Across North America today, arts organizations are typically undercapitalized, too often generate operating deficits, and are fighting to stay solvent. In Canada, fiscal instability was exacerbated when public funding was significantly reduced. Covid-19 has devastated arts organizations even further.
All too often, when levels of deficit and negative working capital become intolerable, arts organizations typically devise temporary solutions such as private “save the arts” recapitalization campaigns, government bailouts, staff layoffs or temporary wage rollbacks, rather than on reimagining the underlying business model.
This article will explain how business model innovation (BMI) was implemented to renew two leading Canadian arts organizations: the Calgary Philharmonic Orchestra (CPO) and Alberta Ballet (AB).
Two Case Studies
In October 2002, after close to 50 years of performing, Canada’s fifth-largest orchestra (in terms of number of musicians and operating budget) had buckled under due to insolvency, lack of leadership, declining ticket sales, breakdown in customer service and environmental turbulence. The Ballet had enjoyed a place of prominence and success on the Canadian arts scene for 50 years and was regarded as one of the premier ballet companies in the country. Yet by 2015, depleted finances, a dwindling subscriber base and organizational inefficiencies, compounded by a province facing the most serious economic downturn in 35 years, had taken a heavy toll.
The Calgary Philharmonic Orchestra and Alberta Ballet shared many common challenges that contributed to their near-death experience. In both organizations, diagnosis revealed that the “art wasn’t broken” but that it was not being effectively leveraged against high-growth and revenue-potential audience segments. Each organization had talented performers and a stellar performance record, but innovative uses of the talent to tap new growth opportunities had not been explored. Each had a long and distinguished history of 50+ years, had a national reputation for excellence, was recognized as contributing to the vibrancy of the community, and had a core of loyal supporters.
Four Common Elements of BMI
1-Preserving the Core Market and Growing New Markets
Both CPO and AB had already captured the bulk of their “core markets,” meaning that any further growth in these markets would be relatively insignificant. Growth needed to come from attracting new audience segments.
At CPO, audience research led to the identification of two new audience segments: those attracted by the flexibility of single-ticket sales, and those seeking to enjoy classical music in non-traditional environments in a variety of venues within and outside of the city.
At AB, research revealed numerous new audience segments that all indicated a strong desire for before- and after-performance receptions, dining opportunities, special events for youth to meet dancers and purchase products and memorabilia, and alternative, more personal and customized venue experiences. Those segments could be targeted for near- and longer-term growth.
At CPO, new and unusual settings were found and facilitated both the renewal of traditional repertoire and the introduction of new works. New business focused on joint community programming initiatives, whereby revenues and expenses could be split between CPO and a community group such as the Rotary Club or the South Asian Association. The Orchestra found an immediate new revenue opportunity within services it had historically undervalued.
At the Ballet, analysis and comparative investigation revealed a social enterprise opportunity focused on serving the physical and mental health of dancers. Supporting the broader dance community through assessment and support of dancers from the earliest years in ballet school through to post-career wellness was identified as an important advancement within the dance sector overall, and represented a new realm of spin-off programs and products that could be widely marketed.
2-Increasing Variable Costs Over Fixed Costs While Building the Reserve Fund
Over a span of 50 years, both organizations repeatedly initiated re-capitalization campaigns in the face of declining public and private funding to address financial shortfalls. The cycle of capital injection, capital erosion through operations, re-capitalization, and re-erosion through operations was deeply entrenched (Figure 1).
As a first step, in order to generate the magnitude of surpluses required, fixed costs needed to be significantly reduced. Obvious cost reductions were made in both organizations, including the following: outsourcing key management functions to third-party providers at significantly reduced cost and with a higher level of expertise; reducing musician weeks from 46 to 40 per year and dancer weeks from 42 to 36 per year; and, at CPO, reducing staff salaries by 20% while simultaneously introducing an incentive pay component with upside potential based on the entrepreneurial success in tapping new markets.
3-Using the Surplus to Motivate and Reward Entrepreneurial Success
The Ballet had depleted its reserve, severely impacting its ability to invest in new solutions for long-term growth. The transformation team proposed a new performance bonus structure that rewarded entrepreneurial success while replenishing the all-important reserve for long-term security as a way to achieve both goals.
For CPO, the success of pursuing new, non-traditional market-growth performances allowed the musicians and staff to derive no-cap variable remuneration, which more than made up for the 20% decrease in their base salary as part of the cost-cutting measures.
4-Streamlining the Board and Introducing a Single Reporting Structure
Both CPO and AB suffered from flawed governance in terms of structure, size and practice. The artistic side, comprising the Artistic Director and their respective teams of artists, made its plans and decisions in isolation – disconnected from all or most aspects of the business operations.
This is consistent with the findings of McDonald et al. (2021, 758): “Goal synchronization is often lacking between the executive director and the artistic director of an arts organization.” The transformation team recommended that a single senior leader, the President & CEO, report to the board.
The Ballet’s organizational structure was reworked to foster better communications and create a path forward for collaborative strategy and planning efforts.
Leadership for BMI
The CPO and AB cases called for systemwide, radical change, which Foss and Stieglitz (2015) label “revolutionary BMI,” requiring the active involvement of top management in everyday decision-making, attention to detail and a highly aligned top-management team. At CPO and AB, the three critical players – the board chair, a key insider and the external change agent – were fully aligned with the concept of the new business model and agreed on what had to be done to successfully implement it. Without this strong alignment and drive to create a successful new business model, BMI would have died on the vine.
The BMI literature highlights the importance of stakeholder engagement and collaboration with networks, ecosystems and partners, but it is relatively silent on the importance of mobilizing the organization for the high engagement needed to change the culture of the organization to align with the new business model (Foss and Saebi 2017; Weerawardena et al. 2021). At CPO, musicians were drawn into the new business model through strategic planning and implementation committees and task teams: organizing new performances; letter-writing campaigns and communications with important CPO audience members and stakeholders; media appearances and interviews; and fundraising calls. At AB, the story was much the same. When the dancers were exposed to an analysis of the data collected from the strategic assessment work, they immediately expressed a willingness to be part of the solution.
Conclusion
As Chait et al. (2005) observe, non-profit boards spend most of their time in their fiduciary role (legal responsibilities of oversight and leadership) and their strategic role (major decisions about resources, programs and services) and little or no time in their generative role (deeper inquiry, exploring root causes, core values, new ideas and game-changing options).
The Calgary Philharmonic Orchestra and Alberta Ballet engaged in BMI because they were in financial distress. If their boards had been aware of their generative role and had spent sufficient time on it as a natural part of their duties, they may have undertaken BMI proactively rather than reactively as they did, and avoided the financial distress that finally drove them to BMI.
Stakeholder engagement that embraces a variety of perspectives is a critical source of energy for BMI. All task teams should include a board member, a staff member, an artist, and an internal or external facilitator/consultant.
Based on the findings of our study, we recommend that organizations not wait for the perfect solution before acting, because the perfect solution may never materialize. They should focus on a limited number of priorities and act on them before adding others.
Above all, BMI requires the combined commitment of leadership, staff and artists to a new vision, a breaking away from the traditional mindset. It requires the courage to move forward through the fog instead of waiting for it to lift.
Contact us at mmiam@hec.ca to request a free copy of the full article published in the International Journal of Arts Management, Volume 24, Number 3, Spring 2022.
You can also browse our abridged research articles here.