[MUSIC] So how big is too big? How much is too much? And when can we tell that we really in the land of not enough? As they used to say on Dragnet, let's look at the facts first. [MUSIC] Look at this chart of information about the current state of play financially for the non-profit arts and cultural sector, and you can see, clearly, this is a fragile field, and it is operating without as much capitalization as it needs. The fragility is exacerbated by the fact that sometimes organizations don't go out of business when all indications are that they should. It's a field that has almost no barriers to entry and a lot of barriers to exit. And that can be problematic. If you don't have enough cash on hand, it's very hard to take artistic risk without putting the entire organization at risk. And you could argue that the whole purpose of a not for profit cultural sector is to take artistic risk, to try those things that don't have immediate or even longer term commercial success possibilities. In the world of creating a public good, supply and demand isn't always a clear metric. It can also be a device of one. In 2012, Rocco Landesman, who was then chairman of the NEA, raised a question, deliberately provocative question, do we have too much theater? Well this lit up the blogosphere. And there were people who felt this isn't even a question that should be asked. I think it's a good question to ask. It's always a good question to ask, do we have too much or too little of something. Particularly if it's a public good. But whatever your ideology may be, when you're looking at questions of scope and scale, you have to consider whether or not supply and demand are in sync. A good overview of that debate can be found on this link here. Now when the economic downturn really began to bite in 2007, John Hennessey, the President of Stanford, wrote a refreshingly honest letter to the Water Stanford Community of Alumni, Donors, and Faculty. And in it, he said that the downturn had been a wake up call for Stanford. That it offered one of the most important opportunities in a generation. The opportunity to consider the appropriate scope and scale of Stanford now and into the future. This is unusually candid. It's also an insightful observation and it reminds us that one of the most important responsibilities that a leader has is to determine with others what is the appropriate scope and scale for this organization? So how can you do this? Well it's generally acknowledged that we've had a building boom in the cultural sector in the last twenty years, from performing arts centers to museums. I'm not saying this is a bad thing, but it's likely that we've over built. There's a comprehensive research study called Set in Stone that really tackles looking at this 20 year trend. It's done by the Cultural Policy Center at the University of Chicago. This is important for us to think about because, if we have over built or if we have built buildings that are too restrictive in the way they're designed for the purposes for which they may need to be used in the future, that has an impact on how we evaluate the scope and scale of individual institutions and of our field. When an organization grows, gets bigger through its facilities alone, it changes the nature of its capital structure irrevocably, something that the Nonprofit Finance Fund writes about extensively. But that is often not understood all that clearly when you start in a bigger building or when you begin to construct a larger building. As a field, there are a lot of people in the sector looking at whether or not our resources are in the right area to meet demand rather than just seeking larger resources. In a commercial sector, you build physical plant because over time it will either save you money, or make you money. In our sector, our motivations are not quite always as straight forward. We've build in large part because over time it can give us presence, physical presence, it will give us the security of free hold. It can make us feel more established. It will confer on us a type of legitimacy that perhaps we seek. We are not sure it's right to seek it through our buildings rather than through the value that we create. The great economic writer, Edith Penrose, noted in the 1950s that unplanned growth without spare management capacity could kill a company more effectively than bad management or bad luck. Particularly when growth means a bigger building or a footprint, a larger footprint. There are inherent challenges in creating financial sustainability. Some of these can be a result of timing issues. It could take a decade for these projects to be realized. And by the time the things actually built, some of the assumptions that were made about the need for it or the uses of it may be outdated. Supply and demand are often out of sync in commercial economic cycles, but there's something different about the sad monument of the underutilized public building. It can create a tough environment for all arts organizations in a community. Edward Hess, a professor at the Darden School an the University of Virginia, has written some very intriguing articles about how US corporate growth model is deeply, deeply flawed. By making growth a major metric, we force companies into short-termism. We know what the outcomes of this can be, we're all living in it. Hess makes some even more interesting arguments about our need to unpack our assumptions that growth is always synonymous with continual improvement. The later, continual improvement, is essential for any business, it's gonna continue to create value, but the former, getting bigger, may not be. I think reframing the idea of growth in our field is a challenge. We need to be very aggressive about continual improvement. But, very cautious about growth. And it can be difficult, because funders, donors, journalists, we're all incentivized to be new, to be bigger, to be different. Scope and scale decisions should be based as much as possible on empirical data. What's the size of the community? What's the complete percentage that we would have to have of that community to make this a sustainable business? How many actual people would need to donate or attend to make the organization viable. What past targets can you point to that demonstrate that, as an organization, you have the ability to be accurate in your predictions? If you have three years of operating deficits, something's wrong somewhere. I think we need to hold fast against the idea that our legitimacy and our power for good within a civil society comes from just being big. We need to remember those sobering facts from the non-profit finance fund research, and we need to bear in mind this quote from John Holden. We should look at the impact we have and the resources we're likely to have. And here's a thought, how about we accumulate a surplus for working reserve rather than spend everything we have every single year on a new production or exhibition? I'm not diminishing the importance of artistic ambition, but we need to temper outrageous optimism if our organizations are gonna be sustainable. We can't always just sell more tickets. And remember, if you're built to lose money on every transaction, volume is never gonna be your answer anyway. Marketing is not the answer to every financial problem. Joseph Horowitz has written very compellingly about the rapid rise of an over production of concerts as the business model for a lot of orchestras. If you look at this quote from a long time ago, it was in the 60s, every year our expenses go up, but the donations remain the same. You can kind of get an idea of what might be causing a financial problem. Being smaller, being more nimble, can be a great strength. Smaller organizations are better able to keep fixed costs less fixed. They are better able to utilize both the labor and physical assets. They're often able to expand and contract which is an essential requirement for responding to the environment. And smaller organizations tend to be tied into their communities and therefore have, if you'd like, a greater predictive ability about the demand for what they offer. I'm not saying we shouldn't have any big organizations, of course we should, but what if the aspiration for an individual arts leader is that my organization is gonna be more sustainable and do higher quality work and that may or may not mean that we're gonna get bigger? [MUSIC]
