Internal Processes - Operations

Internal processes are the mechanism for creating and delivering the customer and financial value the presenting organization aspires to provide. Internal processes include operational, customer management, innovation, social and regulatory processes. Internal processes are driven by the organizations strategic plan which aligns the activities of the organization to meet the customer value proposition and enabling financial objectives. Given the current market context, arts presenters must excel at being cost efficient and growing revenues through individual and institutional support to sustain operations while providing programming that is compelling to its audiences.

Operational processes include developing and sustaining supplier relationships, producing products and services, distributing and delivering those products and services to customers and managing the level of risk in doing so. A key operational process in presenting the performing arts is identifying, partnering and managing quality supplier relationships. Performing artists and production companies provide a core product (programs) and represent the key supplier in arts presenting. Suppliers of programs are identified by attending performances at other facilities, going to industry showcases, communicating with artists and their agents and networking with colleagues. The selection of suppliers is driven by the strategies employed by the customer and financial perspective objectives. A presenter seeking to diversify its audiences will seek suppliers that introduce basic concepts of the arts discipline; a strategy of deepening will require suppliers that build on the repertoire either artistically or conceptually. Programs and their suppliers are selected for their ability to create a meaningful experience for the target audience. A supplier’s skill in providing meaningful programming is best currently measured by an experienced curator of programming that has experience and training in the art form. By understanding the evolution of the art form as well as the sophistication of the target audience, the curator is able align programming to its audience. A curator of programming can test their assumptions by the experience of other presenters through networking as well as products such as the Association of Arts Presenters (2005) presenter’s reports. Presenter reports indicate attendance, reaction of the audience, supplier rating and extent to which the programming challenged the audience. Customer satisfaction surveys are becoming more prevalent in performing arts presenting, the results of which are being collected in databases; as these surveys are standardized and shared, they provide additional support for programming curators in program supplier selection.

The Financial Perspective (Part 5)

In addition to the financial measures indicated in the literature, a metric for facilities overhead has been added as a factor to improve cost structure. Whether or not a presenter operates a venue, charges for utilities, maintenance, grounds and custodial will impact the cost structure of venue use. Utilities in particular can have a dramatic impact on cost given that facilities often involve significant square footage maintained with the requirement of a comfortable environment. Complex lighting, sound and rigging systems also use significant amounts of electricity and generate heat.

Revenue growth for the performing arts is driven by strategies to diversify, broaden and deepen participation as discussed in the customer perspective. Key financial measures for these participation goals include revenue from first time participants (diversify), revenue from repeat customers (broaden) and lifetime customer value (deepen). Table 10 summarizes revenue growth objectives and measures.

Table 10

Objectives and measures for the financial perspective; revenue growth strategies.

Financial Objective	Performance  Metric
Revenue Growth Strategy Build the Franchise Increase Customer Value	Revenue from first time participants Fundraising from foundations Percent revenue growth Corporate and business sponsorships Lifetime customer value Revenue per participant Donation per participant Net margin

The Financial Perspective (Part 4)

The not-for-profit sector which includes presenters has taken action to improve its financial condition. A survey of not-for-profit organizations (including theaters) by Salamon and Sullivan (2004) found that cutting costs and programs were cited as the most effective strategy; while productivity enhancements were cited by 10 percent of respondents. Fees and increasing program margins, advocacy, targeted marketing and forming coalitions represented the most effective growth initiatives. Table 8 presents the ten most effective strategies as cited by respondents.

The financial perspective and of the balanced scorecard is divided into productivity and growth strategies which includes; increasing asset utilization, improving cost structure, enhancing customer value and expanding revenue opportunities. Table 9 summarizes these strategies, performance metrics and benchmarks indicated by the literature for increasing productivity in the financial perspective of presenting organizations.

Table 8

 Top 10 Most Effective Strategies (Salamon and Sullivan, 2004, p. 7)

Strategy	Percent who claimed it effective
Cut costs	27%
Reduced program jobs	16%
Fee-for-service/margin	15%
Reduced administrative overhead/jobs	14%
Advocacy	12%
Marketing - targeted	11%
Coalitions	11%
Marketing - general	10%
Productivity enhancements	10%
Cut programs/program capacity	8%

Table 9

Objectives and measures for the financial perspective; productivity strategies.

