Thoughts On Dynamic Pricing

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It seems like dynamic pricing may start to creep into the non-profit performing arts sector as a common practice. Stories about it are starting to crop up more and more frequently. When the topic of changing prices based on market demand comes up, people often use the phrase “like the airlines do.”

So should I be surprised when today I saw a story about how Opera Australia got advice about dynamic pricing from the airline Qantas?

In the beginning of July, there was a story about dynamic pricing in the Los Angeles Times. Chad Bauman at the blog Arts Marketing did a good job addressing the recent move toward dynamic pricing in a post earlier this month.

Of course, who knows. Maybe dynamic pricing is just a hot story because newspapers see others during stories on dynamic pricing. Still, it is a conversation non profit organizations need to be having, if only to decide it isn’t for them.

I actually started a discussion on the Performing Arts Administrators’ group on LinkedIn back in May. I had some concerns about the approach to pricing suggested by a guy I was partnering with on a show. It ended up that I misunderstood what he was proposing.

There were only a few responses and the conversation appeared to have run its course when I went away on vacation at the beginning of June, but when I returned I found a slew of new responses. I think it reflects some of the concerns and thoughts people have about the practice.

One of the first responders, Mark Wladika, said the practice of variable pricing left him feeling manipulated, though allowed if people were aware from the outset that “hot shows will see an increase,” it might represent a middle ground. Another commenter, Omar Miller, noted that if the maximum variation was only going to be $5-$10, the potential revenue gains may not be worth the loss of good will if audiences felt manipulated. A concern for the good will of the community was echoed by a number of commenters.

As the conversation went on, the need to communicate the policy clearly seemed crucial as well as limiting it to single ticket purchasers and exempting subscribers. It was noted that lowering ticket prices at the last minute has the potential to alienate those who bought earlier at a higher price and end up reinforcing a procrastinating behavior.

Joanne Bernstein, a Chicago based arts consultant, advised that the decision to change a price be based on a rise in demand rather than proximity to a performance date. She argues that people are busy and should not be penalized for not being certain about their plans just because it happens to be less than 24 hours before a performance.

Maggie Christ brought up the legal issues surrounding variable pricing citing NYC laws that require if a range of prices is implied, the maximum price as well as the minimum price is required. For example, you can’t say tickets starting at $15 without noting that the top price is $500. Which, of course, gives a pretty good indication about the cost of most of the tickets and the probable location of those $15 seats.

Toronto based arts consultant, Linda Rogers, pointed out that some arts organizations are limited by the capacity of their ticketing systems. Airlines and many Broadway houses using services like Ticketmaster and Telecharge have a greater ability to alter their ticket structure in response to demand than most arts organizations. I have to agree there because the process we have to follow to charge a higher price on the day of the show is pretty clunky.

One comment I particularly liked came from Kara Larson, an arts consultant from Portland, ME.

“Two important points: 1) People value what we do differently. Correctly differentiating initial prices and dynamically raising them in response to demand allows people to decide for themselves what seats, timing, and price is right for them. The ones who want to wait for a sure-fire hit will often happily pay for the privilege. 2) Being responsible stewards of the organizations people charitably support means making the most of opportunities to earn revenue given our programming. Passing up opportunities to make revenue means asking for more donated support. And vice versa.”

In a later comment she made a pretty thought provoking suggestion about a different way to approach dynamic pricing:

“The base interest is understanding demand in our markets well enough to price ALL our tickets optimally. Building a rational projection model and adjusting it when we discover errors should be our first and most important task regarding pricing. Only when we err (significantly, in my opinion) do we need to correct by pricing dynamically. Dynamic pricing is an admission that we got the prices wrong in the first place, so badly that it’s worth it to the bottom line to invest in a new system for correcting them.

At the last arts center where I implemented dynamic pricing, the revenue increase was significant in the first season and less in the second. To me this was good news, because we had taken what we learned in year one and applied it to the base ticket pricing, so had less correcting to do at the last minute. Remember, whenever you price upward dynamically, you’ve already sold some (and often most) of your tickets at the wrong price.

I suggest that instead of spending what seems, industry-wide, to be an increasing amount of time debating the merits of dynamic pricing we all spend some time collectively developing much better predictive models for pricing in the first place.”

Some members of the group are moving forward with using dynamic pricing. Steve Carignan, Executive Director of the Gallagher Bluedorn at the University of Northern Iowa says he is moving forward with dynamic pricing this season. He asks,

“Performing arts has for a long time been linked to a discount mentality (devaluing our product and trying to cut our way to a smaller loss). Is it our customers who are uncomfortable or us?”

Liz Olson of the NYU Skirball Center for the Performing Arts made a comment that gave me cause for concern.

