Capitalization and Risk

Capitalization has been a hot topic in the arts funding community — and in these very pages — in recent years. Funders and cultural organizations alike are increasingly invested in the capital structures that undergird a vibrant cultural sector. Driven by a shared desire to increase artistic vitality in the Greater Boston area, two GIA members — the Barr Foundation and The Klarman Family Foundation — are taking a closer look at how capitalization supports their grantees’ ability to both take and manage risk. As a part of their Arts Capacity Building Initiative, the foundations commissioned a seminar and short case studies to provide inspiring examples of organizations that embraced risk as both a challenge and an opportunity at a critical inflection point. The insights from these materials seemed worthwhile to bring forward to the GIA community.

Cultural organizations around the country are facing shifting demographics and arts markets, and Boston is no different. An organization’s ability to respond to changing markets depends not only on the vitality of its artistic vision but also on its level of capitalization. Interested in supporting cultural organizations during this time of change, our foundations launched the Barr-Klarman Arts Capacity Building Initiative in 2012. Working with thirty-one arts organizations over five years, the Initiative will infuse over $22 million in two cohorts of midsized arts organizations and organizations dedicated to youth arts mastery. Support is provided to grantees in the form of annual general operating grants, shared knowledge-building activities and trainings, and individualized technical assistance and coaching. The Initiative’s core activities stem from four main goals, which are intended to strengthen the collective capacity of our grantees:

  • improve organizational capitalization and sustainability;
  • develop audiences that are diverse and representative of local communities;
  • promote arts exposure, learning, and mastery among Boston’s youth; and
  • grow organizational and individual cultural competency, embracing our changing city.

The Initiative’s focus on capitalization originated from our shared belief that a well-capitalized cultural organization can be more nimble and creative in taking artistic risks and testing new ideas. The message we sought to convey to our grantees was that a robust balance sheet coupled with reserves rightsized to individual organizational needs can free a cultural organization to pursue new artistic opportunities and address operational challenges, while attending to everyday business fluctuations. Throughout the Initiative, we observed that presenting capitalization with an emphasis on addressing risk, uncertainty, and opportunity clicked with our grantees. This inspired us to look at the effect of risk in organizational practice and present it through a capitalization framework.

Embracing Risk

In partnership with Boston-based nonprofit research and consulting firm TDC, we developed a curriculum on capitalization for the Initiative, stressing the symbiotic relationship between organizational health and artistic mission, vision, and strategy. In 2012, we launched a series of capitalization trainings, led by TDC principal Susan Nelson. The first step was to cover core concepts in introductory sessions, to which organizations were required to bring leadership and board members. These sessions referenced TDC’s research for the publication Getting Beyond Breakeven and a statewide assessment of financial health completed in Massachusetts in 2011. Following the introductory sessions, Nelson presented seminars on more tailored topics, including capitalization and facilities, capitalization and fundraising, and capitalization and risk.

TDC’s final seminar in the series, “Capitalization and Organizational Risk-Taking,” had two primary goals: to define risk in an organizational context, and to provide examples of strategies for embracing risk. The topic resonated with grantees in a fundamental way. It was clear they understood the correlation between risk and capitalization because they felt it every day. Organizations wanted to mitigate operating risk, hedge against the inherent risk of a season, and have the ability to take a risk to innovate or change.

Our grantees asked TDC for real-life examples from their peers on capitalization and risk that they could share in their organizations and with their boards. In response, we commissioned TDC to produce Risk Profiles, stories about capitalization and risk as told by the leaders from three very different and prominent arts organizations: Opera Philadelphia (OP), Oregon Shakespeare Festival (OSF), and The Theater Offensive (TTO) in Boston. Each leader conveyed a compelling and relatable story about encountering risk, speaking to the effects of their decisions and actions on their organizations’ capital structures. We find them courageous for sharing their stories — stories that are often kept private from the funding community — with the thirty-one Boston organizations participating in the Initiative, and now in a wider forum. What follows are the profiles along with TDC’s commentary on the embedded lessons about risk management and risk taking.

