Are feasibility studies a racket? If not, then why do so many capital campaigns derail?

Last Friday, I read a story posted on AJ about Michigan Opera getting a one month reprieve on the $11 million it must pay to Chase Bank if it is going to avoid a possible bankruptcy related to delinquency on a bond obtained for a capital expansion in 2004. How did this arts organization get here? I’m assuming there was a feasibility study at the outset and that the feasibility study gave the arts organization a green light, right?

So how did it end up several million dollars “short” on its campaign? How did we end up hearing yet another story about another arts organization struggling under the debt service associated with a new building, or struggling to maintain higher than expected operating costs following the opening of a new building, or struggling to maintain the minimum amount of cash on hand required for a bond agreement? The recession, I’m guessing, is the party line. But as we all know, there’s always more to it than the recession. Besides, don’t feasibility studies account for the possibility of economic decline when they are giving their assessments? If not, perhaps they should.

Is it possible that either feasibility studies cannot be trusted or arts organizations cannot be trusted to heed the findings from them?

I have never led a massive capital campaign for a building or endowment. I have, however, worked at an organization struggling to operate after such a campaign related to a building expansion. And I have worked at a foundation that was continually approached by organizations seeking increased support for ongoing operating costs after their new buildings were opened. Here is my slightly tongue in cheek characterization of a typical conversation with a feasibility study consultant when I was working at a foundation:

Consultant: As I believe you are aware, Leading Arts Organization has the phenomenal opportunity to build a new facility, which will blah, blah, blah.

Me: Yes, I do know this.

Consultant: Have you seen the plans?

Me: Yes, I’ve seen the plans.

Consultant: It’s going to be a phenomenal venue, don’t you think?

Me: The architecture is pretty stunning.

Consultant: I’m sure you know why we’re calling you. You have long been a supporter of Leading Arts Organization. May we assume that this means you see value in what they do?

Me: Yes, we tend to make grants to organizations that we perceive to be doing great work and that fit within the limited priorities of the foundation.

Consultant: Would you say that your grants are competitive?

Me: Yes, in the sense that we have limited means so we cannot fund everyone doing great work.

Consultant: Of course, so it’s all the more meaningful that you provide support to Leading Arts Organization.

Me: I suppose.

Consultant: Over the next X years, Leading Arts Organization will be seeking to raise an Ungodly Amount of Money Given the Size of Its Operating Budget. This amount will support both the new facility and an operating endowment. This expansion will make it possible for blah, blah, blah. I know you currently provide programmatic support to Leading Arts Organization. Would you also consider a meaningfully sized gift to the campaign within the next two years?

Me: No that is not something we are able to consider.

Consultant: I understand, and had been told that, but just wanted to confirm that information. In that case, as you can imagine, Leading Arts Organization’s operating budget will significantly increase with the move to its new building. To sustain all of the great new educational programs and ambitious, large-scale works that will be made possible once the facility is completed, it will be counting on increased support from its most loyal donors. Would you consider increasing your annual programmatic support to Leading Arts Organization?

Me: We do not promise funds in perpetuity to organizations nor can we commit to increasing the level of support that we provide in the future because an organization’s operating budget is increasing due to a facility expansion.

Consultant: I see. I notice that you made a grant to An Organization Like Ours in the past to support new programming after its new building was opened.

Me: Yes, we did. But, again, we cannot promise today that we can do such a thing in the future for another organization.

Consultant: But it is not impossible to think that, four years from now, when the building is completed, that Leading Arts Organization could apply for similar support for some of the new programs that it is planning and that you would respond favorably to that request?

Me: No that is not impossible; but I would stress that the organization should not count on such support when doing its planning.

Consultant: I see.

Then generally a bit of chit chat as the consultant reiterates the need for the facility, all of the benefits to the community, and perhaps asks a couple more questions. Then, inevitably, the call would end like this:

Consultant: So, I understand that the foundation cannot support the current capital campaign; however, it is fair to say that you think highly of Leading Arts Organization, that you understand the need for the expansion, that you are committed to continuing programmatic supporting for Leading Arts Organization through the campaign, and that you would consider increased support for new programs when the campaign is completed.

