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March 21, 2008
The Imminent Death of Orchestras - Yet Again
In the 45 years that I have been professionally associated with symphony orchestras in America, I have lost count of the number of times an alarm has been sounded about the state of crisis in which they exist, sometimes with warnings of the imminent demise of the industry. So far, at least, those alarms have proven to be false ones - and for the most part, symphony orchestras are more vibrant, healthy, and vital now than they have ever been. That does not mean that they don't have challenges, much like the entire non-profit field, but it does mean that they have learned how to address them.
The latest alarm bell is a study produced by Prof. Robert J. Flanagan of the Stanford Graduate School of Business. The report was commissioned by The Andrew W. Mellon Foundation, and it studied statistics from the largest American orchestras between 1987 and 2003. Data was provided to Prof. Flanagan by the League of American Orchestras. There is no question that there is much very valuable information in the report. It adds considerably to the body of knowledge about the field of orchestras, and it can and will be an extremely useful tool for advancing our understanding of our business model, stimulating debate, and ultimately helping the field to develop and implement adaptive strategies for the future. Most importantly, it provides a platform for serious future research.
Prof. Flanagan's study provides an opportunity for orchestras to continue to discuss, as they have been doing, the value of understanding the dynamic environment in which they exist, and adapting to it. It confirms what we already know: that orchestras do not operate in a vacuum but are intimately tied to the health of our communities. We at the League of American Orchestras are continuing to intensify our efforts to gather best practices and disseminate them throughout the orchestra field. The League is, in fact, already in the process of significantly increasing its efforts to carry out some of the research that the report recommends.
The report is very thorough, very dense (as economic studies tend to be), and one can draw a wide range of conclusions from it. Here is my take on some of its points. The study reaffirms what was suggested by a study done by Baumol and Bowen in 1966, which noted that symphony orchestras do not enjoy the productivity gains achieved in the private sector. It took about 80 musicians 45 minutes to perform Brahms's First Symphony when he wrote it, and it still does, and always will. In the absence of the private sector's productivity gains (like making five times as many widgets in one-half the time), it is logical that operating costs may rise faster than earned revenues. Indeed, what Prof. Flanagan calls the "performance income gap" has widened over the years, and is likely to continue to do so. But orchestras have continued to exist and in many cases even thrive by changing the mix of income streams, through endowments and annual fundraising.
The final two-to-three years of Prof. Flanagan's study (2001-2003) coincided with a severe economic downturn, and the psychological damage done to our country by the events of September 11, 2001. No one will dispute that a majority of our non-profit organizations in America suffered economic troubles in that time. It is unfortunate that the post 2004-05 period did not comprise the final period of the study, because the trends were far better in those years. Over the past few years not only have fundraising and overall fiscal performance improved, but ticket sales have as well. After a few years of flat or declining ticket sales during the early 2000s, there was an 18% increase in ticket sale income to orchestra concerts between the 2004-05 season and 2005-06. And, equally encouraging, paid attendance at classical concerts for American orchestras in 2005-06 was 11% up from the previous year, again after a few years of flat or declining attendance. Attendance for all concerts given by orchestras - including family, education, pops, chamber, summer, and youth concerts - was also up 11%.
Prof. Flanagan points to the fact that musicians' wage increases outpaced inflation during the period of his study. I think it is important to note that the 3.8% average annual increase in the salary of the orchestras he studied is 0.1% over the rate of increase for liberal arts college faculty during that same period, 0.2% under the rate of increase for employees of hospitals, and precisely the same rate as other health-service industry employees (these figures are from the U. S. Bureau of Labor Statistics). Thus, musicians' salaries track extremely well with those of other employees in the non-profit sector. It is also very important to note that Prof. Flanagan excluded musicians in hundreds of orchestras with budgets smaller than his sample (which consisted of the 50 largest orchestras).
The issue of price elasticity is raised in the report; interestingly, for the past three or four years this issue has been in the forefront of the minds of orchestra administrators. A number of orchestras have explored ways of significantly reducing some or all ticket prices, which has resulted in both much fuller houses and a greater level of excitement about their orchestras in the donor community, in turn resulting in increased contributed income.
What I have learned, in four years of visiting and spending a day with 125 different American symphony orchestras, is that it is impossible to generalize - but that a great many of them have been very smart, very flexible, and dynamic in dealing with different economic conditions. Orchestras that are attentive to changing demands and the very nature of their audiences are not only maintaining but increasing attendance. Orchestras attentive to their entire communities (beyond just their subscribers) are also raising more money, and operating in fiscally balanced ways. As I said earlier, Prof. Flanagan's report is a valuable addition to the research that has been done about orchestras, and will provide the field with useful information that will be of use in continuing to adapt to our environment as it changes. But anyone who draws from it the conclusion that orchestras are in peril runs the risk of subjecting themselves to Mark Twain's famous quote: "The report of my death was an exaggeration."
