Of models old, new, and broken

There’s been lots of chatter in the arts blogosphere the past few days over “the model,” most prominently in the email publication You’ve Cott Mail for January 11, which cited a number of online commentaries on the subject, including a very good one from Drew McManus at Adaptistration. But the commentaries invariably miss crucial points and end up in an analytical mush. Most of this is caused by the conflation of lots of different issues into one pernicious concept – the “business model.”

Personally I despise the term as applied to arts organizations. The term “business model” is entirely appropriate when it is applied to entities whose fundamental and primary purpose is to make money for its owners – in other words, businesses. But there are vanishingly few arts organizations in this country whose mission statements include the words “owners” or “profits.” Businesses exist to make money for their owners by making things, or providing services, for sale to other entities or to the public at large. Arts organizations exist to make art for the public. They need to arrange for a revenue stream in order to do that. But in  no sense is the revenue stream, either gross or net of expenses, the point of the exercise. For non-profits, the “bottom line” is not the bottom line – the service provided by the non-profit is the point, not the revenue.

The term “business model” simply cannot be divorced from its implication, which is that the point of the model is profit derived from an excess of revenue over expenses. Using the term to describe any aspect of non-profits is to invite non-rigorous thinking on a level too deep to extirpate.

But I’m not going to win that battle, at least not today. So let me try something simpler: to point out that a “business model” for an arts organization has at least four components, all of which need to be examined before anything meaningful can be said about current of future models. Those four components are

• How decisions are made (governance)
• What the organization does (mission)
• How money is spent in doing those things (expenses); and
• How money is obtained to pay those expenses

What’s important to remember is that these four components not only interact (which is obvious), but that some of the most important interactions are very non-obvious indeed.

Take, for example, the recently reported events at the New York City Opera. These can be best viewed as attempts to revamp the expense component by radically reducing how much the organization spends on the people actually making the art. But doing so will, of course, radically impact what the organization does, and will do so in ways that are both obvious and subtle. One of the most important, yet subtle, ways will be to change how management and the board view putting on performances at all.

In the current model of paying artists, most of the cost of putting on performances is in the form of fixed annual expenses composed of compensation guaranteed to the artists by the labor agreements between the NYCO and the various performers’ unions. This means that the marginal cost of each performance is far less than the average cost (marginal cost being defined essentially as the costs associated with doing a performance that would not be incurred by not doing that performance). The “new model” might lower NYCO’s total expenses, but would radically raise the marginal cost of all performances.

NYCO management might think that won’t change their thinking about doing performances – but it will. If everyone is getting paid regardless of whether the company schedules 1 or 4 performances in a week, the incentives are all to do 4 performances; putting on opera performances are, after all, why there is an NYCO in the first place. But if the company can save a ton of money – or the staff doesn’t have to go out and raise a ton of money – to do a particular performance, the incentives all lean towards not doing that performance and justifying to the board and the funders why that particular performance was just too damned much trouble. After a while, most performances will be seen as being just too damned much trouble, and the company will end up doing just enough performances to justify having a full-time staff.

Interestingly, two components of the current model appears to be left unconsidered by the NYCO management and board –  revenue and mission. The most interesting quote from the New York Times article on the situation came from Gail Kruvand, chair of the orchestra negotiating committee:

“We can’t keep sacrificing if this effort by current management is doomed to failure,” Ms. Kruvand said. “You can’t run a nonprofit performing-arts company on 10 percent earned income,” she added, referring to the rough proportion of ticket sales to donations.

10% earned income? Wouldn’t they be better off by trying a new model of revenue and mission? Why bother to sell tickets at all if all it does is produce 10% of the company’s revenue – especially as that is most certainly not net of expenses, such as marketing, associated with selling tickets? Wouldn’t they be more likely to raise money if they thought of themselves as a cultural service agency and not a Broadway show that never turns a profit? Wouldn’t that liberate them to explore new ways to bring opera to the masses?

It is impossible to have an intelligent discussion about new models without identifying core components of what a model is and putting them all on the table.  Demonstrating that is the only service that NYCO management and board have done anyone during this debacle.