Profiles of Risk Taking: Stories from Three Arts and Culture Leader

The organizations featured in the interviews highlight how “risk” can take on many connotations. The scale, type, and duration of risk differ based on each organization’s unique circumstances. Understanding an organization’s capital structure in the context of its particular risk profile is a critical first step towards ensuring long-term health and sustainability. When assessing the scope and scale of an organization’s capital needs, it can be helpful to break down organizational risk into two categories: strategic and operational.
  • Strategic risks are those that arise from high-level decisions that impact an organization’s future direction. Examples include piloting a new program, shifting core programmatic offerings, instituting directional changes in marketing or development, and deciding to grow or shrink.
  • Operational risks encompass day-to-day risk that emerges in the normal cycle of doing business. The loss of an important funding source and the transition of a key staff member both constitute operational risk.

While these two types of risk are often viewed as separate and distinct, it is important to remember they are closely linked: operational risks ultimately affect an organization’s ability to perform on its strategy, and strategy is broken down into operational tasks for implementation, which come with associated risks. That said, cultural organizations typically assess strategic risk differently than operational risks, as taking strategic risks often comes at a higher cost. The arts leaders we interviewed spoke at length about the ways in which they approached both strategic and operational risk in times of change or crisis. They understood the scale of the risks they encountered, and the lasting effects of those risks on their organization’s fiscal health and overall organizational culture and well-being. This insight appeared to be a critical component of how they made calculated decisions in such trying times.

In their accounts, each arts leader approached risk with an awareness of his own agency and ability to right the ship. Inspired by a new artistic vision for the organization, Opera Philadelphia made major changes to its product design and created a plan for a new capital structure that would allow the organization to continue to take risks. Oregon Shakespeare Festival instituted a more traditional risk capital fund to integrate innovation into its core culture. The Theater Offensive leadership reexamined the organization’s purpose and programming at a crucial moment and made a big decision to change the core nature of how the organization operated. Their profiles are as much stories of leadership as they are about striving for improved capitalization.

Two strategies for negotiating risk in light of capitalization emerged from each leader’s story: risk management and risk taking.

  • Risk management refers to strategies or tactics designed to address fluctuations in an organization’s annual operations. All arts organizations have a degree of risk present in their programming models — not every production will be a smash hit, audience behavior will change over time, and productions may go over budget. Organizations face additional daily risks associated with operations and facilities, whether they are renters or owners. Developing a capitalization strategy to manage the risks associated with programs and operations requires thorough evaluation of an organization’s earned and contributed revenue in light of variable and fixed costs. To ensure organizations can consistently mitigate risk over time, leadership must think carefully about sizing the amount of capital needed to manage risk each year and how to regularly replenish reserve funds that can enhance their organization’s flexibility.
  • Risk taking refers to the act of inviting risk into an organization for a particular purpose, such as testing a new earned revenue stream or programmatic initiative. The degree of risk a leader faces depends on the organization’s financial state. Those with structural deficits require recovery/change capital to propel them out of crisis as a necessary precondition to risk taking, organizations at an inflection point need change capital to help them test a new business model, and organizations on more stable financial footing may require risk or opportunity capital to support artistic risk taking to develop a new product. Capitalizing to take risks requires careful thinking about the scale of the risk, the quantity of capital needed to fund it, a clear definition of success, and an understanding of repercussions of a failure. As with risk mitigation, leaders will also want to develop a replenishment theory or policy for reserves or risk funds to ensure they can continue to take chances in the future.

While the profiles provide numerous examples of risk management and risk taking, we are compelled to note a third type of behavior: risk aversion. Organizations with fragile capital structures and few resources set aside for risk taking often have conservative risk-management philosophies. While these groups may become skilled at managing everyday risk in order to maintain status quo operations, they can lack dynamism and may struggle to stay relevant in changing environments. Risk aversion can manifest in myriad ways: an organization with negative net assets and structural deficits does not take the risk required to stabilize operations and change the way it does business, or an organization on stronger financial footing does not push itself to take the artistic risks necessary to keep audiences excited and engaged. For organizations displaying risk-averse behavior, the ultimate risk may be not taking a chance that could move their organization forward, and paradoxically this can result in unused funds.

Risk taking and risk management are often addressed theoretically as two separate actions, but the two are closely related. All risk taking requires some sort of risk management as organizations must balance opportunities for change or growth with the potential setbacks that could ensue. Risk management, in turn, requires negotiating different types of risks from defensive and proactive positions. Nonprofits often find that the way to thwart a major risk in one area of business is to take a major risk in another (such as developing an earned income stream from rentals to offset swings in grant income). Organizations that develop an aversion to risk typically do so for good reason; many nonprofits have fragile capital structures, and resources for risk taking can be scarce. Despite an increasing interest in supporting innovation, boards and donor markets often do not reward organizations that take risks. No one wants to support failure, yet the very nature of risk requires that failure occurs.

