Saturday, May 21, 2011

What if...We Cast Off our Non-Profit Status?

In honor of Theater Communications Group's 50th Anniversary, the performing arts service organization solicited "what if" manifestos for their upcoming annual conference. In that spirit, I decided to point the "what if" in the direction of the the non-profit business model by asking what would happen if resident theaters abandoned up their non-profit status.

I am by no means the first to address this topic. On Tuesday, May 17, Thomas Cott featured the three great articles addressing this issue in his "You've Cott Mail" that day:

L3C Cha, Cha, Cha by Diane Ragsdale
Questioning Old Dogmas by Colin Tweedy
Revenue Means More Than Business Models by James Undercofler

The Assumed Argument: Mitigating Financial Risk by Relying Less Upon Volatile Funding Sources
I assume that the proponents of reexamining the reliance upon the non-profit business model by our resident theaters comes from those who feel that theaters could mitigate their operating risk by relying less upon volatile funding sources. In a previous post entitled The Funding Conundrum: A Marketer's Response, I discussed tactics an arts marketer could take in light of major government funding cuts. Coming from an advocacy background, my first instinct was to look at ways marketers could become better advocates. In doing so, I was trying to find ways to maintain status quo in a time of dwindling support. However, I now find myself asking what would happen if we found a way to develop an artistically valid and sustainable model that didn't rely upon any government funding? Would that allow us to create our own destiny? Would it eliminate our reliance upon a funding source that at best is dubious these days. We wouldn't have to consult the tea leaves to see if we were going to get our rationing of government funds or face the devastation that comes when those funds are cut at the eleventh hour. I hear many organizations discuss risk management these days. I wonder if eliminating a volatile revenue source and replacing it with revenue that is more dependable could become a very attractive option to companies that want to mitigate financial risk.

The idea of leaving behind the only thing most resident theater administrators have known their entire lives is daunting. In briefly contemplating this issue, a few questions immediately came to mind:

Would we jeopardize the artistic product?
As Ms. Ragsdale pointed out in her well written article on this topic, Arena Stage covered all of its expenses for its first fifteen years from box office revenue. In reading Zelda Fichandler's personal speeches to the original investors of Arena Stage, they don't reveal a particular concern about needing to sacrifice artistic integrity due to the financial pressures of having to meet expenses solely from the box office. However, I do not believe that resident theaters can depend solely on box office revenue if they eliminated their non-profit status, and doing so, would in my belief, inevitably lead to artistic sacrifices. That being said, as contributed revenue sources have declined, many organizations have had to look for new revenue streams so that the box office didn't become the sole method of revenue generation. New sources of revenue are popping up everywhere from real estate ventures, event rentals, restaurants, parking, corporate visibility opportunities, summer camps, bars, consulting services and partnerships with for-profit ventures. As long as there are other substantial revenue streams that prevent the box office from becoming an organization's sole source of revenue, the artistic product should be protected. Check out these articles about popular sources of new earned revenue:

Arts Centers and Real Estate: Sustainable Business Model? Createquity
New Jersey Arts Center Sets Real Estate Venture The New York Times
Lincoln Center to Consult on New Arts Center in China Forbes
Atlanta Symphony Orchestra Purchases Telemarketing Firm Artful Manager

Would we have to sacrifice the revenue currently generated by contributed sources?
Most annual fund campaigns track revenue from individuals, board giving, corporations, special events, foundations and government support. This isn't my particular area of expertise so my thoughts might be naive or worse yet, impossible, however below are my guesses at what might happen to these sources if theaters were to drop their non-profit status:

  • Individuals: Perhaps the largest loss of contributed revenue could be from major donors, who benefit significantly from the tax breaks received from philanthropic giving, although politicians are debating reducing the tax deductibility of charitable gifts. However, I don't believe that revenue from lower level donors would be significantly impacted. Research indicates that lower level donors primarily give to receive benefits designed to improve their experience while attending the theater, and not due to a value-based philanthropic reason. If theaters were to continue to offer experiential benefits in exchange for an additional fee, regardless if they were a non-profit or not, I believe they could maintain the revenue they receive currently from lower level donors.

  • Board Giving: I wonder if non-profit board members could be transitioned into investors in a for-profit model, serving in a similar capacity to a limited partner. That could allow an organization to maintain partial revenues from board members, while offering them an opportunity for investment returns.

  • Corporations: Corporate giving via truly philanthropic avenues has steadily decreased in the past decade. Most corporations now have moved their sponsorship dollars out from under philanthropic officers and into the hands of their marketing departments. Corporate sponsorships are primarily about visibility and client entertainment. I would guess that marketing officers aren't going to care if a theater is a non-profit institution or not when deciding where to spend their sponsorship dollars. They care about the value of the opportunities the theater can provide.

  • Special Events: Why not look at special events as one night, for-profit productions? By programming in-demand talent, pricing tickets at fair market value and controlling expenses, special events should be able to still generate significant revenue.

  • Foundations: Many foundations only give to non-profits because the IRS provides certain tax benefits to those that give 5% of their assets each year to organizations with 501(c)3 tax exempt status. For several theaters, this would be a substantial loss in revenue. I wonder if this could be resolved if the IRS offered to count grants given to LC3s in the same manner as those given to 501(c)3s.

  • Government Support: For many organizations, government funding is either non-existent or so volatile that it cannot be included in operating budgets by prudent organizations. Arts organizations close regularly because they lose municipal or federal support. Many well-governed organizations have already learned to treat government support as icing on the cake, and nothing more. Those that haven't, risk total insolvency if the political climate shifts.
So, What's Next?
For now, it seems there is a lot of talk. These days, there is very little certainty in or agreement on anything, including the best business model for a resident theater. I am mindful though that Arena Stage was founded in 1950 as a for-profit entity, and thrived as such for several years. Could it be that to go forward, the field [5/31: replaced the word "we" with "the field"] must go back? It seems fitting to end with a quote featured from Zelda Fichandler in Ms. Ragdale's article: "I bring this up simply to point out that, while we are gathered here in the name of the nonprofit corporation (and, indeed, without the nonprofit income tax code, our American theater would simply not exist), being nonprofit does not really define us—our goals, our aims, our aesthetic, our achievements. What defines us, measures us, is our capacity to produce art.”


Tamara Sparacino said...

This is a really interesting idea. But, I'm wondering what you see as the advantages of casting off the non-profit status? All these options that you listed can still be done as a non profit (except the "investment" from Board Members). In fact, maybe the best way to go is to keep creatively expanding ways to make money - but keep the nfp status and still have the option of having donors.

This is a very thought provoking post - thanks for the info!

Unknown said...

Chad, I quoted this article in a podcast episode. Really love this thought experiment. Not sure if anyone will talk about it in the comments, but wanted you to be aware just in case.