Posted by hfogel at March 21, 2008 11:07 AM
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A Response from the Elephant Task Force
The Mellon Foundation, the Elephant Task Force, and the "Flanagan Report"
The Orchestra Forum was established in 1999 as part of a program of the Andrew W. Mellon Foundation designed to further creative thinking and innovation among orchestras and related organizations. Forum meetings bring together musicians, managers, and trustees of participating orchestras with invited scholars and leaders from the performing arts, and sessions include blocks of time for ad hoc discussions focusing on participant-posed questions.
The so-called Elephant Task Force ("ETF"), a cross-constituent group of musicians, managers, and trustees grew out of one such discussion in late spring 2003-a time when a significant number of orchestras were facing financial challenges. The economy was still reeling from the bursting of the stock market bubble and the direct aftereffects of 9-11, and national resources were being reallocated away from the arts. Orchestras, both major and regional, had reported significant financial deficits the prior season. All of the Forum orchestras admitted to projected deficits that year ranging from five to fifteen percent of revenue.
From the outset, one key issue for the ETF was the question of whether fiscal problems were structural or cyclical. This question loomed large, for the organizational implications of it being one or the other are significant. A verdict in favor of "cyclical" would imply that the status quo is fundamentally sustainable, and the key financial challenge for orchestras would be to gain greater ability to withstand the inevitable ebbs and flows of the economy. A verdict that the problem was structural would carry with it far greater implications for the long-term management of the organization.
In March 2006, the Mellon Foundation, on behalf of the ETF, commissioned Stanford University Professor Robert Flanagan to conduct an analysis of the economic health of orchestras, with the objective of assessing the cyclical and structural influences thereon.
Responding to the central question posed to him, Flanagan found that changes in the financial balances of symphony orchestras reflect the influence of both general economic conditions (i.e., cyclical effects or business conditions) and trend factors (structural factors unrelated to changing economic conditions over the business cycle.) One example of a trend factor is the productivity lag identified by Baumol and Bowen: the performing arts, unlike other sectors of the economy, benefit little, in terms of productivity, from technological innovations; unit productivity does not rise as fast as the cost of talent; and thus performing organizations' costs almost always (and increasingly) exceed their earned income.
The result is that each time business conditions improve, orchestras find themselves in a slightly worse financial condition than they were prior to the economic downturn, and with a larger gap between performance revenue and performance expense to cover. Flanagan finds that this performance income gap has been addressed by a significant trend increase in nonperformance income (government support, private contributions, and investment returns.) When one combines the modest trend increase in performance revenue and sizable trend increase in nonperformance income, and sets it against the very sizable trend increase in performance expense and trend decrease in government support, there is a quantitatively small but statistically significant trend improvement in the overall financial balance of the average orchestra in the sample. Flanagan calls this a "gentle trend towards surplus," but cautions that this trend may be overwhelmed by small adverse cyclical effects.
Each orchestra's financial situation is unique and each orchestra has a unique place in its own community. There are, however, some common areas every orchestra can examine in order to succeed in a challenging environment. In its multi-year investigation of these challenges, the ETF formulated four areas of attention that can affect orchestras' well-being.
Community Relationships: Ways in which the orchestra organization connects meaningfully to its community and creates true public value;
Internal Culture: Ways in which the orchestra constituents work together in mutually supportive and cooperative ways;
Artistic Activities: Ways in which the orchestra deploys artistic resources broadly and effectively in service of the art form, the community, and individuals in the organization;
Financial Structure: Ways in which the orchestra matches cash resources with expenditures either to maintain the status quo or to achieve financial viability or financial robustness.
Out of the sense of urgency to assist orchestras in addressing financial deficits, the ETF's work grew to a focused consideration of how their orchestras might envision themselves in the future. What began as a response to fiscal exigency-coping with financial deficits-evolved over five years to a call for orchestras to create for themselves both a vision of a sustainable artistic endeavor and the innovations necessary to achieve that vision.
Today, the ETF stands for the proposition that orchestras should re-examine devoting huge energies to short-term coping strategies to address weak bottom lines. The ETF has concluded that coping mechanisms such as unsustainable draws from endowments, underfunding pension obligations and reopening contracts to seek concessions, are recipes for failure. Rather, orchestras are best advised, after carefully weighing costs and benefits, to engage in risk-taking experimentation to find innovative ways of addressing the inevitable challenges embedded in a changing environment.
The ETF hopes that people who care about the future of their orchestras will undertake the self-examination of their individual orchestra's circumstances, and use the ETF's work, which will be shared with the full Forum in May 2008, as stimulation for vigorous, cross-constituency internal debate, on their own terms, about the appropriate choices for their orchestra.
Posted by: Henry Peyrebrune at March 21, 2008 5:20 PM