An Un-Strategic Plan Part 2: Assumptions that Assume Quite a Bit

Previous: An Un-strategic Plan

[Disclosure.  As I mentioned in an earlier post, after I started posting this series, the Minnesota Orchestra management finally released the “independent financial review” they had commissioned several months ago.  I commented on some of the many problems with the analysis—particularly the absurd notion that a document paid for by the management, examining the specific questions pre-determined by management and specifically using data furnished by management could in any way be considered “independent”—but held off posting the subsequent installments of the series in case something relevant was released.

I think that was the right thing to do, and I continue to believe that was a good decision.

But in retrospect, I don’t think I should have worried.

Others have pounced on the document from a variety of angles, including Robert Levine who thoroughly shreds it here.  Of all the problems associated with it, the one most relevant for my deep dive into the Orchestra’s strategic plan is the fact that it exists in a closed loop of information.  Yes it paints a terrible view of the Orchestra’s finances—because it’s using the same information the Orchestra management has been using. 

It’s the equivalent of writing your own entry on Wikipedia, then asking reviewers to “independently verify” the information by having them fact check the article against  your own notes… the ones that you used to write it in the first place.

I may delve into this aspect of the dispute later, but in the meantime I want to continue my series on the Orchestra’s strategic plan.  Although I’ve made a few edits, the bulk of my analysis remains the same.]

 * * *

The labor dispute between the Minnesota Orchestra and its locked-out musicians continues.  I have mentioned that, from my perspective, this dispute is less about the nuts and bolts of the labor contract itself, and more a clash about competing visions of what the Orchestra should look like as an organization—what its priorities are, who it serves, the nature of its product and its role in the community.  The management has put forth its strategic plan on its website, helping to establish what it wants the organization to look like.  In honor of Labor Day, I began a deep dive into this plan, which for me raises some serious red flags.  I began with general thoughts and a look at the mission statement and executive summary; today I’m turning my attention to the section marked “Overview of the Current Situation” that runs from page 7 to page 14.

Management is clearly trying to make a strong statement of The Problem, the dire current situation that justifies and requires the solutions that follow on subsequent pages.  As such, this section provides, at least in theory, the intellectual underpinnings of the rest of the plan—everything that follows is somehow related to the information on the next few pages.

To my mind, this section has some serious deficiencies.  The main problem is that the assumptions that underlie nearly all the graphs, charts and statements assume way too much, and are both lazy and vague.  Platitudes and generalities are stated as fact with little evidence or concrete support.  Because of this, it is difficult to verify whether the assumptions are accurate, if the evidence proves anything, or if the solutions that make up the remainder of the plan will be in any way effective.

 * * *

Page 7

On this page, you begin to flesh out some of your ideas and explain the assumptions and the figures that support them.

But, to be frank, you do so in a peculiar way that ultimately feels self-serving.

To begin, let’s look at the figures showing a decline in both audience members and donations.  First, I am willing to believe that ticket sales are down from the orchestral heyday of the 1990s, but what about other trends during that long sweep of time?  Has ticket revenue declined when adjusted for inflation?  Are profit margins per ticket up since then?  Is the Orchestra less dependent on ticket revenue as a percentage of its overall income than it was 20 years ago?  Has the rest of the budget been adjusted to account for this trend?  Are some concert series doing well?  Is fundraising down uniformly in all areas evenly? Are there new and developing income streams that can help make up the difference?  What about overall users of your product, not just concert attendees?  Maybe these specific questions are irrelevant, maybe there are other questions that are more pressing—but I find it odd that a board filled with CEOs and financial leaders would peg everything on  one or two macro indicators without delving into some of the micro trends that would provide a fuller understanding of what’s happening with the Orchestra’s revenue streams.

It feels like there could be some points of good news to report, but you chose to bury them within a broader framework of gloom.  That’s too bad… these points of light might be good indicators of what specific steps you need to take to right the ship.  Not including them suggests that they don’t support your chosen narrative, and thus you’ve ignored them.

More troubling is timeline.  Interestingly, you chose as your end date to coincide with the Great Recession.  This seems so obvious to say out loud, but you’ve chosen for your benchmark the economically disastrous 24-month period in since the 1930s.

