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Thursday, July 17, 2008

Non-Profit Chamber Music Orgs and the Recession

U.S. Dept. of Commerce, Bureau of Economic Analysis, Balance of Trade, 1Q2004-2Q2008, seasonally adjusted (no CPI or other adj)

C ore June retail sales fell 0.7%, versus the Federal Government's report of 0.1% core retail sales gain. June data showed payrolls turned negative 2008-over-2007. Monthly payrolls dropped by 147,000 net of concurrent seasonal adjustment bias. Broadest Unemployment Rate jumped by 0.2%. Purchasing Managers Manufacturing Index (PMMI) ‘gain’ reported in June was due to [the government’s gratuitous—] re-weightings of the Index’s components [for the June reporting interval].”
— John Williams, Shadow Government Statistics newsletter, 15-JUL-2008.

The economy looks grim. And here in the U.S. you can see signs of radically altering consumer spending of disposable income. You see it in every restaurant—many of them with only one or two tables occupied during prime suppertime hours. You see it in mostly-empty retail-shopping car parks. You see it in drycleaners’ rotating racks, half-empty. You see it in dramatically lower attendance at sports and arts events. Will chamber music presenters see the effect this Fall, in terms of decreased subscription renewals? Almost certainly, yes.

Part of the frustration here in the U.S. is that the current government administration has for years persistently denied and obfuscated the economic facts, presumably for political reasons. Not conspiracy or malfeasance, exactly. Just a succession of convenient restatements of the rules for how the indicators are calculated and which data shall henceforth be excluded from which metrics.

Housing prices going up? Take them out of the calc and insert a bogus government-agency estimated 'equivalent rent'. Food and energy going through the roof? Exclude them and call the remainder 'core inflation', as if food and energy were not inconvenient core truths. Unemployment surging? Quit counting people who've given up looking for work. Averages higher than you'd prefer? Then use geometric means [e.g., Nth root of the product (a(1) * a(2) * ... * a(N))] instead, which will deemphasize high values and give extra weight to low ones. Presto! More favorable-looking numbers!

Federal Reserve Bank Chairman Ben Bernanke’s testimony before the U.S. Senate Banking Committee this week is perhaps the first forthright admission by a government official, that the economy in the U.S. is seriously troubled and will not likely recover anytime soon.

Non-profit executives have the skills and resilience to cope with economic down-turns, even prolonged ones. But their operational planning and financial planning depend on having factual information. Rosy, erroneous economic data from the federal government seriously undermine any manager’s effort to plan and manage an enterprise rationally.

One alternative is to utilize John Williams’ ShadowStats.com and other sources of independent data that are not susceptible to gratuitous political manipulation.

ShadowStats.com: CPI trend, 1980-2008, under evolving Federal policies for calculating CPI; vs. CPI trend for same period using same calc method as Federal govt used in 1992

Another alternative is to follow the international foreign-exchange and other indicators and commentary that reflect how other countries perceive the economic situation in the U.S., in a way that is entirely independent from U.S. government messaging (for example, the USD-EUR exchange rate, below).

Yet another alternative is to follow the Financial ‘prediction futures markets’, on InTrade or similar web-based services. Still another alternative is to utilize financial measures that are decoupled from the markets themselves, such as the Silicon Valley Venture Capital Index. The Silicon Valley Venture Capitalist Confidence Index (Bloomberg ticker symbol: USFSVVCI) is based on a quarterly survey of 27 San Francisco Bay Area venture capital firms. The Index measures and reports the opinions of professional venture capitalists in their estimation of the highgrowth venture entrepreneurial environment in the San Francisco Bay Area over the next 6 - 18 months. The Silicon Valley Venture Capitalist Confidence Index for the second quarter of 2008, based on a June 2008 survey measured 3.07 on a scale with 5 denoting high confidence and 1 low confidence. In just 3 quarters’ time, by the end of the quarter just completed (2Q2008), the USFSVVCI index has fallen 32% from its 2004-2007 average, to a third consecutive new low since the Index’s inception. (The 32% is referenced to bottom = 1, since there is no zero score possible.)

Univ San Francisco Silicon Valley Venture Cap Index trend

It’s a recession. We feel it. We see it all around us. We smell it. Don’t keep misleading us with conveniently-revised, ever-evolving economic indicators. Call the recession by its proper factual name, please—won’t you?—you in the media and government. And do something major about it, quickly!

I t’s a Recession when your neighbor loses his job; it’s a Depression when you lose yours.”
— President Harry Truman, 1948.

