Defending Flanagan

I was dismayed at the response to Robert J. Flanagan’s very long, very serious, though very academic report on orchestra finances. (Unavoidably academic, however, because Flanagan is an academic.) Could be that I’ll sound impatient in what follows, for which I either apologize or not. I’m not sure.

But here’s the background. For many years, the Andrew W. Mellon foundation funded more than a dozen orchestras through a program designed to encourage innovation, called the Orchestra Forum. The strengths and weaknesses of that endeavor aren’t something I’m going to discuss here, but I was involved for some of its run, as a “fellow” of the program, going to its biannual retreats and participating in all discussions. And it was from one of those discussions that the Flanagan report was born. The executive director of one of the Big Five was worried about orchestra finances, and convened a meeting attended by representatives of several orchestras, including at least two other high-powered executive directors, but also musicians, and members of various orchestras’ boards and staffs. I was at this meeting. The subject of discussion were what the people there called “structural deficits” – what they saw as a long-term pattern of orchestras’ expenses growing faster than their income. Obviously this problem – if real – was serious. So out of this meeting grew something called the Elephant Task Force, a group of board members, musicians, and staff members from a variety of orchestras, who met under Mellon’s auspices to study the problem. The name, of course, comes from the notion of the elephant in the room that no one wants to acknowledge, in this case the serious financial problems that – at least as Task Force members saw it – weren’t being faced.

Eventually the Task Force made its report, which was delivered at one of the Orchestra Forum retreats by the board chairman of the orchestra whose executive director had started all this rolling. His report was dramatic. I’m not going to go into any detail about what was said, but it was dire, including projections that showed how a major orchestra (unnamed) could easily go out of business not many years in the future. I don’t know that I’ve ever had such a shock in all my years in this business.

But where should the Task Force – and its dire predictions - go from there? One thought was to have its work repeated by an economist. Enter Flanagan, commissioned by Mellon to study what the Elephant Task force had studied, to see if its conclusions were correct. What he came up with is milder than the Task Force’s presentation – no predictions of demise. But certainly he supported the ideathat orchestras have structural deficits, and, though he didn’t use the term, that notion was a central part of his report.

Which is why I’m going to seem impatient.

One big reaction to the report was people not even remotely understanding what Flanagan said, and thinking instead that he’d only reported something obvious, that orchestras have deficits, that their income from ticket sales can’t alone support them. “Duh!” said many people, with scathing derision, most famously here, but also echoed here and here (and probably other places). This stupid guy works all this time, we’re told, backed by a major foundation, and all he comes up with is something everybody knows. Orchestras can’t earn all the money it takes to run them. Duh! But that’s a complete misunderstanding of what the report actually says. I’ll grant that report isn’t lively to read, and that Flanagan does repeat, maybe more than he needs to, the statement that orchestras can’t pay their expenses with earned income alone. Maybe he does this because he’s an outsider to the field, and maybe to the entire non-profit world, so the fact of deficits is more notable to him than it is to people – who’d certainly include everyone making fun of him – who live with this information every day. But then William J. Baumol and William G. Bowen also keep repeating this very basic fact in their seminal 1966 study, Performing Arts: The Economic Dilemma –which was an important starting point for Flanagan, as it should be for anyone looking at performing arts financial issues – and nobody made fun of them.

But what did Flanagan really say? Now we’re back to those structural deficits, strongly sensed by people directly involved with them - orchestra people, musicians, board members, and staff members – and strongly stressed in the Elephant Task Force report. Flanagan (though, as I said, without using the term) said that they exist, that for orchestras, the gap between earned income and expenses is constantly increasing.Here’s where he summarizes that, on page 28 of his report:

For most orchestras the trend increase in real performance expenses is two to four times as large as the trend increase in real performance income.…[T]he majority of orchestras have continued to experience a long-term worsening of the performance income gap, even after controlling for the perturbations introduced by changes in general economic conditions that are beyond the control of the symphony community. Even if orchestras adjust successfully to the cyclical “weather,” the long-run economic “climate” of the industry produces ever-increasing performance deficits. [Those are his italics.]

And just to make everything clear: When Flanagan talks about “performance deficits” he doesn’t mean bottom-line deficits, the kind that leave orchestras in the red at the end of a fiscal year, and therefore in debt, because they spent more money than they take in. He knows perfectly well that orchestras raise money far beyond what they earn in ticket sales, and that overall their budgets are in balance. A “performance deficit” simply means the difference between the amount of income earned through ticket sales and the amount of income needed. This constantly is growing, and while it doesn’t leave orchestras floundering in helpless debt, it certainly puts pressure on them.

Or, to put this differently: As time goes on, a smaller portion of orchestras’ budget comes from ticket sales, and therefore a larger portion of their budget has to be raised from private and institutional donors. So, as the decades pass, orchestras have to work harder and harder to raise the money they need.