“…I don’t think that foundations or donors will look at variable ticket pricing fondly. They like when we are able to show self-sustainability but from what I have seen donors tend to punish non-profits they deem as operating “too much like a for profit.” (as seen in the endless debate about overhead costs and executive pay at nonprofits.)”

Does anyone have any insight into the validity of this? Have any foundations made comments of this general sort? Another commenter said she didn’t feel this was the view foundations and donors viewed attempts at dynamic pricing. However, neither offered much in the way of explicit evidence for either view. I hate to say that from what I have read, either could be the dominant perception at this time. Or perhaps the practice isn’t wide spread enough that foundations have developed a clear policy and approach.

It’s Yesterday Once More

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Tip of the hat to Don Hall (aka Angry White Guy in Chicago) for linking to the Everything Is A Remix web series, some thing of a labor of love by NY film maker Kirby Ferguson. Parts One and Two came out a while back. Part Three just came out a week ago. The last part is due out this fall.

As I have been thinking about intellectual property rights recently, the series struck a chord with me. As you might imagine, the premise of the series is that there are no original ideas. The first video makes that abundantly clear by examining music, especially that of Led Zeppelin, who didn’t make a lot of effort to change any elements of the songs they were appropriating and very little to credit the original artists either. The second video talks about movies like the Star Wars series and the Kill Bill movies and the influences they tapped.

In the third part, Ferguson starts to talk about how creativity and inspiration are based on the work of others, standing on the shoulders of giants, as Isaac Newton famously said in the 17th century. (Though Bernard of Chartres apparently referenced the metaphor in the 12th century.) His example that most startled me was noting that Xerox created a graphical interface computer with a mouse, desktop, pop up menus and other familiar features, Alto, in the 1970s. It was mostly used by Xerox and some universities and was never released for commercial use. Apple made improvements to the design and interface as well affordability and released the Lisa and Macintosh in the early 80s and that eventually morphed into the iPads people are running around with today.

There is actually a transcript and links to all the music and video Ferguson used for each video chapter, should one wish to purchase any of it.

One thing I appreciate about a lot of blogs and other online venues is that people often make an attempt to at least make a passing reference to the source of their information and the jumping off point for their posts. I feel a little bad for Xerox. Sure, they failed to really exploit the technology they developed for nearly a decade before Apple took off with the idea. Because of this their name gets lost in history if not for people like Ferguson. I am sure Apple probably would have faced a law suit if they had made a public nod in their direction.

Still, it is nice for people to acknowledge that they got their good ideas from you. The tracking data for this blog often shows people from universities reading for a long time. I often wonder if my ideas are making it into a paper–and if I am being credited. Or maybe someone just left their browser window minimized behind their chat window for a long time.

The discussion about intellectual property rights, etc is a pretty lengthy debate and even though I recently talked about the issue, I actually wanted to take another tack with this post and ask:

Are we in the arts standing on the shoulders of those who came before and moving ourselves to innovation?

Again, a subject of lengthy and long debate where the current thinking is probably leaning toward an answer in the negative.

But it strikes me that maybe things aren’t so bad as they seem. Or at least perhaps some of the steps that need to be taken may not be as intimidatingly far away as they seem. If, as Kirby Ferguson says, innovation doesn’t come mostly with a flash of divine insight but rather after an onerous road littered with failures and mistakes, then maybe it is just a matter of recognizing how the past is manifesting itself today. (Albeit probably requiring hard work and likely failures.)

I think I have mentioned before that when I was in grad school getting my MFA in Theatre Management, my class read Danny Newman’s Subscribe Now! was unworkable in current times when so much competed for people’s time and attention. He suggested having subscription parties where key people in the community would invite their friends over for tea and would help convince them to subscribe to your season.

Seems pretty difficult to replicate these days if you think about it in literal terms. But this is exactly what happens on different social media platforms and sites like Kickstarter. Key people in the community present your cause/organization to their friends and convince them to become involved. It is tougher to identify specific influential people than in the past when planning subscription parties. But for the same effort you invested in cultivating relationships with those people, you can disseminate information about your organization in a manner that convinces people to become interested and involved with your organization. They may not become as deeply invested as people did in the past, but you can potentially reach far more people than you did in the past.

I will grant that some innovation that moves past recasting the old in familiar terms will be required for the arts to successfully innovate for the future, but it doesn’t all have to be created nearly whole cloth from scratch.

(In the interests of correctly referencing things. The title of this blog is from a Carpenters song)

Cost of Making Things Free

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So I am off on vacation for a couple weeks. Regular readers fear not! I have set up a series of entries to appear according to my usual posting schedule.

Since summer officially started, I thought it appropriate to take a look back at my post about how the Public Theatre manages to offer Shakespeare in the Park for free. Please be sure to read to the comments section in the entry where my misunderstandings were corrected by a reader two years after the post. In my defense, the Shakespeare in the Park website still doesn’t do much to clarify that.