Me: No. I’m sorry if I was not clear. Leading Arts Organization should not plan on increased support from the foundation in the future. That’s what should be conveyed.

Consultant: Mmhm.

My hunch is that the large majority of feasibility studies conducted are irrationally exuberant and portray campaigns and the expansions that they support as being sustainable when, in fact, the large majority of them are not. Why would they do this? Well, the cynical side of me assumes it is because (a) consultants are not generally hired to deliver the truth; rather, they are hired to legitimize the choices that arts organizations and funders have already determined to undertake and/or (b) feasibility consultants often stand to gain from campaigns that go forward as many of them offer ongoing fundraising or building consulting services.

One thing I do know from doing a number of these interviews is that these plans are always notoriously vague. No one will ever say to a potential donor:

Here’s the deal, if we go forward, we will need you to give support from now until you die and we will need for your annual commitment to us to increase by 300% over the next three years and then by 15% every year thereafter. And if you and many other people do not do this then we will be on the verge of bankruptcy within 5 years and will need to do a special emergency campaign. At which point we will go back to everyone that gave to this campaign in the first place and make them feel obliged to throw good money after bad and keep us in this building that we cannot afford for another year or two by making what we will call a “one-time stretch gift”. Of course this is a somewhat deceptive term as we will keep coming back to you and doing this as often as is necessary to keep us in this building, for as long as we both shall live. (PS: We are, of course, counting on the fact that you will consider a bequest, as well).

So what’s the solution?

I’ve been thinking for a few years that perhaps we need feasibility studies undertaken on behalf of “the people” of the community—paid for with local government funds but hired and supervised by an independent committee. Think of it as spending a little to save a lot. Not only are many facility campaigns kicked off with massive grants from local governments but many local and state arts councils award grants on a formula basis (meaning the larger your budget the larger your grant, relatively speaking). Thus, once the facility is completed the people might expect that even more dollars will be flowing to the arts organization on an annual basis.

This audit (which could be in addition to the audit commissioned by the arts organization) would be aimed at:

  • Accurately projecting the capital campaign costs (assuming the delays and inflation that are inevitable), the size of operating endowment that would be needed to cover costs related to the facility, and realistic income and expense projections the first 15 years in the building.
  • Determining to what degree there is sufficient commitment in the community to support both the costs associated with creating or renovating the facility and the ongoing operating costs.
  • To calculate the anticipated increased amounts that would likely need to be given by the local government, major arts foundations, and key major arts donors over time (i.e., the ususal suspects that often end up holding the tab on these projects, especially when they go south).
  • To assess the feelings of the local community about a potentially significant amount of government dollars being invested in the organization if the building were to go forward (and the opportunity costs associated with that commitment). For instance, there could be a question such as: “The city is trying to decide between investing funds in a new opera venue or a new aquarium. Which of these would be more valuable to you and your family?”
  • Finally, such an assessment could assess not only the feelings of those living in the area that would be on the receiving end of any building planned for the future, but the people on the losing end, so to speak (that is, those living in the neighborhood that will lose the arts organization when it moves).

[A brief tangent related to this last bullet point: In response to my post last week on the new Barnes one of my favorite bloggers, Scott Walters, posted the comment, “While Montgomery County is certainly not rural, Merion is an unincorporated town. The move to Philadelphia continues the urban centralization of the arts.” I wonder: How did the people in Merion feel about their museum being taken away? How will the loss of the collection impact their local community? Were their voices heard in this process?]

Are capital expansion feasibility studies a racket—a deception between organizations and consultants that stand to benefit from positive assessments? If so can we fix this? Would feasibility studies commissioned by local governments help, or would those be just as corrupt? Why do so many campaigns derail and run out of steam? Why are the expansions so impossible to sustain over time? How do we get a better picture of the total costs of ownership of these buildings? How do we recognize a potential disaster in the making before loans are issued, grants are awarded, and architects are hired? And if the problem is not with the way these feasibility studies are executed and interpreted then are we to assume that donors lie when asked about whether they’ll support an organization’s expansion plans—that they promise generous support but then change their minds?