The stories shared in the Risk Profiles demonstrate that financial stability is not a pass/fail course. Just as net assets accumulate gradually over time, the road to financial sustainability will include bumps and turns and is best represented as progress along a spectrum. Every organization needs to set its own course and determine its goals and milestones. Every nonprofit leader must confront risk and will react in his or her own way. There is not one metric that tells the whole story; understanding the larger context (of mission, vision, and history) is critical. Ultimately, every organization must ask, “Do we have the resources to manage risk successfully and take the risks we need to survive and thrive? If the answer is no, what are the steps to getting there?”

David Devan, General Director, Opera Philadelphia

Caught in the thick of the 2008–9 financial crisis while attempting to institute a new strategic plan, Opera Philadelphia had a bold vision for the future but barely enough resources for regular operations. Forced to make cuts and institute a new level of financial rigor by forgoing the advance use of subscription funds, the organization made it through the financial crisis with a renewed artistic vision, a dynamic new product, and a commitment to capitalization and risk taking.

Background

Upon arriving at Opera Philadelphia in 2006, David Devan had two mandates: stabilize operations and establish a new strategic direction to lead the organization into its next stage of development. Devan spent two years doing his research. He closely examined the organization’s data and conducted benchmarking research to better understand how and where Opera Philadelphia fit into the national landscape. Through this research, Devan came to an important conclusion: Opera Philadelphia was not doing work that the opera community perceived as important. This insight pushed Devan and his management team to conduct a strategic review of the organization’s artistic product and market influence. The review evolved into a multi-year strategic initiative founded on an ambitious new goal – to become one of the country’s top five most influential opera companies.

Then, just as Opera Philadelphia was about to launch its new strategic initiative, the market collapsed. Before the organization had a chance to raise the capital necessary to support its new direction, all funds were pulled out from under its feet. Devan will never forget the day when his CFO came to him and said, “David, we are going to run out of money.”

In response, Devan assembled a team of board members and senior staff to troubleshoot. The group unanimously agreed that to mitigate the risk of stalling operations they would need to escrow, or freeze spending on, the organization’s subscription revenue. This decision would in turn create a $1,000,000 cash hole they would need to fill in six weeks.

Emergency response

After reaching this conclusion, the group immediately informed the Opera’s landlord that they would need an extension of several months on their next payment. The team approached the Opera’s full board and other committed donors. They explained Opera Philadelphia’s financial circumstances, their plan forward, and the six-week turnaround period they had to work with. In exchange for their support, Devan committed to three key strategies that would set the organization on a path to long-term financial health: 1) Opera Philadelphia would work diligently to eliminate all accumulated debt, 2) it would continue its firm escrow policy on subscription revenue, and 3) it would maintain its relationship with its landlord. Devan also agreed that should the organization fail to raise the required resources, the Opera would be left with no choice but to abandon their new strategic initiative.

The board rallied behind the turnaround, agreed to Devan’s terms, and raised $500,000 in cash in just three weeks. Devan commended their rapid response and support, “It was only because the board was able to dig deep and quickly that we came out ahead.” Not only did the board’s efforts help the organization financially, he explained, but it also built board and staff confidence.

The crisis inspired a new level of financial discipline within the organization and motivated Devan to think more seriously about capitalization and balance sheet health. This new financial discipline also “caught the eyes, ears, minds, and wallets of a large number of foundations,” enabling the Opera to raise sufficient revenue to match the board’s gift. Close to its deadline, Opera Philadelphia received $1,000,000 in recovery capital and renewed its commitment to the long-term strategic plan they had set aside at the advent of the crisis.

These resources were not sufficient, however, to sustain staff at pre-crisis levels, and a significant reduction in force was necessary. To better align the necessary lay-offs with Opera Philadelphia’s new strategic direction, management created a “change index” that rated each staff person’s openness to change and risk. Devan applied this metric throughout the organization, assessing veteran and new staff alike. In the end, the Opera laid off 20% of its staff.