The alacritously-repeated claims in the media—to the effect that ‘These are un-charted [economic] waters. No one can predict what will happen. No one knows how these [economic] things work.’—are disempowering and inertia-enabling, and interfere with managers’ planning as well.

T his is the worst financial crisis since the Great Depression and the worst U.S. recession in decades.”
— Nouriel Roubini, 16-JUL-2008 on BloombergTV.

There are past deep recessions and inflationary periods about which we do know quite a lot, to which we can turn for clues and predictions and ideas as to what we should do and what results we should expect and how soon. Ruth Towse’s excellent book, for example, shows how the non-profit economy contracted from 1991 to 1994 (see esp. pp. 144ff) before recovering. Similar economic and inflationary trends between 1978 and 1983 are also germane. For the authorities and media pundits to bloviate on about “No one could’ve predicted … No one can say …” disserves the entire society. Non-profit organizations are probably among those most vulnerable during such periods.

S ocial capital [represented by the arts] ... is largely forgotten by governments pressurized to treat the arts in the short to medium term as a set of sectors within a creative or cultural industry, for economic gain mostly.”
— Lorelei Loveridge, 2008.

Have a look at the book co-edited by Steinberg and Powell. Steinberg continues his extensions of Weisbrod’s work, identifying and characterizing three types of economic failures in the non-profit sector:

Market failure;
Voluntary failure; and
Government failure.

The choices (for possible actions that chamber music orgs’ executive teams and Boards of Directors can take) are substantially different for addressing each of these three failure types. Therefore, it’s wise to have a clear notion of what’s happening and what failures are in-play as you plan and execute your operating plan in these tough times.

I n uncertain economic times—especially when the airwaves and the front pages are abuzz with talk of recession—non-profit executives may overreact. Under pressure from their boards of directors, they all too frequently take ‘cost-cutting’ too far. The greatest victims are new-donor acquisition, which is often sharply cut back or even eliminated temporarily, and donor cultivation programs such as donor acknowledgments communications.”
— Mal Warwick & Dan Doyle, NonProfitTimes, MAR-2008.

Adverse economic conditions affect fundraising results in multiple ways and do not hit all nonprofits equally. For example, the rise and fall of the stock market strongly correlates with the ability and willingness of foundations and big individual donors to give to the arts. Foundation grants are especially prone to dramatic curtailment, since most foundation assets tend to be in equities, and U.S. nonprofit regulations and foundation boards tend to limit their annual giving to five percent of assets at the most. This effect tends also to kick in later than the economic downturn itself, as grants are typically made on the basis of the previous year’s asset valuations.

Corporate giving to nonprofits shrinks as corporate profits decline. This is a big deal as the spend on energy and materials has skyrocketed in the months past. But the impact of a poor economy will affect different companies in very different ways. Many companies manage to preserve their profits for many quarters through cost-cutting, even in a prolonged ‘down’ economy. And there are some businesses in “countercyclical” industries—ones that serve basic human needs such as groceries and gasoline and heating that don’t go away in a recession—which are profiting from a downturn despite the adverse impact on everybody else. Corporate donors (or big individual donors) associated with such businesses might increase giving. So you might look to cultivate those donors this year. Probably you won’t be looking to see big giving to non-profits by, say, banks and other hard-hit businesses this year.

In summary, if you’re a chamber music presenter or other non-profit arts manager, factually fore-warned is fore-armed. Avail yourself of the trustworthy, untampered-with data that are out there. Become a more discriminating data-consumer, as Prof. Menzie Chinn says. And start looking to potential donors whose businesses are maybe more resilient than your traditional donors, or to some whose businesses may somehow be backhandedly benefiting from the economic pox that’s upon us.

E xcept in cases of severe economic downturns, the effects tend to be much less pronounced on membership renewal rates, average gifts in direct mail and telefundraising ... and other barometers of giving by people who aren’t necessarily wealthy. However, as a recession drags on, donor acquisition efforts may become even more challenging than they already are. Even those people whose day-to-day finances aren’t curtailed by a recession tend to become more cautious, and response rates in acquisition may shrink because donors hesitate to expand their giving choices. Shrinking personal income and a bear market on Wall Street take their toll.”
— Mal Warwick & Dan Doyle, NonProfitTimes, MAR-2008.

Saturday, October 21, 2006

Niches & Long-Tailed Culture

CMT: Jacob Hale Russell, in the Wall Street Journal, October 14, 2006, Page P1, has a thought-provoking and disturbing essay on the growing tension in philanthropy— ‘Hunger vs. the Arts’, as he calls it. Today's philanthropists prefer to fight disease and poverty instead of—not in addition to or balanced with—supporting cultural causes. It's a rising concern for many potential donors to the arts: “We get the ‘ask’ from every charity and non-profit. What is the justification for donating to chamber music when the money could help stamp out malaria?”