Or what else could it be? And, equally as important, who should be held accountable when these projects end up millions of dollars in debt?

I would love to be proven wrong about my suspicions in this realm and hope that those that undertake such studies, arts leaders, consultants, and donors to these campaigns will weigh in and share their thoughts.

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Comments

  1. Sarah Gee says

    As someone who has been involved in a number of fundraising feasibility studies, there’s an element of truth in your comments Diane. There are, indeed, organisations which completely disregard professional advice because they are so confident of their own abilities to raise funds (the rule of thumb is that it’s usually those with the least experience who are the most gung-ho). Some of the responsibility has to be borne by trustees, although there’s a bigger question as to whether they have the correct skills or experience to see an organisation through a capital campaign; indeed, there are some trustees I’d suggest barely have the skills to be a trustee (and I say that as a trustee, former employee and a consultant, ie I’ve worked with boards in a range of capacities.)

    But for all the disaster stories, there are as many – if not more – success stories. Projects delivered on time and on budget. Venues that have not only retained their audiences through a closure period, but grown them on reopening and maintained that trajectory in future years. Organisations that have converted capital appeal donors into project and revenue supporters.

    I’m not saying that all feasibility studies get it right. But neither do they always get it wrong. As with so many things in life, it’s largely down to the initial brief (and whether it covers things like on-going running costs – I’ve only once been asked to include that, despite offering it on all occasions) and the quality of interrogation by the organisation itself. The best clients I’ve ever worked with are the ones that challenge reports, and me, to ensure that they understand fully what’s being said, and sense-check all figures and timelines. The best consultants welcome that approach.

  2. says

    This sounds just right, and the conflicts of interest seem actually almost identical to those faced by Moody’s, Standard & Poor’s and the other ratings agencies. They’re being paid by the people they’re supposed to be judging – of course they want to give the preferred answer over the right answer.

  3. says

    I had a similar experience. I was actually called twice on the same project by two different consultants doing a feasibility study. By the end of the first conversation, I got the sense the consultant was a little skeptical that all the ambitions of the new organization were feasible.

    When I commented to the second consultant that I had already received a call about the project, I was told the nascent organization wanted a second opinion. From what other colleagues said, the second consultant was apparently also was concerned about the viability.

    My suspicion was the organizers didn’t like the findings of the first consultant and hired a second, but they may have been just trying to bolster their case by hiring the second group. As far as I know, the project isn’t moving forward, but with the money behind it, it could easily be resurrected.

    In respect to the Barnes. I have been following the issue for over 10 years. One of the problems was that the Barnes house was located in a residential neighborhood which limited the daily attendance because the neighbors didn’t like the traffic. On the other hand, low visitor density was apparently part of the design. From what I read, the museum will work to limit the number of people in any one gallery at a time.

    I am sure the Barnes House was a point of pride for many people in Merion. There were many who objected to the collection being moved, but I am not sure how many were from Merion.

  4. says

    It’s quite true that it is difficult for Americans to accept the reality of how small (and small-time) many of their arts organizations must be. The Michigan Opera’s budget is only 1/38,000th of Michigan’s gross state product (about 0.0026%). With its wealth and history, Michigan should be home to one of the world’s great opera houses. Instead, Detroit ranks 242nd in the world for opera performances per year. Michigan’s population is close to 10 million, so why should the Met’s budget be over 300 times higher?

    Facts like these are also part of why Americans have difficulty facing the extreme poverty of so many of their cultural organizations. They know they deserve better. Our system of private funding is a quasi-feudalistic form of cultural plutocracy. A funding system that is delusional will, of course, create delusional expectations. A racket, indeed.

  5. says

    I wouldn’t disagree with the general pitch of your argument Diane, but I think it overlooks an important element of the process, at least in UK terms. The pragmatic reality of the situation seems to be that capital build funding is ephemeral, and frequently offered on a seemingly ‘now or never’ basis due to the vagaries of political will, inter-departmental funding bids and budget slippage. When the necessary forces align to offer a brief window of opportunity, what is required is the ‘best case’, not necessarily the ‘right case’, else the funding be lost to another govt. department and/or the civil service ether. This, inevitably, can lead to a ‘build it now, worry about it later’ mentality which, when the macro-economic context shifts, can leave some organisations high and dry.