After the cuts, Devan gathered the remaining employees and explained, “You’re it. And this is why you’re it.” Devan promised that the organization could sustain its remaining staff for a year, without furlough days or cuts to salary and benefits. He also made it clear that the organization needed to move quickly ahead with its new strategic plan, and that remaining staff needed to be committed to the vision that lay ahead. After that point, the Opera’s internal culture noticeably shifted. “Everyone who remained felt a sense of pride,” said Devan, and that pride has stayed with the organization to this day.

Back on track

Opera Philadelphia emerged from the crisis with a better understanding of the connection between capitalization and risk management. In 2009, the Opera developed a capitalization plan that laid out how the organization would improve its financial position, demonstrate financial performance, and carve out a strong brand and track record of artistic success in the marketplace. The plan’s associated fundraising goal was $3,000,000.

Also key to the plan was a board-mandated annual surplus of $100,000. The board instituted this policy to demonstrate the Opera’s commitment to strengthening its own balance sheet. Along with an annual surplus, Opera Philadelphia decided that it would not pursue funding for an endowment, instead raising funds for sufficient working capital and operating reserves. “Because we did not have an endowment during the economic downturn, we had to ‘eat what we kill.’ We had the tenacity to stay alive,” said Devan.

The plan also established, at the advice of Susan Nelson at TDC, a $1,000,000 risk capital fund to help raise the company’s artistic profile as it worked to become a leader in new American opera. The board decided the risk capital fund could be used to finance strategic initiatives fundamental to the advancement of the company, for which traditional funding was not available. The fund’s policy also required that resources be deployed only after a repayment plan had been set. Reflecting back on this period, Devan believes that the Opera’s capitalization strategy, which connected financial

health and artistic excellence, empowered the board and staff to focus on the organization’s new strategic direction.

With the capitalization plan in place, Devan’s biggest question remained, “How do we pay for it?” Opera Philadelphia turned to the same foundations that had followed the organization through its period of crisis and development of a capitalization strategy. The Opera’s relationships with these foundations enabled the organization to seed its risk capital fund and support other capitalization efforts. Simultaneously, by posting annual surpluses, the organization demonstrated its commitment to self-financing risk-taking, reserves, and compelling art.

Reframing risk

When Opera Philadelphia first established its risk capital fund, Devan thought the board would use the fund to invest in strategic business initiatives. However, Devan soon realized that he could more easily obtain outside support for business initiatives with clear goals and outcomes than for inherently risky creative initiatives. Today, 100% of the risk capital fund is being used to fund new artistic endeavors, specifically the commissioning of five new American operas. “Commissioning is a high risk activity,” commented Devan. “Not everything can be a total hit. It made sense that we self- finance it through the risk fund as there is not a lot of appetite for artistic failure in the funding community – we always need to be perfect.”

Fortunately, a commitment to capitalization in its strategic plan has helped the organization to succeed with funders. “In a sea of instability, we look pretty stable,” said Devan. The organization has also had success raising artistic support from individuals. “Many individual donors are not unlike venture capitalists,” Devan remarked. “Once the work has been developed and previewed, the investor gives the OK on the proof of concept and makes a financial commitment.” Opera Philadelphia has had the most success in raising individual support after the development stage, when a new artistic project has gone through previews and is primed and ready for the market.

Innovation requires risk

Devan made it clear that Opera Philadelphia is not out of the woods, and that the organization faces new risks each year. “New artistic works live in a battery of other risks that we constantly work to mitigate. How, when, and where we produce work is always connected to our core financing.”

Devan holds firm to the idea that artistic risk cannot be formulaic. “We get so granular in terms of trying to figure out the outputs on art that we forget the point,” he expounded. “We invest in art because we think we will create amazing and compelling experiences that will lift spirits, but in the end, you won’t know the output until it happens.” Only after the fact can you step back and ask, “What was really great about that? Where did it succeed and where did it fail? How did we make it happen?” But at the beginning, Devan asserted, risk-taking can be as simple as putting your trust and resources in good people – good artists – making good art.

Reflecting on the last five years, Devan is amazed by how far the Opera has come. “We hit most of our targets in our three-year strategic plan in year two.” The board’s commitment to artistic innovation and capitalization has never been stronger. In its most recent round of planning, the board pushed Devan and his team to think bigger – “they were ready for the real innovation,” he said. Looking back, Devan believes that Opera Philadelphia was able to institute financial discipline and develop a successful capitalization plan because its board and staff were energized by the new strategic initiative. “If there is nothing inspirational attached to where you are going, it is a bridge to nowhere.” Getting one’s financial house in order can only be driven by excitement and passion for the art.

