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Not-for-Profit: Successfully Navigating the New Business Landscape for Symphony and Opera Companies


June 2014

The following was distributed as part of CohnReznick's The Not-for-Profit Advisor - Spring 2014 issue.

As orchestra and opera companies cope with steady declines in patrons, ticket and subscription sales as well as the number and sizes of donations and grants, managing these challenges will require a heightened reliance on an effective conservancy business model. The model, which structures donors and artistic organizations as partners in sustaining the profitability and growth of the organization, has historically served orchestra and opera companies well. However, effectively addressing the challenges arising from the changing economic landscape will necessitate a retooling of the standard conservancy business model. It will require that the model focus on areas such as the separation of the core businesses, marketing endeavors, underwriting specific costs, and financial measurement and planning. In the forthcoming discussion, CohnReznick shares its perspectives on how symphony and opera companies can fine-tune their business model for greater success in today’s financial environment.

Countermeasures with Obvious Limitations

In the face of financial and economic challenges, a number of orchestra and opera companies either liquidated under bankruptcy or simply closed their doors. High-profile examples in the past three years include the Louisville (KY) Orchestra, the Syracuse Symphony Orchestra, the New Mexico Symphony, the Honolulu Symphony, the San Antonio Opera, the Baltimore Opera and the New York City Opera. Others reorganized either with or without bankruptcy protection or curtailed their missions.

Companies that responded to the declines in the predictable ways ran up against the expected limitations:

  • Cutting ticket and subscription prices with the hope of boosting or at least preserving volume. Not surprisingly, most companies did not find large segments of audiences that were waiting for lower prices. Now that attendance has resumed since the onset of the recession, some companies are confronting the paradox of record turnout but less overall revenue.
  • Cutting the season. Reducing the number of performances certainly cuts the large direct costs, but curtailing the product tended to diminish the perceived value; a company with a shortened season looks like a company that has lost a certain amount of relevance and capability.
  • Cutting costs. For symphony and opera companies, the largest cost is that of the performers and production personnel. Cutting compensation for performers may come at a price to the company: it could serve as a disincentive to current performers and thus turn them away and render a pay scale that will not attract the necessary replacements.
  • Shedding debt through Chapter 11 reorganization. When an arts organization sheds debt through bankruptcy, old and new vendors alike will grant little or no credit and will be less willing to extend other terms or make donations or concessions. 
  • “Churning” the donor base for additional gifts. It generally holds true that arts organizations have success with making additional, often emergency, appeals to the existing donor base. Compared with developing new donors, it is relatively quick and easy to get current donors to make additional gifts and persuade past donors to resume giving. Of course, the amount that can be generated is limited and the extra appeals may create or reinforce an image of a declining organization less worthy of donations.
     

The Strength of the Conservancy Business Model

Donors view their contributions to the arts differently than those given to charitable organizations: Donors and the artistic organizations they support view themselves as partners in conservancy. This partnership concept extends to the ticket buyers and, especially, the subscription audience. The partnership concept contributes to the dependability of donations and the ability to predict levels of giving and sales. 

Over years of cycles of appeals and marketing, donors and buyers have also participated in improving the timing of collections. Collections of donations and grants are now routinely made in time to plan the outlays. With regard to ticket receipts, the rise of subscription sales (advance sales of an entire season) greatly enhanced the business model by shifting much of the purchases from just days and weeks before performances to weeks before the season opens – well in advance of much of the cash outlays. Now companies routinely budget with confidence for contract and pension obligations, long- and short-term debt, royalties, and guest appearances. Even in the cases where a business failure indicates a mismatch between receipts and outlays, the story is often that the board and management predicted a shortfall, but then placed too much confidence in turnaround measures.

Tweaking the Conservancy Business Model

The increasing challenge of raising donations and revenue will force new efficiencies on the business model for performing arts. As is the norm with good trends, the early adopters benefit most.

Separate the Core Businesses: The Company, the Venue, and the Endowment

The business of the performance company is different from the business of the performance space and both are different from the business of the endowment. There may be a need to manage two or all three together within the same organization, but even in that case, it is useful for the governing board and management to maintain the mental rigor necessary to distinguish between the respective missions and procedures.

A venue that presents the works of several performance companies will emphasize variety: different ensembles and artists, perhaps even separate concert series such as jazz, classical, pop, and dance. By contrast, each performance company will strive to emphasize variety within its repertoire. For example, a chamber orchestra that is perhaps dedicated to the Baroque era may emphasize the variety of guest soloists and perhaps the occasional foray into another era. An opera company may distinguish between light and dramatic works or highlight a season of primarily concert or semi-staged presentations punctuated by a fully-staged production.

The venue matches rental revenue and perhaps some donations to the costs of utilities, custodial staff, technical staff and administration. The performance company matches donations and ticket sales to the main cost of performers followed by production, marketing, royalties and administration.

When those separate missions are combined in, for example, a symphony orchestra that maintains its own performance space, the governing board and management are coping with a complexity that tends to mask problems. A simple exercise of allocating a portion of revenue equivalent to the going rate of rent for a similar performance space will allow the company to measure the performance of the venue business.  

There is good reason to create a separate legal entity for the endowment. Placing the endowment in the hands of its own governing board helps eliminate any appearance of endowment mismanagement and, for that matter, discourages potential raiding of the endowment. Separate ownership of the endowment insulates it from the fortunes of the performance company or the venue. Donors will be more encouraged to fund the endowment if they know that the mission will be supported even if the company or the venue should fall upon hard times and be forced to close down. The endowment can fulfill the expectations of the donors by shifting its support to an appropriate entity.

If it is not practical to place the endowment in a separate legal entity, then the company’s management has to govern the endowment in a transparent manner, assuring its independence and integrity.

A New Focus on Combining Marketing Resources

Where a venue is a standalone business presenting various performance companies, the core businesses of the venue and the companies overlap in the promotion of the venue’s season-long program. 

To be sure, there has always been cooperation among the venues and the companies in marketing endeavors, but joint marketing efforts often do not get the attention they deserve in a market where the proliferation of emails, e-blasts, websites, and social media pages needs to be met with smart, efficient message delivery, not just additions to the clutter.  

For the venue, a significant competitive advantage can be the ability to quickly and efficiently incorporate (1) the mailing lists (email and regular mail) of each of the performance companies in its own mailings, emails, e-blasts, etc.; and (2) the social media links – Facebook, Twitter, Instagram – of the companies on its own social media sites.  

The New Angel

Performance companies have been encouraging donors to underwrite specific costs, for instance, the printing of programs or the rental of the venue. Lining up donors for these specific expenses is a way of making sure the donation precedes the expenditure. The donor, in turn, gets credit for something tangible — something that the patron can see, hear or feel and associate with the donor. Years of cultivating these underwritings has created a role for a new angel — the underwriter of administrative costs.  A positive consequence of a grant that completely covers administrative costs is that donors of smaller amounts – $25, $50, $100 – feel that they are contributing directly and completely to the mission of the company.

Rolling 12-Month Financial Views

Anticipation of problems is the overriding concern of financial analyses. 

Traditional budget and performance views look at the current year and the upcoming year as separate items. However, the relative fortunes and challenges of one year intimately affect those of the next. It makes sense to reflect that link in planning. Replacing the current year view with a rolling 12-month view links your current resources with the next 12 months of operation. If you are three quarters of the way through your year, then it is appropriate for you to be looking at the first three quarters of next year as part of your current operation. 

Simple, Smart Analyses

A few relevant comparisons can go a long way in financial measurement and planning. 

The board or management of a performance company or venue may feel that they are not economists, nor can they afford to hire one.  Consequently, a typical budgeting exercise may consist of looking at last year’s donations and making the forecasted amount five percent higher or lower depending upon the board’s collective “gut feeling” as to whether the economy is strengthening or weakening. 

However, there is no need to rely purely on guessing. 

There are several economic indicators readily available on the Internet that can be used to replace the previously mentioned “gut feeling” with more substantiated reasoning. For example, historical unemployment rates by state or county can be compared against donation levels, potentially revealing strong correlations that can be used in planning.

Another opportunity for easy, yet insightful, analysis can be found in the comparison of the percentage mix of income – donations from individuals, corporate support, sales, investment income and government grants – to the organization’s history and to that of similar organizations. Differing trends in either comparison may indicate available but overlooked funding sources.  For example, underrepresentation in corporate support may indicate that a renewed courting of businesses will be fruitful.

Addressing Excess Seating Capacity

Whether attendance is in decline or not, filling a house is often a problem.

Full houses give audiences the impression that they are getting a lot of bang for their buck. Conversely, empty seats create the impression that the performing company is of lesser value. It is a frustrating problem because it tends to unfairly hold true regardless of the size of a venue. For example, 185 people sitting in a 200-seat theater encourages a favorable view of the performance, but the reality of the same 185 people spread out in a 500-seat venue suggests the performance company is not an adequate draw. 

Unfortunately, performance companies usually don’t have the opportunity to match seating capacity to the audience size. In an attempt to fill the house, some companies use ticket giveaways. The problem is that ticket giveaways erode the perceived value of the paid ticket. A company can find itself creating an expectation among its patrons that no one should have to pay the sticker price. These companies are weighing the devaluation via empty seats with the devaluation via ticket giveaways.

There is a caveat to this and that is ticket giveaways that are genuine outreach to people who could not normally afford or get to these concerts such as music students, retirees, or nursing home residents. Patrons paying full price are less likely to see themselves as disadvantaged by this type of giveaway.

As venues are newly built or renovated, they are likely to offer a combination of both large and small spaces or “flex space” where audience seating can be tailored to the attendance to create the image of full houses. The Amato Opera thrived for over 60 years targeting relatively small audiences using small venues. From 1951 to 1964, it was housed in a 299-seat space. Interestingly, in 1964, it moved to a smaller space – 107 seats.  

An Overlooked Asset

Many companies record their performances. That library has value that may not be apparent because it cannot easily be converted into revenue through, for example, sales of DVDs or downloads. However, the recordings, and even the existence of the library, can be used to attract donations, attract merger partners, and create free downloads and distributions to raise awareness of the company.

Another overlooked aspect of the library is that segments of each performance can be edited and packaged into different collections to create new items focused by theme, genre or “best of” collections. A new collection can be tailored for any given donor, foundation, or audience segment. 

Educating the Donor

Potential contributors would be turned off by a litany of costs or an analysis of cost drivers. However, these contributors have been sheltered from two insights that can help a company greatly when it is seeking funding. 

First, the majority of potential contributors do not realize that royalties are a significant cost of presenting music composed after 1922. Hence, a Leonard Cohen or an Aaron Copeland work presents a significant hurdle that the works of Bach, Beethoven, and Mozart do not.

Second, a majority of potential contributors do not realize that symphonic works composed after Beethoven’s time generally called for much larger orchestras. Consequently, much of the Classical and Romantic era music is significantly more costly to perform than is the music of the Baroque era. 

The “education” does not have to be the stuff of dry lectures and articles.  Both of the above items lend themselves to marketing opportunity. They play to the emphasis of variety: the “chamber orchestra concert” that opens a season versus the “grand symphony performance” that closes the season and, in between, the “annual spotlight on the modern era.” The complementary appeals for funding can succinctly point out the differences in costs. This would demonstrate clearly the link between increases in support with the variety of the repertoire.     

What Does CohnReznick Think?
The conservancy business model will still have to cope with and address the steady decline in attendance at classical music concerts and a corresponding shrinking of support.  The good news is that the observations above do not point to the need of an overhaul – rather, they point to modification, adaptation and fine-tuning. 

Contact

For more information, please contact Andrew Masini, Senior Manager, CohnReznick Advisory Group, at 732-635-3137.

To learn more about the services offered by CohnReznick Advisory Group, visit our webpage.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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