Financial Objective	Performance  Metric	Industry Averages
Productivity strategies Increase Asset Utilization Capacity Utilization Marketing Efficiency Development Efficiency Coalitions/partnerships Improve Cost Structure Increase Program Margin Reduce Administrative Costs Facility Costs	No. of seats sold/available Revenue/marketing expense Contributions/fundraising expense Rental revenues Program revenue/program expense Percent of all expenses Percent of all expenses	81% 3.19 7.93 .73 11% Not available

The Financial Perspective (Part 3)

Kushner and Pollack (2004) identified four key operating measures in their study of performing arts presenters that impact the financial perspective. The four measures are development efficiency, marketing efficiency, program margin, and capacity utilization. Development efficiency is the number of dollars contributed per dollar expended for fundraising and development activities. According the authors, the ratio for all presenters in the study average $7.93 in FY2001/02. Another study by Hager et al (2004) of Federal 990 forms submitted by not-for-profit arts, culture, and humanities organizations indicated a development ratio of $5.55 for FY 2001 returns.

Marketing efficiency is the number of dollars generated per dollar of marketing expenditure. Kushner and Pollack (2004) study of performing arts organizations found that on average, each dollar of marketing expense generated $3.19 in revenues.

Program margin is the ratio of box office income to the sum of artistic and production expense. Kushner and Pollack (2004) found that on average, box office revenues covered only 73.3% of production expenses; production expenses did not include marketing or overhead costs. In the study by Hager et al (2004), program margin for arts, culture and humanities not-for-profit organization was 72% in FY2001.

The final operating ratio indicated by Kushner and Pollack (2004) was venue capacity utilization. Revenues in the presenting context are directly proportional to the price and number of seats that can be sold. The number of seats available is the result of the venue capacity and the number performances available. Their study of finance and operations indicate non-for-profit presenter’s averaged 81% capacity in 2001/2002.

The website Charity Navigator (2005) provides a useful methodology for evaluating not-for-profit organizations which includes many arts presenters. In addition to working capital, fundraising and program efficiency ratios, the site also uses an evaluation of administrative expenses, revenue and expense growth rates to understand the performance of an organization. Administrative expenses are measured as a percentage of all expenditures. The median for all not-for profits according to the site was 10.3 %. Kushner and Pollack (2004) report administrative expenses represented 11% of all expenditure for not-for-profit performing arts presenters in their study of FY 2001/2002 Form 990 returns.

Charity Navigator (2005) views consistent revenue growth over of an extended period of time (currently 36 to 48 months) as an indicator of program sustainability. Revenue growth must outpace inflation as well as the growth of expenses. The Theatre Communications Group (2003) study of 214 theaters indicated that the 4 year compounded growth rate of revenues (adjusted for inflation) was 11%, while expenses grew by a rate of 18% in FY2003. The Theatre Communications Group data mirrors the Census Bureau data presented earlier (Table 3) that indicated average annual sector growth of 9.75% for not-for profits from 1997 – 2002. Expense growth was not available from the census data. Salamon and Sullvan’s (2004) survey of not-for profit organizations indicate that liability coverage and benefits were most cited as reasons for increased operating expense. The Theatre Communication Group (2003), Kushner and Pollack (2004) both indicate increases in private contributions, significant decreases in government funding and investment income. Box office income has remained relatively flat in recent years.

The Financial Perspective (Part 2)

Working capital is also indicated as key financial measure of not-for-profits by Charity Navigator (2005), the Theatre Communications Group (2003) and Kushner and Pollack (2004). Working capital is the net liquid assets of an organization divided by its total expenses for the most recent fiscal year. Working capital indicates an organizations ability to sustain programs and operations during downturns or to take advantage of opportunities in good times. The median working capital ratio for all not-for-profits according to Charity Navigator is 0.7 years (8.4 months). In the Theatre Communication Group study (2003) working capital had reached a low of -.10 in 2003; the fifth consecutive year organizations reported a negative working capital ratio. As cited by the study, a working capital ratio of .25 (3 months) is considered adequate to handle most cash flow fluctuations. Kushner and Pollack (2005) also indicate a significant decrease in working capital among the performing arts presenters it studied. Median working capital ratios decreased from .264 (2001) to .098 (2002); a decrease of 63.1 %. The study also indicates that the current ratio (current assets divided current liabilities) decreased by 32.8%, from 1.98 to 1.33 for the same period. The current ratio indicates current assets available to cover current liabilities; a ratio of 2 to 1 is considered generally acceptable. Table 7 summarizes high level financial measures for performing arts presenters and are an inseparable component of the of an organizations mission to enhance, enrich and improve the quality of life.

Table 7

Objectives and measures for the financial perspective; productivity strategies.

Financial Objective	Performance  Metric	Industry Averages
Sustainable financial operations	Net income ratio Working capital ratio Current ratio	.05 .25 2

The Financial Perspective (Part 1)

The financial perspective is seen as an enabler in the not-for-profit arts presentation field. Financial performance provides the means to pay artists and staff, secure facilities and market programming. Arts presenters on average receive 52 percent of their revenue from earned income (ticket sales, concessions, rentals) and 48 percent from contributions by individuals, foundations and government entities. Over half of unearned income comes from individual donations (Hager & Pollock, 2002). Both earned and unearned revenue sources are lagging measures indicating whether or not the presenter is achieving the value proposition that is attractive to its target audiences. Individuals will attend events more frequently and make contributions to the arts presenter in proportion to level of benefits experienced. Private and public institutions will also act in their self interest by funding presenters that are perceived as providing community benefits not available from other sources.

Although financial returns are not the stated goal of mission driven arts presenters, financial measures are a clear and objective measure indicating how well the presenter is providing the intrinsic and instrumental benefits its target audiences want. The long term sustainability of any arts presenters is dependent on responsibly managing its financial perspective resulting in a positive net income over an extended period of time. Kushner and Pollack (2004) identify net income as a significant indicator in their study of the financial health of performing arts organizations; highlighting a drop in net income from 5.3% in 2001 to 4.2% in 2002 as a percentage of expenses. The same study indicates that over half of the organizations studied reported negative net incomes. A similar measure is also indicated in the Theatre Communication Group Study (2011) of 1876 theatre organizations that filed Form 990’s. Change in Unrestricted Net Assets (CUNA, total unrestricted income – total unrestricted expenses) increased by 24% from 2007 to 2009; resulting in a CUNA of 7.7% of expenses in 2011. Positive net income is seen as the overriding financial objective of arts presenters for sustainability.

Demand for association and status.

Presenting the performing arts has, for me, been about creating great experiences for audiences and artists in a live setting, and doing so within a financially sustainable model. The performance and the impact on the audience being at the center of the experience. And yes, part of that experience is the social  experience of being with others, one that changes with each different audience member.

There is another level of demand for the arts and specifically for arts organizations that I subconsciously recognized, but just recently have come to better understand. Its the demand for association and status. And over the last couple of years of speaking with leaders of performing arts organizations, I've learned the demand for association and status are much greater than the demand for the arts experiences itself. As a result, arts organizations have become the product, rather than the conduit that delivers the experience being demanded. Programming has become a secondary function of the organization. Selling association and status has become much sustainable than selling engaging and entertaining arts events, especially in our hyper media entertainment driven world.

Absolutely nothing wrong with using the arts to make connections with others, or to use the association with the arts to enhance one's brand, but it does add a complexity to managing the arts that is filled with opportunities for inefficiency and corruption. Part of the complexity seems to involve not being able to publicly discuss the demand for association and status, yet alone responsibly manage it. Can you imagine telling your development office to rank donors or board members according to their influence or power rating? Yet we all know the hierarchy exists and influences decisions, and so does everyone in your organization. It's clear that executive directors of arts organizations need a high level of diplomacy, superior interpersonal skills and an ability to market a strong vision for the organization. That vision seems to include delivering the connections and public branding many donors and board members seek, I just hope it doesn't drive away the board members and donors that are committed to meaningful artist/audience experiences.