Bill Rauch, Artistic Director, Oregon Shakespeare Festival

Upon arrival, Bill Rauch propelled the Oregon Shakespeare Festival (OSF) to new heights of artistic innovation. With the development of the American Revolutions program and the production of classic musicals, OSF tried new works on traditional Shakespeare audiences, testing its own assumptions about audience tastes and preferences. Supported by a discretionary risk capital fund and its board, OSF weathered the 2008–9 financial crisis with a firm commitment to programmatic dynamism and artistic risk.

Background

Immediately after joining Oregon Shakespeare Festival as Artistic Director in 2007, Bill Rauch received the board’s approval to launch a new, innovative program that he had proposed during his interviews for the position. As a part of the new program, “American Revolutions,” OSF would commission and produce 37 new play works focused on moments of change in United States history.

Rauch, who has always been drawn to contemporary adaptations of Shakespeare, wished to mirror Shakespeare’s commitment to dramatizing periods of upheaval in history by commissioning new works set in our country’s past. “We are, after all,” he remarked, “a country that originated from revolution.” The American Revolutions program would build on the resources already available at OSF, including a repertory of 100 actors and several stages. The program would also extend OSF’s commitment to supporting playwriting artists, challenging playwrights to consider their art in the context of American history.

The American Revolutions program represented a big leap for OSF. It took the organization away from traditional Shakespeare, and refocused efforts on the development of new works. “I didn’t know if anyone else would be excited by the idea. I was proposing a huge undertaking,” Rauch remembered. Fortunately, OSF’s board was excited from the start, and Rauch was given the go- ahead to begin implementation.

Then, the financial crisis hit. OSF had just passed its budget, but quickly recognized that its financial position was shifting, and that leadership would need to cut costs to respond.

Standing up for the art

After learning about the cuts OSF planned to make, two board members independently reached out to Rauch with the same concern: would OSF limit itself from taking the artistic risks it proposed? “They did not want me, the new Artistic Director with an emerging program, to be hamstrung,” said Rauch. And so the board members each gave $1,000,000 to seed a discretionary Artistic Opportunity Fund. This fund proved instrumental for OSF at a time of great uncertainty, giving the organization the confidence to take risks it otherwise would not have taken.

With the leadership gifts backing the Artistic Opportunity Fund, finding other funders to support the American Revolutions program did not prove difficult. One foundation in particular took a leap of faith, making a large multi-year donation that helped the program to gain momentum. Rauch attributes their fundraising success to the fact that the funders believed in the vision for the program.

Making the jump

Oregon Shakespeare Festival is a destination theater, which means that audience members travel long distances to get there and typically see three or four plays per visit. This setup creates an expectation of excellence that makes risk-taking particularly challenging. However, Rauch emphasized that offering a dynamic product that keeps audiences interested and coming back is critical. “I try to make the actual stories and how they are told as unpredictable as possible. This is the core risk. With a large audience, you will please some people and not others with every choice you make,” said Rauch.

The American Revolutions program puts its full trust in the playwrights it commissions. Not limiting the artistic imagination is a core value of the program, according to Rauch. OSF picks individual writers, introduces a historical theme, and gives the artists free reign. Writers are not limited by cast size, number of scene changes, etc. “We tried to give them space so that the pieces could grow out of their hearts, minds, and imaginations,” said Rauch. This freedom “has allowed the writers to take wonderful risks and to create works they may not have created otherwise.”

In collaboration with the Executive Director, Rauch also changed the leadership team’s structure in order to make the American Revolutions program a clear focus of OSF. They brought on Alison Carey, Director of the American Revolutions Program, as a senior member of the management team. This structural decision, which gave Carey power and visibility within the organization, was hugely important in setting the program up for success.

Carey made some important changes right from the start. Rauch had originally envisioned the commissioned plays focusing on American presidents, just as Shakespeare’s plays focused on English monarchs. However, Carey and Rauch jointly determined that a focus on American presidents was too limited, opting instead to document “moments of change.” “It was an elegant way to bring many things together at once,” said Rauch. “I was lucky to have a good idea, but even more fortunate to have the right people to help develop the idea.”