DSM: The issue has been a factor in philanthropy for a long time. But it’s more prominent now as some of the world's wealthiest people have directed large gifts recently to address humanitarian crises—think, for example, of Warren Buffett’s $30 billion donation to causes like AIDS and tuberculosis initiatives through the Bill and Melinda Gates Foundation. And this type of donation symbolically sets the agenda for other donors: it defines what’s fashionable, what’s “in”. But if people insist that spending on cultural activities is only morally acceptable after all hunger and homelessness and illness have been solved, the community will be much the poorer for it. A diversity of experience is fundamental to a stable and vibrant society, and you must not hold that dignity and diversity of experience hostage to the bottomless pit of human suffering. The world will always have malaria, disasters will continue happening, children will continue to be homeless and hungry and die. Those have been a part of the human condition since time immemorial. What’s new is the implication we see more and more in the U.S.—the implication that those humanitarian needs trump all others; that somehow other values are morally inferior, comparatively speaking; and that giving to other causes is somehow not as commendable as a gift to mitigate hunger or poverty or disease.

CMT: I agree with your notion of diversity of cultural experience as a common good or a utility. It's up a notch or two on Maslow’s triangle, admittedly. But cultural experiences are essential for both personal and community development, and for the maintenance of a free and humane civil society. You get a sense of this when you witness the re-emergence of the arts after genocide or civil conflict or natural catastrophes—Rwanda in the late Nineties or today, for example. The arts and sport and so on—they spontaneously reappear soon after destructive events, in part because they are addressing an elemental human need. The dignity you refer to—it isn’t so far up Maslow’s triangle at all. So the arts should be regarded as a public right, not unlike basic health services or education. By the way, it’s characterized that way in the enabling legislation of public arts subsidies and governmental agencies and NGOs. In other words, earlier generations’ public leaders held the same beliefs as the two of us have just been discussing, and they enacted laws and policies based on those beliefs. But we need more than restoring or re-examining the public ‘right’ to the arts, or support of the arts as a public good or utility by the government. We need to get private donors and philanthropists to think of the arts in this same way. It is a ‘public good’ and it adds value to the fabric of the community, every bit as much as, say, a new community soccer complex for kids' athletics.

DSM: In this era of the "long tail" new-economy business and cultural pluralism, we should also look at segments of cultural life that happen not to have big market share. Not everything is as popular as kids' soccer or Mozart. If we don’t do this, cultural policy regresses to nothing but a coercive and “colonizing” popularity contest—whether it is a high-brow elitist popularity or a low-brow, mass-market, lowest-common-denominator popularity. There is today a sort of unhealthy detent or pseudo-peace found in hi-tech democracies—North America and Europe, anyhow; the places we two have direct experience with. Is this cultural pseudo-peace not a de facto type of imperialism or exceptionalism? Today, the nonprofit sector remains a creative, vibrant and unique feature of American life, with thousands of organizations, both large and small, working together to create a better world. Unlike its commercial for-profit counterpart, the public good, rather than personal gain, is at the core of its activities. And any effort to address issues within the nonprofit sector must take into account the sector’s diversity and complexity and avoid the unintended consequence of stifling its vitality. Further, any policy changes must be aimed at strengthening the great American traditions of giving to, volunteering in—and serving as leaders, directors and trustees of—our charitable organizations, including chamber and classical music organizations. You have to have more diversity; you have to engage the strength of the constituencies in the long tail. To get back to Jacob Hale Russell's WSJ essay, I think that an exceptionalism that privileges a few dimensions of human experience (disease, poverty, health, hunger, housing, social exclusion) and disenfranchises other dimensions (culture, arts, sport) undervalues the contributions to human dignity and to cultural sensitivity and peace and understanding and other benefits that are associated with the arts in civil society. It drives toward a monoculture—not enough species, nothing but corn in the fields, nothing but white pines in the forest, not healthy. Do you think so too?

