Getting SMART

Published in: GIA Reader, Vol 24, No 1 (Winter 2013)

Jesse Rosen

About four years ago I attended an extraordinary meeting in Philadelphia. Susan Nelson, principal of Technical Development Corporation (TDC), was presenting the draft of Getting Beyond Breakeven to the Greater Philadelphia Cultural Alliance and many other stakeholders associated with the work. Three things struck me: the severity of undercapitalization and its consequences; the clarity with which Susan explained the elements of well-capitalized organizations; and the empathy expressed for leaders struggling to get off the treadmill of just balancing the budget and make real forward progress in fiscal health and mission delivery.

Although Beyond Breakeven focused on arts organizations in southeastern Pennsylvania, the dynamics described in the report could apply to just about any region or arts institution. They certainly applied to much of the orchestra field. I determined to get to know more about Susan and her work. We met for lunch in New York and I told her, “I want the knowledge and perspective you have to get into the thinking and behavior of orchestras.” Thus began a conversation that culminated in two very important actions. At the League of American Orchestras’ 2011 conference in Minneapolis, Susan led a plenary session on capitalization and strategy. For many in the audience this was indeed new knowledge and a new way of thinking. League delegates gave the presentation very high marks. The year 2011 wasn’t just any year for any of us. Orchestras were still being rocked by the Great Recession, as well as by longer-term trends that were eroding revenue streams. Many orchestras rose to this challenge by controlling costs; others tried reinvention. Too many, though, were simply overwhelmed by the confluence of multiple sources of downward pressure on income and unanticipated new costs. In many of these instances, orchestras entered the recession in already fragile financial condition. It appeared to us that the full extent of the financial weakness often came as a surprise to boards, managers, and musicians. Financial knowledge, oversight, and transparency were simply inadequate.

So shortly after our 2011 conference we sat down with Susan and her colleagues at Technical Development Corporation, seeking to take the next step. We wanted to create a tool, deeper and more comprehensive than any existing diagnostics, that would foster a shared understanding among an orchestra’s stakeholders by focusing on financial flexibility and strategic risk. Our goals were to:

  • help managers improve their understanding of the principles of financial health, including, of course, capitalization; and
  • have managers apply those concepts to their strategies, planning, and communications.

We would do this by:

  • offering a near-term financial risk assessment;
  • assessing the alignment of resources to longer-term institutional strategies; and
  • providing clear narrative and graphic illustrations, as well as real-time consultation, to help managers understand and communicate the findings.

The result of these conversations was the creation of SMART — the Strategy, Money, and Alignment Readiness Tool (you can see why we chose to call it by its acronym!).

Here’s the description:

Part 1 is an Excel workbook platform that an orchestra populates with financial data from the past five fiscal years, to achieve a clear understanding of its current financial position. After submission to TDC, the orchestra receives a narrative that describes the role of capitalization, accompanied by a set of financial ratios and other indicators, along with commentary on potential risks and key issues to consider in financial planning. A phone consultation with TDC reviews findings and reflects on implications.

Part 2 of the tool is geared toward testing how well the orchestra is positioned to execute future plans. It is not meant to test the strategies themselves, but rather to invite staff and board to reflect on the process used to develop strategies and to test the orchestra’s financial capacity to execute them. Through a series of drop-down menus, an orchestra enters information about intended strategies such as audience-building initiatives, endowments or capital campaigns, or new product ideas. SMART poses key questions about the financial implications and the underlying analysis that led to each strategy. It automatically generates trend analyses, which become the basis for a second TDC phone consultation. Observations and recommendations are integrated into a summary memo, which in turn is confirmed during a final phone consultation.

For both parts of the tool, participating orchestra staffs agree to share findings with their boards.

While we were developing SMART, we were also involved in a continuing conversation with Regina Smith, senior program officer, Arts and Culture, at the Kresge Foundation. We had been exploring various issues of mutual concern in the orchestra field and were eventually invited to submit a proposal to support SMART. The Kresge Foundation’s subsequent grant provided the resources necessary to develop and implement the project, for which we remain grateful.

The groundwork for the introduction of SMART began at the League of American Orchestras’ annual Mid-Winter Managers Meeting in New York in January 2012, which was attended by eighty-one executive directors from across the country. During the plenary session of the meeting, Ms. Nelson previewed SMART and discussed how orchestras can create an integrated organizational and financial strategy that responds to current sector realities. In conjunction with this meeting, the League held a daylong seminar for executive directors titled “Aligning Money and Organizational Strategy: Beyond Breakeven,” led by Susan Nelson and Allison Crump, senior associate at TDC. The goal of this seminar was for participants to learn how an orchestra’s financial position informs its degree of risk, and how to connect money and strategy. The twenty-seven participants engaged in a case study of an imaginary orchestra’s strategic plan that helped them understand the importance of aligning resources and mission, as well as the need for proper capitalization.