Surprising results

Once in motion, the American Revolutions program excited staff and board members, the playwriting community, and OSF’s peers nationwide, many of which have since produced the new works on their own stages. OSF’s audiences were also riveted. In fact, OSF’s staff was surprised to find that some audiences preferred American Revolutions’ productions over their traditional Shakespearean works. “For us, it used to be that anything Shakespeare was a slam dunk with audiences and newer, contemporary work was associated with great risk,” explains Rauch. Now, OSF finds that newer work, such as The Liquid Plan, is selling at a higher capacity than audience favorites like A Midsummer Night’s Dream. OSF is watching these trends closely. Rauch explained that they wish to “figure out if this is a by-product of excitement over new work, or a real shift in how people are relating to Shakespeare.”

The American Revolutions program did so well at the box office that OSF’s leadership did not need to touch the $400,000 they had budgeted to draw from the Artistic Opportunity Fund in 2009 and 2010. These available resources gave OSF’s leadership further confidence to take more risks, and support other artistic endeavors, such as organizing a 14-member orchestra for a production of Pirates of Penzance.

In 2009, the organization utilized the Artistic Opportunity Fund to produce a traditional musical as its yearlong run. “That might sound like a slam dunk to some theaters, but it was an enormous risk for us – we’re a Shakespeare festival!” said Rauch. Among OSF’s peers, musical theater is traditionally seen as a staple of high school and community theater. Leadership worried that their most loyal audiences might push back. But again, their assumptions proved wrong. By producing musicals in OSF style, with a focus on innovative storytelling, the move proved an enormous success. Without the back-up resources in its discretionary fund, Rauch believes, the organization may not have taken the leap.

Managing the fund

In emergencies, OSF has needed to utilize the Artistic Opportunity Fund as an operating reserve to stabilize operations. In 2011, a load-bearing beam broke in one of OSF’s main theaters, taking the theater out of rotation for six weeks. Another year the Festival closed after smoke from a nearby wildfire wafted onto campus. In both cases earned revenue took a considerable hit and OSF looked to its discretionary fund to help it weather the rough patch. “Like most organizations,” said Rauch, “we must align resources, needs, and ambition.”

Since the Artistic Opportunity Fund’s inception, OSF has been on a cycle of deployment and replenishment of resources. “At the beginning we wondered whether we would be able to replenish what we used,” Rauch said. “But we found that many people don’t want this fund to dry up.” That said, the replenishment conversations OSF staff have had with foundations and major donors did not always come easily. Rauch acknowledged that OSF is constantly determining where artistic risk fits among other priorities and capital funds. “The rebalancing of priorities is key within any arts organization,” and business needs must always align with artistic vision. OSF’s new strategic planning process will address these issues head on.

Culture of innovation

While Shakespeare’s canon is still the core of OSF’s identity, risk taking is now a key component of its culture as well. As Rauch said, “there is risk in taking chances, but there is also huge risk in the sameness of approach. Audiences can expect a certain thing from you, but they can also be bored by that.” Rauch strives to continually provoke strong responses from audiences, and realizes that to do so, OSF’s artistic approach cannot stay the same. Art, Rauch believes, must always be dynamic.

Abe Rybeck, Executive Artistic Director, The Theater Offensive

The Theater Offensive (TTO) was founded on passion, creativity, and desperation. After years of creating great art in survivalist mode, the organization found itself with a broken balance sheet and its future operations under threat. Knowing that it needed to take big risks and make deep cuts, TTO implemented a strategic plan that laid out a new vision to reinvigorate programming and recapitalize the organization, while staying true to its roots as a community-based and community-driven organization.

Background

The Theater Offensive grew out of a guerrilla street theater group in the mid-1980s focused on responding to the AIDS crisis, and fighting racism and homophobia in Boston. TTO’s founder and Executive Director, Abe Rybeck, remembers the organization’s early years, when the AIDS epidemic ravaged the community it sought to serve, as both passionate and tense. “Our reality was that people were dying in our organization and all around it. If someone told me at the beginning that we should put money away toward an operating reserve, I would have thought that was crazy. Every dollar put in a bank would be a dollar kept from saving someone,” Rybeck remembers.

For 18 years, TTO posted annual deficits or very small surpluses. Like many small arts organizations, Rybeck indicated that they were making ends meet by “spending tomorrow’s money today.” And in some ways it worked. TTO consistently put on great productions with very little money. After some time this model became business as usual.