Mutant Business Models Are Coming! (Embrace Them Before They Embrace You)

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Apropos to yesterday’s post about non-profit business models is a piece by Saul Kaplan on the Harvard Business Review discussing how every organization that offers some sort of service needs a business model regardless of whether you are a non-profit, NGO, government entity or for profit business.

If you have never thought about your organization’s business model but figure it is about time you did, you may found Kaplan’s comments about the mutability of business models a little disheartening.

“If you ask any ten people in your organization how it creates, delivers, and captures, will the answers even be close?

If not, it’s probably because, in the industrial era when business models seldom changed and everyone played the game by the same set of well-understood industry and sector rules, it wasn’t as important to be explicit about business models. Business models were safely assumed and taken for granted.

That won’t work in the 21st century when all bets are off. Business models don’t last as long as they used to. New players are rapidly emerging, enabled by disruptive technology, refusing to play by industrial era rules. Business model innovators aren’t constrained by existing business models. Business model innovation is becoming the new strategic imperative for all organization leaders.”

He goes on to talk about the need for new, hybrid business models that blur the existing lines. I take some comfort in the fact that business models are currently a hot topic of discussion among various arts administration blogs. It means we are staying current with trends rather than following far behind.

One thing in particular I took away from Kaplan’s post was the importance of keeping involved in the conversation about business models given that existing lines of separation between profit and non profit are likely to become less distinct.

“Perhaps the most important reason for developing common business model language across public, private, non-profit, and for-profit sectors is that transforming our important social systems (including education, health care, energy, and entrepreneurship) will require networked business models that cut across sectors. We need new hybrid models that don’t fit cleanly into today’s convenient sector buckets. We already see for-profit social enterprises, non-profits with for-profit divisions, and for-profit companies with social missions. Traditional sector lines are blurring. We’re going to see every imaginable permutation and will have to get comfortable with more experimentation and ambiguity.”

Wait, What Is This Guy Actually Talking About?

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In the morning when I look at all the Twitter streams I follow, I often click interesting looking links and then come back to the web pages when I am done with all the new tweets. The result is often a long series of tabs on the Firefox browser and often I don’t quite know who suggested what story when I get around to reading it.

Since most of those I follow have an association with arts and culture, you might understand why I initially thought the blog post I was reading was on that subject. It wasn’t until I got to the sixth point that I had any inkling it was on another industry altogether and the eleventh before I was sure.

RULES FOR BUSINESS MODELS

* Tradition is not a business model. The past is no longer a reliable guide to future success.

* “Should” is not a business model. You can say that people “should” pay for your product but they will only if they find value in it.

* “I want to” is not a business model. My entrepreneurial students often start with what they want to do. I tell them, no one — except possibly their mothers — gives a damn what they *want* to do.

* Virtue is not a business model. Just because you do good does not mean you deserve to be paid for it.

* Business models are not made of entitlements and emotions. They are made of hard economics. Money has no heart.

* Begging is not a business model. It’s lazy to think that foundations and contributions can solve news’ problems. There isn’t enough money there. (Foundation friend to provide figures here.)

* There is no free lunch. Government money comes with strings.

* No one cares what you spent. Arguing that news costs a lot is irrelevant to the market.

* The only thing that matters to the market is value. What is your service worth to the public?

* Value is determined by need. What problem do you solve?

These sentiments are actually about news delivery and found on Jeff Jarvis’ BuzzMachine blog. For awhile there I thought an arts blogger was replicating Adam Thurman’s posting style on Mission Paradox. I had to go back to my Twitter account to try to figure out where the heck I got this link, finally discovering it was the Artful Manager, Andrew Taylor.

Honestly now, if I hadn’t alluded to the fact it wasn’t about non-profit arts and cultural organizations, would you have known it wasn’t? Every point made is a topic of conversation that has come up regarding the arts. Hopefully, they are conversations you have had at least with yourself, if not the staff and board of your organization.

The fact that news organizations are facing these same questions is of some comfort–at least we know the arts are not alone in the challenges being faced.

At the same time, the fact these questions can be asked of the news industry only serves to confirm their wider relevance. These are questions any business must ask. The arts are not special in this regard.

As much as I feel my practical side provides a good balance to my idealism, it is tough to think about the arts not being the exception. Every time I scroll up to re-read these points and see “Virtue is not a business model,” and “Business models are not made of entitlements and emotions,” there is a part of me that says, “Yes, but the arts are different.” In many respects this is true, but the arts in the U.S. operate in an environment where what is written above is also true to a great degree and must be acknowledged.

Rather than try to talk all of us out of our belief in the sublime experience the arts can bring to every day existence, I will merely stress the need to be mindful of the aforementioned truths and not allow our aforementioned belief in the power of the arts to dismiss the stark reality they represent.

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