During the winter ten orchestras of varying profiles were recruited to pilot SMART before its official launch in April 2012. By June forty orchestras were participating in the initial round of the program. The support from the Kresge Foundation allowed the League to offer the tool at no cost to members. At the June 2012 conference in Dallas, Susan Nelson and Allison Crump repeated the seminar offered in January and took the participants (ranging from executive and finance directors to board chairs) through the recently launched tool. Ms. Nelson and Ms. Crump also participated in two one-hour sessions open to all conference delegates. They discussed the tool and how it could be useful to orchestra leaders who are thinking about how to respond to changing audience behavior, undertake a capital campaign, address structural deficits, expand or manage contraction, and/or focus on long-term sustainability.

Although round one is still in progress, we have some preliminary findings. Overall, we have received a strong response from the participating orchestras that issues of capitalization and sustainability are of great concern and focus, and they are grateful for this support as they navigate today’s challenging environment. Many of the orchestras welcome the independent perspective provided by TDC that confirms their internal assessment of their financial position and offers feedback on their plans. As one leader commented, “When I saw the first presentation I thought, ‘We already know all that. Why would anyone who does a good job need someone to tell them what they already know?’ But when our final report came out, seeing it all in one place and how it all linked together made a bigger impression. I realized a lot of board members don’t have the same focus, and that it was a good tool to present to the board so they can see what we’re up against.”

Several participants have been in the midst of or about to begin a strategic planning process, and for these organizations in particular, the SMART process has been a timely and useful intervention. One particularly successful example was the Firelands Symphony of Sandusky, Ohio. The symphony had experienced rapid growth and a doubling of its budget over the past five years with consistent surpluses, but had been extremely conservative with its planning. It was in the unusual position of having ample financial resources, but unable to communicate to questioning funders the need for continued support. The symphony had projects it wanted to undertake; its leaders knew they needed to make some investments in order to continue growing their audience and improving their product. But the board was hesitant to allocate funds given the economic uncertainty and difficulties faced by other orchestras across the country.

After going through the SMART process, the Firelands Symphony changed the way it defined its reserves on its statement of financial position by creating board-designated reserves. It also identified areas of potential future risk, including concert cancellations due to weather, shortfalls on expected revenue from its gala, or missed subscription and single-ticket sales projections. The symphony allocated a portion of its operating reserve to cover these risks with the balance available for prioritized strategic opportunities requiring additional investment. The financial review and analysis also led the symphony to hire a marketing consultant for a year with a corresponding increase in its marketing budget, as well as to increase the pay of its musicians. In addition, identifying risk and opportunity capital gave the Firelands Symphony talking points to help funders better understand its financial position and requests for continued funding at the current levels.

While the Firelands Symphony represents perhaps a counterintuitive example (i.e., an excess of resources), their experience — of looking at finance through a new lens, increasing knowledge and understanding of good practice, sharing this information with stakeholders, and making different kinds of decisions — is not unique at this stage of the League’s understanding of the impact of SMART.

Noting that the participating orchestras are not a representative sample of the field, TDC observed a few consistent themes in the cohort. Many are seeking validation of their own observations, as well as a fresh approach to engaging their trustees and stakeholders in these important conversations. Certain topics have resonated widely, including tapping deferred revenue for liquidity, cautions about precious capital being locked in too-small endowments, and taking advantage of internal resources to explore change and adaptation before the cliff of insolvency is directly ahead — or underfoot. There are also too many situations where lack of transparency has become an ingrained habit, as lack of trust leads to obfuscation. Repeatedly, TDC encountered evidence of the stress of cutbacks and disinvestment in infrastructure; most staffs are stretched to the breaking point, and any minor setback or emergency triggers a crisis — as demonstrated by delays in or abandonment of the SMART process in some cases. This stress reflects the precarious financial position that TDC found to be prevalent.

At the same time, TDC found reassuring evidence of grounded thinking, changing behavior, and even some instances where adequate resources have been accumulated to provide at least a small cushion of reserves. Most often, these hopeful examples were found in smaller orchestras, where modest amounts of reserves can have an outsized impact on the ability to plan and explore new initiatives. As they have found in other settings, many managers have a clear understanding of their predicament, even when viable options to address their challenges may not be apparent. The prevalence of optimism is a noteworthy characteristic, which clearly sustains many orchestra executives facing challenging circumstances.

When all participating orchestras have completed the process we will be able to more fully assess impact. Our indicators, expressed here in a general form, will include (1) greater transparency in financial reporting; (2) the inclusion of at least two of SMART’s financial risk indicators into the orchestras’ financial reports; and (3) evidence of wider engagement of stakeholders in the resource-strategy deliberations.

Getting SMART is of course only one step on the path to healthy and resilient orchestras. Strong governance practice, innovative and effective leadership, artistic vibrancy, and authentic community engagement round out today’s imperatives. The League is working hard with its membership in all these areas, and we are very pleased to now have SMART in our toolbox.

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