This cycle was especially hard on staff members. There were periods of cutbacks when TTO needed to lay off staff, and periods of growth when the organization increased its numbers. Such uncertainty meant that every year or two the organization would turn over a new set of employees. “It was amazing to have people stick around for two years,” Rybeck said.

Although highly stressful, this operating cycle persisted. The turning point finally came during a board meeting when TTO’s president looked at the budget and exclaimed, “Does everything we do have to be impossible?” The board and staff were exhausted by TTO’s history of setting unattainable goals. Rybeck remembers, “We were always measuring down from perfection instead of setting the standard at something doable and then meeting or exceeding it.” From that point on, TTO leadership and board members recognized that their status quo needed to change.

Righting the ship

In 2008, TTO participated in a project led by the Nonprofit Finance Fund that helped staff and board members learn about the importance of the balance sheet. Around the same time, TTO recruited a new board treasurer who was a full-time CFO at another nonprofit organization. The new treasurer took one look at TTO’s finances and declared, “This is no way for an organization to live.” The organization had negative unrestricted net assets, serious debt, and its situation was getting worse as the effects of the global financial crisis set in. Although it seemed impossible at the time, her driving message was that TTO needed to produce consistent annual surpluses.

Following up on this diagnosis, the treasurer recommended a number of concrete steps to set TTO on the path towards financial health. First, TTO outsourced its accounting to an external firm. Rybeck met with the agency every week to review the organization’s financial situation, forcing him to face the reality of TTO’s finances and break bad habits such as spending incoming revenue three times over. The accountant also instilled a disciplined schedule for releasing restricted funds to TTO quarter-by-quarter. Although this process made managing the organization’s cash flow even more challenging, it also made it clear when TTO was trying to spend money it did not have.

During this period, Rybeck realized that TTO had to drastically reduce spending. The organization’s operating cash was at an all-time low, and every time they cut a check there was a question of where the resources would come from. Lastly, TTO carried debt. By 2010, to right the situation, Rybeck was forced to cut two-thirds of his staff. “It was devastating,” he recalls.

A new path

During this period, TTO board, staff, and community constituents were also engaged in a comprehensive strategic planning process. The organization’s board and staff realized that their new strategic direction needed to be excellent to justify the cuts happening across the organization. The upheaval propelled the board to consider even bigger questions. “We had to ask ourselves why do we exist,” Rybeck said, “and if we didn’t have a good answer, we needed to get out of the way and let other organizations emerge.”

To help determine the organization’s new strategic direction, TTO organized a series of community meetings. During these discussions it became clear that working with TTO’s neighbors in community to create place-based theater was a niche the organization could fill. This option also made financial sense. In prior years, TTO had paid large fees to rent formal performance spaces. With this new program, TTO could develop workshops and shows with community members and present them directly in neighborhood spaces. Board, staff, and community members responded with enthusiasm to the organization’s new direction – The Theater Offensive OUT In Your Neighborhood – and in June 2010, the strategic plan was approved.

To further reflect on its programmatic offerings, TTO rated each of its programs on 1) mission- relevance and 2) ability to bring in resources. Analyzing each program separately allowed TTO to deal with its financial problems piece by piece. This approach also helped the organization to challenge some of its internal myths. For example, staff determined that the Out on the Edge Queer Theater Festival, which had long been considered core to the organization’s identity and beloved by audiences, was not meeting the organization’s mission as well as other programs.

A capitalization strategy

Along with its new ideas for programming, TTO’s strategic plan laid out the following capitalization goals: produce annual surpluses, achieve sufficient cash coverage of restrictions, and by 2013, establish a cash reserve. The organization’s immediate priority, however, was to improve cash flow and recover its balance sheet.

In May and June of 2010, TTO conducted a campaign that introduced 30 of its largest and most committed donors to the organization’s new strategic direction. Rybeck knew that TTO donors had also been affected by the financial crisis, so rather than ask them to increase their gifts, he requested that they make a five-year pledge to maintain their current giving level. It was the first time TTO had strategically sought multi-year funding from its donor base. The request worked. In only a few months, TTO raised $200,000 of pledged recovery capital, which showed a positive trend on the balance sheet.

TTO also went to foundations with its strategic plan and asked for support. These were some of Rybeck’s hardest conversations. Transitions were taking place within the Boston area foundation world and it seemed that each foundation relationship needed to be renewed. Finally, after months of difficult pitches, an out-of-state foundation granted the organization $100,000. TTO was able to leverage this major grant, along with individual donors’ multi-year pledges, to convince local foundations to support OUT in Your Neighborhood.