Really?

Do you feel that specific two-year cycle is a good indicator of future trends?   While economic times are still tough, the market has returned in full force.  National studies have shown that contributions are returning to pre-recession levels, and contributions to the arts have seen high rates of growth.  For example, Giving USA— the very source you cite to show a collapse in arts funding—has shown that by last year, giving had already returned to pre-recession numbers and has been the fastest-growing charitable cause over the last 12 months.  In their annual report released in June, they write:  “Previous Giving USA reports had noted that donations to arts and culture sank 8.2% during the two-year recession of 2008 and 2009. The $14.44 billion given in 2012 vaulted the sector back above the pre-recession peak of $13.7 billion in 2007.”

Arts funding at the local level is also on the rise. In the new budget for Minneapolis, there is extra funding available to arts projects.  Crowdfunding for specific projects has taken off, providing another avenue for supporting the arts.  Ticket sales have seen improvements, as well; one recent article in the Star Tribune demonstrated that many local theaters were experiencing a rise in audience size, with the Jungle Theater doing particularly well.

But it’s just not the arts in general that have thrived—orchestras specifically have thrived.  They have done so all over the country, in places that continue to feel the effects of the recession.

The Cleveland Orchestra has seen surges in attendance, driven in part by increased demand by young listeners.

The Houston Symphony is celebrating its centennial this year on the heels of two years of record-breaking fundraising.

The San Diego Symphony has been chalking up record ticket sales; its budget has doubled in the last decade and its leadership is celebrating 14 straight years of balanced budgets.

The Buffalo Philharmonic has sold more subscriptions this season than any time in its 75-year history.

The Kansas City Symphony appears to be entering a golden age of high attendance, strong fundraising and good governance.

There are, of course, still caveats and challenges ahead for funding the arts, but I believe a longer-term analysis, more carefully argued, would make your point better.

So why are we basing a business model or an economic forecast on the pain and fear of the Great Recession?  Aren’t massive cuts a permanent solution to a temporary problem—one that is on its way to being resolved, and has already been resolved elsewhere?

Interestingly, at this point you set out to prove your point by casually tossing off two examples of orchestras facing difficult times.  This is curious.  The orchestras you mention are, by and large, the worst-case scenarios that feel cherry-picked to show classical music as a whole is on the brink of collapse.  What about the other orchestra I mentioned above:  Kansas City, Pittsburgh, Cleveland or Houston, among others?   Even one of the cases you hold up as proving the need for a new model, Philadelphia, seems to undermine your claim—musicians took a 15% pay cut, and that was part of a bankruptcy proceeding.  You have demanded the Minnesota musicians take a 40% cut… just because.   Why the vast difference?

One other point on this section.  I recognize that the League of American Orchestras is an important trade group and a reliable source for facts and figures—I can see why you would quote them.  But this article by Philip Kennicott, the art and architecture Critic of The Washington Post, has shown in clear terms where as a group they often fail at seeing the forest through the trees, and may not be the best source of strategic thinking.  I think you would benefit from drawing on other sources that could provide a more holistic view of the situation.

* * *

In these pages, you move from industry trends to the specific trends of the Minnesota Orchestra.  All well and good—this is exactly the kind of thing your plan should do.

Page 8

This graph is good.  But it contains few specifics.  I’d like to see grand totals here to get a better sense of what we’re talking about.  Plus, I get that this is still a “background” section, but I hope at some point you indicate what your preferred percentages would be.  If you’re goal is to wean the Orchestra off the endowment completely, for example,  that will have tremendous implications for everything else in the plan.

Page 9

Page 10

The charts on these subsequent pages vividly demonstrate some of the financial challenges the organization has had, and I am willing to believe your data.  In fact, I doubt there are many that wouldn’t agree that some sort of changes must come to the Orchestra to give it greater financial stability.

That said, there are some problems right off the bat.  Despite your clear indication that this section of the strategic plan sets out to describe how things stand for the Orchestra, you give no indication of why things stand this way.  For example, why did the earned income fall?  Was it because ticket prices were too high?  People are losing interest in classical music?  Traveling downtown is a burden?  Osmo is passé?  These are not random questions—each would require a different strategy to overcome.  You’ve assumed classical music is unpopular, based on a decline of revenue… but what if the problem is in the presentation of classical music?  Same with contributed income… why are these trends happening?  How do you propose to enact a solution to this problem when you don’t know or can’t explain why the problem is occurring?

It’s no different from having a doctor say to you, “You have abdominal pain?  I must remove your gall bladder at once!”  End of discussion.

Similarly, you don’t give any indication of why the endowment has dropped.  Why not?  The assumed rationale seems to be “the stock market tanked as part of the Great Recession.” This statement may be true, but it is woefully inadequate.  Were all your investments in the stock market?  In the stock of one company?  I suspect not, which means that the reasons for the decline are many and varied—lack of diversity, bad investments, selling low and buying high, and so forth.  These are serious concerns that must be addressed before moving forward; before demanding $5 million in sacrificial cuts from the musicians, why don’t you spend $50,000 to re-evaluate your investment strategy?  Less charitable folks may also suggest that if you were going to downsize the staff, you should have started with the person managing your investment portfolio.  That may be extreme, but I would reiterate that if you are going to truly lay out the Orchestra’s situation, you have to give the specific reasons for the decline in investment revenue, or you will never be able to effectively address them.

Another point with this section is you seem content to talk about “The Endowment” as if it was a single monolithic entity.  This is not the case.  Sure, there is $150 million in “the endowment,” but how much of that can be accessed at any given time?  In other words, how large is the board-designated portion?  My recollection is that because of the way the endowment has been set up, there is only a relatively small amount that can be spent at the Orchestra’s discretion, with everything else being untouchable.  Is that still the case?  If so, what is the real-world maximum you can draw down to?  Isn’t that number equally important to note?

I have another point that may seem minor, but is quite significant—why haven’t you included industry averages in any of these charts for comparison?  You give industry-wide data on the first page, but after that we’re only left with your numbers on where the Minnesota Orchestra is.  This may not seem a huge issue, but essentially it means that the solutions you lay out in the final part of the document don’t take into account other data, or provide examples of what you might be able to achieve.  If you were to compare income streams at a range of orchestras, would you see that one or another of these steams was underperforming? Or realize the Orchestra is actually doing pretty well and ahead of the curve?  You aren’t looking to your peers in any meaningful way, either to see how they’re doing or to see how they achieved their results.

As a result, it is no wonder your ideas are the only possible solutions—you’ve given yourselves no other options to choose from.

Similar to the above point, if this really is an attempt to give the “lay of the land” and explain the need for an orchestra that the community can afford, why no general information about the community?  Why no comparison data for other Twin Cities arts groups, or non-profits in general?

The lack of this information only furthers the feelings of disdained detachment and close-mindedness that permeates this document.

Page 11I note that in this document, $7.4 million is spent on administration, building and financing, and general overhead. This summer, when he was forced to return a nearly $ 1 million grant back to the Minnesota State Arts Board, Henson implied that the Orchestra spent approximately $13 million this last year. That’s nearly double.  Why the discrepancy? What was the additional $5.6 million spent on?

More to the point, your own “independent” analysis brings up another uncomfortable truth…  that your financial situation may be worse than you report because of severely underfunded pensions and a $9.3 million bonding debt due in 2015.  (This may help answer the question I asked directly above.)

Why haven’t you listed those items?  Yes, in the strictest of senses, they don’t fit nicely into a chart depicting “operating expenses” and so could be left off.  But doing so wildly skews the numbers and gives a false report of the true extent of the Orchestra’s financial situation.

…in your organization’s strategic plan.

How on earth do you plan to get out of this financial morass if you don’t accurately identify the problems looking you in the face?

And how does this lead an outside observer to have any faith in the information you’re laying out?

