The Art of the Deficit-Productivity Gap
This is the next installment in my blog series “The Art of the Deficit”. Part 3 will focus on the “Productivity Gap” in the symphony orchestra. Part 1 was an introduction to this series focusing on the dysfunctional business model of the modern American symphony orchestra. Part 2 focused on the lack of government funding and the resulting operational cash flow coming from the private sector. In Part 3 “Productivity Gap” I intend to dig deeper into these organizations to see how rising labor costs affect their bottom line and the lack of productivity affects the financial stability of organizations.
Productivity is defined by measuring the output of production, per the unit of input. Labor productivity is usually described in terms of output per worker per hour. There are several formulas and theories that help economists draw conclusions about the productivity of different industries. In the case of the symphony orchestra, there are the musicians, admin staff, and costs of production(output). This is in relation to the concerts(input) performed. Unlike industries such as agriculture or industry, orchestras need the same amount of people to play the specific repertoire as they did hundreds of years ago. They are virtually unchanged. If a Mahler symphony used over 100 people a century ago when it was composed and premiered, the same amount of people are used today. In terms of productivity, orchestras cannot use a specific technology, innovation or new business idea to produce the same product with less people and in turn less cost. When this wall is encountered, this is known as a productivity gap.
Wages and labor costs need to rise in order to keep up with the inflation of all goods and services throughout the general economy. A symphony orchestra is a very labor intensive situation. The payrolls(output) can be quite substantial, in relationship to the concerts(input) produced. The concert performance is the product. The nature of the concert business leaves ensembles open for business for only a hand full of hours. If an orchestra plays two concerts in a given week, they are only in their setting for about five hours. These organizations have difficulty penetrating new markets, attracting new customers and shrinking their workforce. The output rises without any gains in input. This is where the productivity gap comes into the equation. It is in this situation, where the imbalances take effect. This is partially the nature of the beast. From an artistic point of view, professional organizations want to be as true to the score and the composers wishes as possible. I agree with this completely on an artistic level, however the macro effect of having such a labor intensive situation can take its toll on the budget of an orchestra. These are fixed cost systems with relatively little mobility to change their economic models. This leads many ensembles into a financial conundrum.
I disagree with the notion that orchestras are supposed to lose money because they are non-profits with an artistic mission. It is in this balance that is the biggest concern. When output rises without any correlation to the input, the deficit balance becomes a real problem. Most of the budget difference is made up with charitable donations. In Part 2, I talked about how most of the money for the arts comes from the private sector. It is very important to the patrons that their money is used properly and can be accounted for. When these balances become so out of whack that the survival of the organization is in question, their reaction is going to be to pull back and not invest their money in these particular groups. The cardinal rule of the non-profit world is to never show financial weakness because nobody wants to save a sinking ship.
Entrepreneurship and new ideas are going to be the solutions to these problems. A perfect example of this is what the Metropolitan Opera is doing with its broadcasts to movie theaters around the world. They are taking advantage of a digital medium and in turn are going to make a great deal of money that will add to their bottom line for generations to come. Granted most ensembles don’t have the legendary reputation of this famous institution, however I think cultivating new ideas to increase non-earned income is really the key to long term survival. I personally would like to see orchestras make money doing non-music related projects. They can create and develop departments to form new businesses and alliances to make more money. Weary foundations that have been burned over and over giving money to arts groups and seeing it squandered, can make their grants initial investments in building up more cash flow possibilities for arts groups. Endowments are really the saving grace and most important and reliable way to enter the future. I will devote time to endowments in its own segment later on in this series. When the costs of total production rise faster than than ticket income plus private charitable donations, what is to be done? This is the question of our generation. The answers lie in new paradigms of thinking, use of 21st century technology, and a fresh entrepreneurial spirit that can lead us in a new direction.
1 comment September 14th, 2008