CMT: Yes. As some donors have diverted their giving to other humanitarian social causes, arts organizations have continued, I think, to depend overly much on their traditional base, people who deeply interested in the arts and old money and wealthy philanthropists—bigger donations from fewer donors. As more of the traditional donors allocate more of their giving (or in some cases all of it) to humanitarian causes, arts groups need to enlist the support of the next generation. The Boston Symphony Orchestra has done this reasonably well. Under Peter Brooke, the BSO has overtly tried to appeal to new donor types. It's brought in more celebrities, put on glamorous gala benefits, created task forces to target executives in specific industries including life sciences and investment banking, and positioned itself as an organization that is strategically related to the city's economic development. In February, the BSO invited doctors to an afternoon reception and private chamber-music performance before an evening concert. It was the third event organized by a committee of doctors that includes Robert Mayer, a trustee who's also an oncologist at the Dana-Farber Cancer Institute and a dean of admissions for Harvard Medical School. At the reception, about 100 physicians talked with each other and with other attendees/guests about trends in healthcare, as much as they did about the afternoon's lecture on Schoenberg's music. Dr. Mayer says they're following up with the guests to encourage them to subscribe or donate. I’m not sure how many chamber music presenters (as opposed to standing chamber orchestras) have things like done this. But it seems like a promising avenue to try.

DSM: It isn’t that old money has to be substituted with new money. It’s really has to do with diversity and sustainability—and cultivating additional new donors whose larger numbers and whose diverse motivations will diminish the organizations’ cashflow variability and “lumpiness”. There is nothing you are going to do that will stem the tide of fashion—whatever the traditional large donors elect to do, patterned after the Gates or Buffet or not. You are still going to seek the big gifts and endowments and so on from the deep pockets, as always. But offering more product, more programs and series, and more experience types to more diverse audiences and donor constituencies—is one way for chamber music presenters to reduce their vulnerability.

CMT: The vulnerability isn’t just the dependency upon a handful of big private donors. The National Endowment for the Arts' budget is $124.4 million this year, down 23% from 1995. And state funding has fallen 27% from 2001 to 2006 according to Americans for the Arts. The vulnerability is the tandem dependency on flagging public-sector funding.

DSM: So what we need, probably, is more corporate sponsorship. And corporate donors are being more parsimonious about their giving—many prefer to support branded programming these days, where they are the exclusive sponsor and can leverage the promotional aspect of that. They prefer to sponsor a particular concert or series, rather than give a contribution to the chamber organization’s general fund, where it gets mingled with the contributions of several dozen other companies in the community. They’re disinclined to give when the gift is a “me too” gesture; they want exclusivity and the visibility that goes with it. We didn’t see this as often 10 years ago.

CMT: One of the challenges for arts groups is to convince potential donors of the benefit that their gift will deliver. If you're a healthcare institution, you show the donor a sick child who was helped, and it's easy. Selling donors on the cultural benefits of chamber music is a lot harder, more abstract. For prospective donors who are business leaders concerned with economic growth of the community, you need to show them objective facts about the relation of your programs to hiring and retention in their industry, in addition to softer things—cultural amenities that enhance the the community’s rank as a desirable place to live and work. Arts & Economic Prosperity: The Economic Impact of Nonprofit Arts Organizations and Their Audiences, released in 2002, reveals that America's nonprofit arts industry generates $134 billion in economic activity every year, including $24.4 billion in Federal, state, and local tax revenues. The $134 billion total includes $53.2 billion in spending by arts organizations and $80.8 billion in event-related spending by arts audiences. The $53.2 billion represents a 45 percent increase (from $36.8 billion) since 1992, when Americans for the Arts last studied spending by arts organizations. The $134 billion in total economic activity has a significant national impact, generating the following:

4.9 million full-time equivalent jobs
$89 billion in household income
$6.6 billion in local government tax revenues
$7.3 billion in state government tax revenues
$10.5 billion in Federal income tax revenues

DSM: Those facts are helpful. But to grow those numbers, and specifically to grow them with new corporate donations and groups of individuals, I believe you need to expand the diversity of the programs. There's always fear among classical music artistic directors and executive directors, about the risk of offending their traditional donors by diverging too much from the frequently-played parts of the canon. To please one or a few individuals is to alienate 10 times as many others—who would have found a more diverse repertoire (or specific portions of it) more exciting—more intellectually or emotionally engaging, more stylish, more “cool”. To survive and thrive, chamber music presenters—all classical music organizations, really—need to be producing programming for the “long tail”, and adjust the pricing and marketing of each of the program lines or series to match the needs and capabilities and preferences of the “niche” in the long tail that that audience segment has.

Concerning these cultural policy and arts marketing and long-tail topics we’re exploring, here are a few of the online sources that I like:

To be an artist is to suffer for your art—to be a bit tortured, at least by questions and doubts. The questions about relative value never let up—Is it beautiful? Is it moving? Is it relevant? Here are some books on different dimensions of that, and how to communicate about value with donors and with cultural policy-makers: