Sunday, July 19, 2009

July 19, 2009

 

WHAT'S WRONG WITH THE ARTS BUSINESS MODEL?

Hello everybody.

“And the beat goes on...........”

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THE NONPROFIT ARTS BUSINESS MODEL

Bloggers love to feed off other bloggers. Last week Doug McLennan, in his blog diacritical, (www.artsjournal.com/diacritical/2009/07/attention.html) opined on the nonprofit arts organization business model of selling tickets to consumers as: “If you believe your business model is the classic consumer transaction (I make the performance, you buy the ticket) then you're done. Sorry.”

In his blog, The Artful Manager, (www.artsjournal.com/artfulmanager/main/what-exactly-do-you-sell.php) Andrew Taylor commented on Doug’s observation and added: “The deeper challenge for arts organizations is that they DO sell a product, even as they DON'T. That is, an important segment of any arts audience doesn't recognize the complex bundle they're seeking when they buy a symphony or theater ticket. They've come to use that event as a placeholder or proxy for that bundle, without even knowing it. To this core group (often the most passionate about the art form, the most loyal buyers, the most committed donors) the bundle IS the product. And as you innovate around the delivery or context of your creative work, you challenge their passionate connection to the discipline's tradition.

And Andrew added further: “There's clearly a need to redefine and reframe what an arts organization delivers, and why people recognize the value of that effort with their time, attention, and money. But we're not so fortunate to have a clean break and a fresh start.”

In a follow-up Sunday www.artsjouornal.com/diacritical/2009/07/of-ticket-sales-business=model,html Doug clarified his argument that in the "Attention Economy" products and services compete for consumer's 'attention' -- not just with others in the category but across categories - i.e., a jazz concert competes with other jazz concerts, with other arts performances AND with You Tube or video games or whatever. He offers that relationship building was, and remains, one of the keys to getting the attention (and ultimately the sale and loyalty) of customers. He goes on to offer some specific suggestions - by way of example - of how organizations might approach dealing with the complexity and increased competition for people's attention as one flaw in the current arts organization business model. I applaud Doug's moving the discussion of business models to offering concrete, specific suggestions as to what might be done.

This is not the first time we have all heard that the nonprofit arts organization business model is outdated and desperately needs revision. It’s time to move the discussion beyond what is wrong, to figuring out what to do. We need to dig deeper into what we mean when we talk about a failed business model. What should our model be?

Before we can talk about what specific changes are required, we need to come to some common understanding of the concept of a ‘business model’. I'm not sure we all mean the same thing when we discuss the issue. What does the term mean exactly? I think most people assume by ‘business model’ we are talking about a compilation of how we create and deliver a product or service – the “something of value” and convert it to an economic value. But, of course, in the nonprofit arts sector that conversion is perceived of as only a necessary evil as the means to our real purpose which is to foster and promote both the creation of art and its wide dissemination. The for profit world contents itself with the conversion of something of value to the economic value of bottom line profits which, in turn, usually results in the increase in shareholder value in the company. So for example, Blockbuster Video was a ‘bricks & mortar’ business model for the delivery of videos – now outdated by the advent of DVDs and the Netflix model of online rental and postal delivery. The creation of the content of the (mostly) movies is another business entirely. The arts sector is, by and large, in a business that combines these two examples – i.e., we create the art and deliver it to the public. So obviously the whole concept of business model is different for the nonprofit universe than it is for the ‘for profit’ world, and therein lies some of the confusion.

Wikipedia defines a business model as “a framework for creating economic, social, and/or other forms of value.” It goes on to suggest (based on the framework created by some guy named Osterwalder ) the following parts of such a model:

Infrastructure
  • Core capabilities: The capabilities and competencies necessary to execute a company's business model.
  • Partner network: The business alliances which complement other aspects of the business model.
  • Value configuration: The rationale which makes a business mutually beneficial for a business and its customers.
Offering
  • Value proposition: The products and services a business offers. Quoting Osterwalder (2004), a value proposition "is an overall view of .. products and services that together represent value for a specific customer segment. It describes the way a firm differentiates itself from its competitors and is the reason why customers buy from a certain firm and not from another."
Customers
  • Target customer: The target audience for a business' products and services.
  • Distribution channel: The means by which a company delivers products and services to customers. This includes the company's marketing and distribution strategy.
  • Customer relationship: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management.
Finances
  • Cost structure: The monetary consequences of the means employed in the business model.  
  • Revenue: The way a company makes money through a variety of revenue flows. A company's income.
So when Doug talks about selling tickets to performances as too simplistic a business model in the era of the "Attention Economy", and Andrew talks about still having to deal with legacy systems in dealing with our customers, both are talking about the business model in the traditional sense – i.e., the conversion of the creation of our product / service (art) into an economic value that will allow us to sustain our endeavors (because, bottom line, we are like a business – like it or not )– and if we can’t pay our artists and our arts administrators and all the overhead associated with creating art and delivering it to the public, then it’s game over for us. Doug and Andrew may also be talking about several of the above component parts of the business model as well, but principally they are talking about the Distribution channel under the Customers banner, and, on a deeper level, the customer relationship subsection.

Changes in any of the above subcategories will impact and alter all of the other subcategories. So if we change somehow the means of delivering our product, we will likely change the customer relationship, and those changes will likely impact both cost structure and revenue flow (ostensibly for the better).