TTO continued to raise funds from every source it could to support operations. The organization also became more careful with its spending, and eventually budgeted for and achieved surpluses, without needing to make drastic cuts at the end of each fiscal year. When TTO finally found itself in a more stable position, with positive unrestricted net worth and a plan for debt repayment, it began to focus on building a cash reserve.

To determine the purpose and size of the reserve, the full board first engaged in a discussion about strategic and operational risk. Board members asked, “What are the negative risks that we face? What do we see as our biggest threat?” The board unanimously agreed that the biggest risk the organization faced was losing core staff. They also recognized that it would prove challenging to replace critical employees since TTO salaries were well below market rates. In response, the board created a “Compensation Fund” which set aside resources to increase the salaries of core staff and provide benefits to employees. The board’s commitment to this fund lifted staff spirits considerably. After everything that had happened, the staff saw the board prioritizing them and their commitment to the organization.

Moving forward

Rybeck believes that the board and staff gained a keener sense of the weight of their own responsibility throughout the process of organizational change. “Typically, when we think of innovation in the nonprofit sector,” Rybeck reflected, “we think it requires a lot of money on hand. This was not the case for TTO.”

Rybeck believes the organization would not have taken such bold risks on a new approach to its work had TTO not been in such serious financial distress. Though a painful and challenging period, the process of re-capitalizing taught Rybeck an important lesson: “When I look at a program that I think is sacred, I now take a tougher look, and ask: ‘Is it really so sacred? Is there a better way to do this?’” In the end, TTO board and staff now share a much clearer picture of the organization’s priorities. Moreover, there is evidence that this shared understanding has spread to TTO’s constituents. “Before, people did not understand everything we did,” Rybeck remarked, “but now, our strategic plan has made what we do crystal clear.”

TTO continues to push its boundaries artistically and operationally. In 2013, the organization set aside $75,000 in a cash reserve, and it has budgeted for another $75,000 in 2014. In a final reflection, Rybeck shared, “The biggest pleasure that has come out of this process is that now, instead of spending hours of time and days of my life dealing with the stress of cash flow, I can devote that time to what I care about most – taking artistic and social risks to accomplish our mission.”

Commentary on Risk Profiles

The Risk Profiles provided rich material for our grantees through TDC’s seminar “Capitalization and Organizational Risk-Taking.” TDC encouraged the group to reflect on how risk factors into their operations, goals for the future, and the capitalization strategies they employ to meet those goals. They provided the following framework to help grantees think about risk in the context of capitalization.

It Starts with a Conversation

The Risk Profiles, along with TDC’s commentary, draw attention to the necessary relationship between strategy and money and to the importance of innovative leadership at times of change and crisis. In the Barr-Klarman Arts Capacity Building Initiative, we encourage our grantees to assess their own relationship to risk in the context of capitalization and strongly advocate for board engagement in these conversations:

  • Can you invest in your art and programs?
  • Can you invest in developing and sustaining audiences, or youth programming and teaching artists?
  • Can you respond nimbly to external forces?
  • What are the short- and long-term effects if you can’t?

A willingness to ask hard questions coupled with transparency about an organization’s current state of financial health are a good starting place for determining an organization’s preparedness to take on risk. Conversations about risk with grantees following the “Capitalization and Organizational Risk-Taking” seminar have been rich and meaningful, and we have heard that the profiles have been shared widely with staff and board members. One and half years later, grantees are still referencing them in their grant evaluations with us.

The foundations would like to thank the leaders of Opera Philadelphia, Oregon Shakespeare Festival, and The Theater Offensive for sharing their experiences with the Barr-Klarman cohort organizations, and now the GIA Reader audience. Each organization profiled achieved new heights by asking hard questions, facing the implications of self-evaluation, and building its balance sheet to take and manage risk more effectively. We would also like to thank TDC, our partner in the Initiative, for framing risk in the context of capitalization.

Our biggest takeaway from the profiles, seminar, and discussion that ensued is that real risk taking, the hard stuff that accompanies organizational change, takes time (sometimes years) and the commitment and courage of the organization’s leadership and board. As grantmakers and stewards of the cultural community, our foundations’ work is to support that journey, being nimble and responsive when new questions and needs arise, while fostering a sense of community and cohesion in support of a more culturally vibrant Greater Boston.