Did the people who laughed at Flanagan know that he was saying this? Do they themselves know that, over time, the gap between earned income and expenses has constantly grown larger? And about what Flanagan concluded:

First, Baumol and Bowen came to exactly the same conclusion in 1966, after a similarly serious academic study. Second, the conclusion is supported by data. As Flanagan points out (and as I wrote long ago right here in my blog), orchestras used to get much more of their income from ticket sales than they do now. In fact, there’s been a constant decline in this for 70 years (and maybe even longer, if we only had earlier data to show us what was happening). In the 1930s, orchestras earned, on the average, 85% of their budgets from ticket sales. In 1962 the figure was 58% and in 1972 it had fallen to 47%. It’s a lot lower now. So it’s hard to dispute Flanagan’s conclusion. What he did was put the data on firmer ground, adjusting it to eliminate bumps and dips created by the economic ups and downs, so we can see the data in its purest form.

Third, there’s an economic principle that predicts that this will happen, called, variously, “Baumol’s dilemma” or “Baumol’s disease” or “Baumol’s curse.” Baumol, who’s been called the most distinguished economist who’s never won the Nobel Prize, came up with this principle in his 1960s study. Basically it says that enterprises not engaged in manufacturing – and especially service industries – don’t show gains in productivity equal to the productivity gains in the rest of the economy. Thus they’re always lagging behind financially, always looking for more and more cash to pay the rising expenses that everybody has, but which they have trouble meeting, because their productivity doesn’t rise.

Or, more specifically: If I run a car company, over the long run I spend less and less money to make more and more cars. This is because, thanks to productivity increases, I can make more cars with the same number of employees. (Or, unfortunately, even fewer, which is one reason why Michigan is a wasteland of unemployment.) Thanks to this , I can pay my employees more, and I have money to set aside for research and innovation.

But if I’m an orchestra, I’m playing masterworks with the same number of musicians I used in 1937. And my staff is bigger – I’m now paying many people to raise money for the orchestra, while in 1937 I had no fundraising staff at all. (And no marketing staff, either – both funding and ticket sales more or less took care of themselves, or at least were vastly easier than they are today.) So, roughly speaking, putting on concerts costs me the same amount it did in 1937. Purely in fiscal terms, I haven’t gotten more productive. But meanwhile salaries have risen, across the board, throughout the economy, and I have to pay those salaries. So I’m in an economic bind. I’m always squeezed – I always have to find more money than I needed a decade ago.

Or, more simply, my ticket sales just don’t pay as large a part of my expenses as they used to – which is exactly what in fact has happened.

So there’s no doubt that Flanagan is right. And if anything, he understates how serious the situation is. Yes, orchestras have found ways to raise the money that they need. But there’s always the potential for a serious crisis, and one in fact arose late in the 1960s, when the largest orchestras expanded their seasons and raised musicians’ salaries – and when the costs of that collided with the long-term trend of getting less and less income from ticket sales.

And so the largest orchestras, back in 1969, really thought that they were going out of business. I have to laugh a little here (however grimly), because classical music optimists keep saying, “Oh, all this talk of gloom and doom is ridiculous. People are always saying classical music will die!” And, then, often enough, they’ll cite newspaper stories from the late ’60s and early ’70s, predicting orchestras’ demise. Ha! they say. It never happened! See how silly these predictions are?

But what really happened? The crisis was very real. And so the Big Five hired McKinsey, the big consulting firm, to study what was going on. McKinsey did a preliminary study, and then a bigger one in 1972, working now for a consortium of 28 large orchestras. (See my blog posts about this, here and here.)

The conclusions? Orchestras were in really big trouble, and the only solution was for the federal government to fund 25% of every orchestra’s budget. We know that didn’t happen. So how did orchestras survive?

It’s simple – they developed the funding structure we take for granted now, in which they work feverishly to get donations from individuals, corporations, and foundations. And they staff large development departments to do that work. This all evolved during the 1970s, in response to the late ’60s financial crisis that orchestras quite genuinely had.

Which shows that the funding pressure, growing over time, can get quite serious. It can lead orchestras to completely reinvent the way they fund themselves. So what happens if they have another crisis like the one in 1969? What happens if the percentage of income from ticket sales keeps falling – which we have no reason to believe won’t happen – and other funding, under stronger pressure now, falls short? (Which could happen, for many reasons, one of which is the decline in concert attendance that Flanagan cites, and which I’ve noted in my blog before, here, for instance. One important source of donors, for orchestras, is the people who go to concerts. So if the number of people going to concerts falls, the number of donors ought to fall, too, at least in the future. Flanagan doesn’t note this danger, and also doesn’t mention the late-’60s crisis.)

There’s more to say about Flanagan, of course. The study has its flaws, and some details of it have been strongly challenged, privately, to me, by a consultant who’s worked with major orchestras. He thinks, for instance, that Flanagan is wrong in one of his other notable conclusions, which is that money spent on marketing and fund-raising may not do much good. (He also thinks orchestras will have a major financial crisis in the next few years.)

And I can understand, at least a little, the anger of the musicians in ICSOM. Flanagan does say that musicians’ salaries, during the period he studied, rose faster than the consumer price index. I find his other comments on salaries very mild - he’s hardly saying that salaries should be cut back. But musicians are sensitive.