Putting aside for a moment discussion of our model in relationship to our social and intellectual and other goals, and confining the discussion to the traditional aspects of “business” (i.e., money), what then is really wrong with our model? Should we be looking at both the creativity side as well as the delivery side of the equation, or is what is wrong solely on the delivery side? Does it start at the infrastructure level above? While we arguably possess the creative capabilities and capacities to deliver something of value, do we fall short on having those same core capabilities and capacities to execute on the business model? Do we lack the personnel, the expertise, and the tools to fully exploit and capitalize on the product, and is that but a function of money (or lack of money)? Is that some kind of Catch 22?

Our costs and revenue model has (over the last five decades) diversified our income between public and private funding and earned income. Earned income was never enough in the model to cover all our costs. Was / Is our model too dependent on public funding and is the new reality now driving that home? Or did we depend too much (or not enough) on philanthropic donations – both institutional and individual? And what other source of revenue is there for us? Instead of focusing on revenue, should we be focusing on cost cutting? But where do we cut and how much (more) can be cut? If our biggest expense is people (artists and administrators) how can we cut that any more than it’s already been cut?

How can any arts organization other than the largest and most financially stable ones possibly follow Michael Kaiser’s advice not to cut programming or marketing in the current economic climate? Should, as Kaiser has suggested, we focus more on selling the value of our institutions themselves instead of specific artistic creations and works? Is that part of expanding our 'relationships' and using newer techniques and tools to engage people more so as to get their attention? While perhaps an Alvin Ailey or a Royal Opera can raise bridge funding from the local community based on the intrinsic, innate value of the organization to the community, is it realistic to think that all the arts organizations in a given community can successfully follow that advice? Can communities fully support the huge number of arts organizations that currently exist? Will the market correct the arguably overbuilt arts ecology over the next two or three years as the funding sources for the arts likely experience deeper and more profound cuts and cutbacks (from government to foundation to individual support)?

Is the problem we face perhaps centered not in revenue and expense, but the perceived value of our product – at least to the wider audience we don’t seem to have? Implicit in Doug and Andrew’s observations is the central notion that we need to change the business model so as to make it work in terms of generating enough revenue to cover the expenses. If there is a problem in our perceived value to be shrinking (competitively) can relationship building help to repair it? To what extent do we not offer enough value to our customers (or at least to the universe of those potential customers that we absolutely must have to make this work for us). How do we correct that? Or are Doug, Andrew and perhaps the research of those like Alan Brown suggesting that our model doesn’t market the right product – that, in fact, the product is not just an arts performance or exhibition, it is, rather, a whole set of experiences and in that light our product might really be a ‘service’? And that would be a very interesting debate and discussion, but it would still beg the question of how to market ourselves, of what kind of business model we need.

When we talk about an outdated business model are we talking about the central core issue of what our product (or service) really is, or are we talking about how we should market and sell the product (or service), and if the former, are we talking about such things as newspaper advertising vs. the internet, or Facebook vs. Twitter or something much more fundamental?

So back to Doug and Andrew. If Doug is right and the model of simply trying to sell tickets to performances is outdated and too simplistic, and the complex relationship between our organizations and their customers is not only changing, but is impacted (as Andrew suggests) by both the things we have done in the past to form and manage that relationship and the way we have done those things, then what does the typical (if such a thing exists) arts organization do? Are we talking about ultimately moving to a wholesale revision of the business model, or merely some small tweaks and fine tuning? Do we need to somehow better understand the relationship between us and our audiences, and then figure out ways to improve it so that we can increase the cash flow from the value we offer?

The model has to have some theory and application to it to address the financial issue of revenue meeting expenses, does it not? And if it does, then very likely the model clearly doesn’t work anymore because few arts organizations now have (or are likely to have over the next three years) a cash flow greater than its costs. And does the “typical” arts organization have either the resources or the time to engage in the process of better understanding their audiences and the marketplace (which is changing by day) – at least in the near term? What can be done to help them? Who can help them?

Which leads to that deeper business model analysis – has our product (service) lost its value - relatively speaking - with all but a core audience? Has the perceived value of what we offer fallen in the current economic climate, or are such mundane things as parking, convenience of location, and scheduling more important to our customers than the complex bundle of expectations and values of what an arts experience means and offers? Is the answer to our failed business model that we are too simplistic or that we are too complicated in our approach and relationship with our customers? Are we a less competitive option in the pantheon of people’s leisure choices in the current economic climate? Or are we just failing to adequately market ourselves in a competitive manner.

Rethinking a ‘business model theory’ raises so many questions. I don’t know the answers to any of them. I’m only asking. But we've been talking about the outdated business model for years now - mostly in small bits and in a vivisectionist way. We need to get a handle on the big picture so we can talk about it with an eye to doing something about the systemic aspects of the problem.

The current economic situation is likely to get much, much worse for the arts through 2011. Two plus more years of government, foundation and perhaps even individual cuts in our funding streams (cuts very likely to be far, far deeper and more painful than the cuts we have seen in the past two years), coupled with likely decreases (or flat ‘no growth’) in audiences, is going to dictate changes to our business model well beyond what we anticipate, what we would like or what we can cope with. The pressures on small and mid-sized arts organization leadership will only grow more intense.

Have a good week.

Don't Quit.
Barry

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