  6. says

    One of the solutions is a consumer-reports style directory of consultants. At $1500+ a day we should get more than a fill-in-the-blank template populated by formulas and a protractor on a map to estimate “audience”. These firms (and we all know who they are) prey on the dreams and insecurities of the non-profit sector, peddling confidence, not results.
    Due diligence. Call references of former clients. Did their plans WORK? Did they help implement with staff and board. Did they help with mid-course adjustments? Did their work turn out to be delusionally optimistic, leaving the organization and the community left to pick up the operational pieces? caveat emptor indeed!

  7. says

    One of the best ways to avoid being led down the primrose path on a project is to break the feasibility study into two parts — conducted by two difference consulting firms.

    The first part if program or project feasibility: to truly understand the community’s needs for such a facility, hearing from as many “stakeholders” as possible, especially those whose “yea” or “nay” will strongly influence success or failure. Don’t listen exclusively to the vested interests — staff and board; listen to patrons, audiences, civic leaders, educators,and those who will use the facility. This is also an opportunity to hear from non-users and learn what would make them part of the “family.” Very often the concept envisioned by the organization’s leadership turns out to be off the mark. Sometimes the answer in this phase is “don’t build it.” This is the point to change or abandon the project.

    If the answer is “yes” or “yes but,” the concept can be modified as needed. Then a building program, construction and operating cost estimates, and conceptual drawings can be the basis for the funding feasibility phase.

    These studies don’t guarantee success, of course. But they do significantly reduce the risk of failure.

  8. Will Maitland Weiss says

    I would temper your healthy skepticism of consultants with more thought to the magical optimism of artists, their boards, and sometimes even their communities. I have had the personal experience, at two separate arts organizations, working with feasibility study consultants who had to plead that we not proceed with grand capital campaign schemes. At a third organization, I managed a campaign that combined bricks, mortar, a permanently enhanced operating budget, and a permanently enhanced constituency eager to support the new programming–and everyone balanced the budget happily every after.

    Consultants need repeat business. Nothing artful or nonprofit about this; it’s how McKinsey succeeds. Which is why good ones engage in the kind of analysis promoted by the Nonprofit Finance Fund (and others), like the points in your suggested audit and unlike the wishful thinking of the consultant in your play-within-a-blog. The far greater danger, in my experience, is the well-intentioned exhuberance of arts leaders and some of their supporters. The passion which enables them to ignore the lukewarm interview responses and the numbers that just don’t add up is, after all, what drove them to pull off a miracle in the first place and create that arts organization where there was none.

  9. says

    I see a lot of truth here, and what you’ve described no doubt is a fairly accurate characterization of more than one campaign. But you’re putting too much blame on the feasibility consultants, and not holding the organizations themselves as accountable as they should be.

    Feasibility consultants (like any kind of consultant) do have a perverse incentive to tell their clients what they want to hear, rather than the objective truth. Just like blue-chip consulting firms such as McKinsey and BCG, arts feasibility consultants are often used to validate a preexisting decision with presentations full of data and analysis, as you suggest. But, they are often responding to the overconfidence of their clients. I don’t think that even a very honest firm would think its job is to check the client’s ambitions.

    And I do not think that giving the government and independent panels the responsibility is going to stop this problem. Government leaders are often very tight with arts organizations in their communities, if that arts organization has any size and any Board members with any clout. And somebody has to appoint people to independent panels (usually a governmental chief executive). So you will face the same problem, coupled with a downgrade in subject matter expertise and analytical skill.

    The organizational leaders are most responsible for the organization’s stability. The buck has to stop with senior management and Board leadership. I think you captured the real issue when you said irrational exuberance. The overconfidence bias is well-studied, and is a systemic part of being human. And when that overconfidence bias is mutually reinforced among all the people in an organization, it can lead to calamities. But you can also set up structures in an organization to debias it. Of course, some of the people in organizations are specifically expected and tasked to dream big and plan big. But others in these groups should have the devil’s advocate role. And because people truly don’t like the devil’s advocate, you need to assign the job to more than one person (a Trustee finance committee can often be good at this), and you need to give people a chance to rotate out of this role so that they aren’t marginalized within the organization as naysayers.