Page 12

Your point here is straightforward, that musician costs have risen compared to all others.  Great—I believe you.  The graph vividly demonstrates the rise in musician costs.  But… well, as an isolated fact, it means nothing.  Did those other costs decline because they were inefficiencies or redundancies that you were able to pare down?  Did you eliminate costly expenditures?  More to the point, are you getting a good return on investment by allocating more resources to the musicians?  Does this improve your product, making it easier to attract interest, audience members and donors?

Page 13

This starts to get into your main argument, that the Orchestra’s finances have been in a precarious state for the past decade, and only stern medicine now can save it.

Really?

But as reported in 2010, the Orchestra had had four straight years of balanced budgets.   How do you publicly reconcile this fact with your present position?   Another point of fact.  You yourselves indicate that for most of the 2000s, you were averaging a healthy draw from the endowment of less than 7%.  The “dangerous” draws of 10% or more only happened after the 2008 recession.  So how does this match with your statements that the organization has been in financial crisis for more than a decade?

I can understand that in the wake of the 2008 bust that things went astray.  I can recognize that you pulled extraordinary draws from the endowment to balance the budget… as Alan Fletcher mentioned in his recent speech at the Orchestrate Excellence meeting, such tactics are sometimes necessary and many organizations did the same.  That’s one of the reasons you have an endowment, as a buffer in times of trouble.  But weren’t your finances in reasonably good shape prior to that?

In the report from you “independent” analysis, there is an indication that you have been underfunding pensions and leaving off debt financing from the books.  For a financial manager, these problems had to be easy to spot.  So why didn’t you resolve them?  Why is there no indication of these monstrous red flags in your strategic plan?  You certainly knew these problems were in existence–to my knowledge, all the men who served as chairman of the board during the 2000s are still on the board.

And as I look over this section, an uncomfortable question is developing in my mind:  you have been blaming vague trends for your financial predicament, generally using the passive voice (“the stock market fell” or “musicians’ salaries have outpaced revenue”).  Is the real problem one of financial mismanagement over the last five to seven years?  Isn’t the $9.3 million taxable bond due in April 2015 a much bigger problem than the musicians’ salaries… and isn’t it a problem of your own creation?

So, why are you demanding $5 million in salary cuts from the musicians to cover for your mistakes in other areas?  Why are you so fixated on the musicians’ salaries without publicly admitting the much larger problem?

Page 14

This chart does show, in vivid terms that there is a difference between your income and expenses.  But what is the basis for this? What are the assumptions? I recognize again that you are calling this a summary document, but you essentially put two disembodied bars on a graph and say, “See?  We have to make cuts to balance things out!” Obviously this page is a teaser, but it brings immediate questions to mind:

Based on the fact that debt servicing and pensions are not included elsewhere in this document… what confidence can we have that this chart is factually correct?

There’s no indication of a timeline here.  Is this a chart for the next forthcoming year? A five year goal?

Will the gap recede as the market improves (especially since the market has done so)?

Again, if this is a temporary situation, why suggest a permanent solution for it?

Perhaps most importantly, let us assume that all your projections are correct, and this is the start of an ongoing financial gap that will persist well into the future. This chart doesn’t tell you what kind of change is necessary.

It might indicate that a large-scale business reset is required, but there is no indication of what such a reset should look like, what the options are, who should come up with ideas or who should implement them.  Or, for that matter, the timeframe over which they should be implemented.  Is it better for the organization to have all the pain at once?  Or will that be too much of a shock, and the preferred method is to integrate painful transitions more slowly?

This gets to the heart of the dispute… are you justified in demanding $5 million in pay cuts unilaterally with the musicians, effective immediately?  Can’t there be a more organic solution?

I’m curious as to how subsequent pages address these questions.

* * *

Thus far, you’ve given some indications of why a new business model might be necessary, but you haven’t given a clear justification of your specific course of action.

One final thought.  You are an arts organization… where is your statement about the your art?  How can you lay out your current situation—in your strategic plan—and make no mention of current state of your music, and your music making capacity?  This is beyond baffling… do you suppose that music just spontaneously happens, completely divorced from what else is going on in the organization?

Next: Unclear Goals, Uncertain Paths to Success

Xochipilli

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7 thoughts on “An Un-Strategic Plan Part 2: Assumptions that Assume Quite a Bit

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