  10. says

    The arts institutional scrum for the last available dollar is a blame game which looks the other way when it comes to understanding the real problem at hand, which is that we as a people are spending our money supporting a military industrial complex rather than fostering the arts.

    We say the arts are important. We say we can’t live without them. But we also have drank the austerity kool-aid and too willingly have not asked the simple question- why can’t we as a society spend our money on the arts?

    Americans for the Arts’s recent 2011 National Arts Policy Roundtable suggests the usual recommendations we all have heard over and over, but nowhere does it suggest that art organizations should become more politically organized and unified and begin a truth telling mission that if we as a society want a rich arts society that the government can provide and should provide more funding.

    If we didn’t have the money for bombs or jet aircrafts, or for corn syrup farmers, or oil and gas companies, or for the federal highway system then my argument wouldn’t have a leg to stand on. But we do have money for all of those things and arts organizations and agencies seem all to content to fight for the last scraps rather than begin to push back on the political front with the message needed.

  11. John G. says

    Feasibility studies are not a racket, if done properly. As a consultant who conducts multiple feasibility and planning studies each year I take great care in making sure my clients get the information they need to make a good decision. I have lost business for telling organizations they cannot be successful with the project as designed. It is not in my interest to set up a client for failure. They can choose to ignore my advice, and too frequently do.

    I am not surprised to learn there are consultants out there who would rather please the client than do what’s best for the client. These consultants do not last long, because most organizations do not want to hire a consultant with a resume full of failed campaigns. Not all arts organizations are the same, nor are all consultants, so I’d ask everyone to be thoughtful about such sweeping generalizations.

    Interestingly I have had to change the language I use for these projects. Nonprofits/NGOs didn’t like the term ‘feasibility.’ We were told multiple times it was too negative, and implied a project might not be ‘feasible,’ shocking I know. We’ve begun describing our feasibility process as a campaign planning process. This is more than semantics, it goes to nonprofits desire to avoid hearing bad news, even when it is true. It’s also incredibly frustrating that Executive Directors and Board members prefer rose colored glasses to honest analysis.

    I frequently discuss, quite candidly, annual increases in the budget with interview subject. They appreciate an honest and thoughtful approach in my experience. Part of the feasibility process becomes more fully fleshing out a reasonable business and operations plan looking out at least five years.

    Something you don’t mention, that I see occur frequently, is organizations cannibalizing annual operating support in order to build. Every campaign I’ve worked on has sought to engage donors at higher levels for capital and operating support, and if I have to choose it will be operating support no question. Most campaigns use the building as an opportunity to increases sustainable contributed revenue, and grow the endowment when possible. However, that’s a much longer-term proposition.

    There is not a single reason for the failures you describe, consultants, Executive Directors, Board members, donors, artistic directors, elected officials, and many others can contribute to these bad decisions. Recent project in my community consistently overestimated the earned revenue and attendance, and now funders and donors who were burned are being much more thoughtful, as they should be.

    There is plenty of blame to go around, and while consultants might contribute to some of the problems they also prevent numerous campaigns from moving forward. It’s just that only a handful of people know about it.

    • says

      John G.
      I so wish there were more consultants like you. I think feasibility studies are essential (I’m writing an RFP for one right now, as a matter of fact!). As others have mentioned, it is critical to have an all-information-is-good mentality. Delusional optimism and civic ego-style projects are hard nuts to crack on that front. All too frequently the strategy is for the community boosters/board of directors to circle the wagons. Facts that don’t fit the vision are discounted along with the people who have the temerity to raise them. (I raised operational cost questions once and was once branded a “lesbian” by a board member of the organization–not that there’s anything wrong with that ;). As you suggest, that often extends to consultants who bring inconvenient truths to the table. Those reports often get buried.
      The approach then is a covert, unspoken, conspiracy between the consultant and project visionaries to downplay the downsides of a “feasbility” study. The project keeps up the hallucination in the community. And the consultants pocket tens of thousands of dollars. And the community pays the price long after the current leaders and consultants are gone. It’s THAT cycle I wish we could circumvent. But given the frailties of our species, not likely to happen anytime soon.

  12. says

    When a campaign fails, as noted in many of the comments, there is plenty of blame to go around: consultants, board members, and donors share responsibility, and of course, unforeseen circumstances, both external and internal, can intervene.

    But another factor, arguably the most important of all, is the organization’s ability to execute a successful campaign. Ten or fifteen years ago, standard practice was for an organization to retain a consultant to manage the capital campaign. Though rarely on site for the duration, s/he visited regularly, attended all critical meetings, monitored results, and provided training, coaching, and strategy at every phase. Today, however, all but the very largest organizations typically bring in a consultant only for a study, a campaign plan, and sometimes some assistance with a few critical leadership-level gifts, then move on with a handshake and a “thanks, we can handle it from here.”

    They can’t. Executive staff, however competent, can’t afford the time or the single-minded focus that managing a successful campaign requires. Adding a staff member for campaign management may keep the trains running, but the essentially subordinate nature of the position undermines his/her ability to speak frankly and provide direction and supervision to trustee-level volunteers. And if obstacles are encountered, staff members rarely if ever have the experience-based bag of tricks a consultant can use to develop effective responses and revised strategies.

    So the campaign falters….and, hey, it must have been a bad study, or that terrible campaign plan the consultant sold us.

    Penny wise, pound foolish, as the saying goes. Talk to your consultant about budget constraints; any reputable consultant will be happy to work with you to develop a consulting relationship that minimizes cost without sacrificing the oversight and the expertise that only a consultant can provide.

  13. says

    Hi Diana,

    I do quite a few fundraising feasibility studies and the case study I tell prospective clients is about the time I did a study for an organisation which needed to raise £20m for a new museum. I told them that they would be lucky to raise £5m and the project didn’t go ahead. I count that amongst my best work as a consultant!

    I think we simply expect too much from feasibility studies which are a series of best guesses dressed up as science. Capital budget over-runs are found even in hard-nosed businesses and nobody gets customer projections right all the time. Still, better to have some well-researched estimates than none at all. I have worked a lot in Spain where they have never heard of feasibility studies and where airports, cultural centres, motorways and other grand schemes get built on borrowed money on the whim of a mayor or regional president. There are many big cultural centres in Spain which are half-built, or built but never opened, or opened but hardly used. Google CREAA Alcorcón to see a primne example (also a client of mine, though long after they decided to build it).

    I think most feasibility studies are fairly honest, but often simply wrong. Accurate predictions are very difficult, especially predictions about the future.

  14. says

    Excellent article. Our firm provides feasibility studies for all types of projects globally. One of our challenges is to not allow clients to pressure us. We provide an unbiased service and earn a fee for doing so. However, many clients do believe that they can “buy a consultant”. In our agreement we have a line item that clearly indicates that the fee is not contingent on the outcome of the study. The Economic Hitman days will never end.

    Appraisers are not qualified to provide economic studies have entered the market. We all have already seen how their valuations are part of the problem. The Appraisal Institute teaches antiquated ideas and the concept that if the project is more valuable than the cost alone does not provide for a feasible venture.

    Predication of the future can be made. Things go up and they go down. It is all about probability. We use items such as the Monte Carlo Simulation and Decision Tree analysis as predictors. These analyses provide for scenario simulations of rising costs, decreasing prices and so on, as well as the inverse.

    Pressure from third parties is part of the problem. We have a long list of projects that we deemed infeasible for several reasons. We are often asked by developers to provide a list of banks and developers who have had success with our studies. Very foolish.

    I have never met a developer who though their project was infeasible. Also, a pro forma or cash flow statement does not make a project feasible. There are many items to cover. If you follow this link to our site you can view all of the items we cover.

    Out studies are not cheap. A good study should not be low cost. http://www.wert-berater.com/about_feasibility_studies.html

    I know that our competitors will do what they can to earn a living. But many provide a dis-service to the clients by blessing their deal.

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