And – as Flanagan, for whatever reason, doesn’t note – some orchestras have negotiated pay cuts in recent years, sometimes temporary ones, sometimes longer lasting. So no wonder musicians fly up in anger when the subject seems to come up, as maybe it seemed to in Flanagan’s report. (The consultant I mentioned says, by the way, that musicians’ pay hasn’t risen any faster than the pay of other highly trained professions, a comparison that Flanagan might have made, but didn’t.)

But what I can’t understand – or at least don’t have much sympathy for – is the hysteria (there’s no other word) in the musicians’ response. When they start talking about “our great art form,” as they do toward the end of their statement, it’s clear that their emotions have surged way beyond overdrive. It’s as if they’re afraid of bad news. “Bankruptcy used as a fund raising tool,” they scream. “Ridiculous.” But Flanagan never talks about bankruptcy. Nor does he think that orchestras are going bankrupt. And if the financial news is bad, should orchestras hide it?

Are they even able to hide it? This actually is a subject discussed behind the scenes in the orchestra world, and with my own ears I’ve heard at least one powerful orchestra manager say the public should never be told how bad things are, because that would scare off donors. The answer of course would be that donors would be more than scared if they find out they’ve been lied to. They’ll be furious.

But there’s an additional problem with hiding bad news – you might go into denial, and hide the bad news (or at least the extent of its badness) even from yourself. At least if you admit your problems it publicly, you’re forced to do something about them. (Or at least to say you are.)The ICSOM musicians, I fear, sound like they’re in the denial zone, since one reading of their statement might be something like this: Bad news is bad for us! So there isn’t any!

And one final point. Some critics of the report seem to have anointed themselves as economists, and go around disputing any economic analysis that they decide they don’t like. I found this happening when I e-mailed privately with one published critic of the report, someone I’m friendly with, and I’ll admit I called him on it. There’s also a notable music blogger whom I won’t name, someone I otherwise greatly respect, who – though he probably wouldn’t tell physicists what’s wrong with the theory of relativity – runs out to tell the world why Baumol was wrong, why Baumol’s dilemma shouldn’t be taken seriously. Which isn’t to say that economists, even distinguished ones, can’t be wrong. (And Baumol, often cited as a top candidate for the Nobel Prize, is certainly distinguished. I won’t offer any single link here. Just Google “Baumol Nobel Prize” and see what you get.) And of course economists can disagree with each other. But I had a cognitive psychologist pester me, via e-mail, with total nonsense about Pierre Boulez. And at one of the Mellon meetings, an arrogant consultant told some of us that professional conductors aren’t needed, that orchestral musicians should just take turns conducting their orchestras. When we tried to tell him why he was wrong, he smugly told us that we were standing in the way of innovation.

So how would an impartial panel of economists react to this blogger’s post? Choose one:

This man is right. And he’s taught us something! None of us ever thought of anything he said.

Or:

Yes, he has a point. We’ve disputed these things among ourselves, and some of us say pretty much what he does.

Or:

Sorry. Some of us might disagree with Baumol, but this man doesn’t understand the principles involved. What he says doesn’t make sense to any of us, even those who come to the same conclusion he does.

Though from what I’ve gathered – and I, as a non-economist,

could of course be wrong – there’s no serious disagreement with Baumol’s theory. Well, at least I covered myself by saying that I could be wrong. I am wrong. Some economists do argue with Baumol, and you can find these arguments in a standard text, The Economics of Art and Culture, by James Heilbrun and Charles M. Gray. I’ve ordered that book, and will find out what sense I can make of the debate. But I’d urge you take this as en example not only of me making a mistake, but of how tricky it can be for non-experts to venture into expert territory.

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Comments

  1. Robert E. Harris says

    Outside the manufacturing-construction sector there have been very small productivity increases over the past 50 years. This is true for education, the justice system, medicine, the arts, the military, and so on. Introduction of computers has increased productivity in a few areas, but very little overall. Almost everything that depends mainly on people to get it done costs a larger fraction of the GNP (per unit output) than it did 50 years ago.

    Private colleges have attacked the problem most successfully by raising larger endowments. I think symphony orchestras must do the same to survive.

    REH

  2. Ken Nielsen says

    Well analyzed Greg.

    Those who argue that the business will survive as it always has should at least ask themselves if they are comfortable with an ever increasing amount – and percentage of budget – going on fund raising and marketing.Most organisations will soon, if they have not already, reached the flat part of the S curve in response to greater spending.

    I don’t know the answer but all my business experience tells me that solutions come from many people worrying about a problem and trying possible solutions. A solution is unlikely to come from a commission representing the industry.

    So, lots of experimentation and lots of exchange of experience, please.

  3. says

    Wow. This certainly explains a lot of my organization’s interaction with the local symphony management as well as the musicians. The ‘great art form’ attitude creates a barrier with the wider community. That’s why we’re getting free teaching space at a local rock club and the Jazz Hall of Fame–and a cold shoulder from the classical crowd. Even though we have taken almost two dozen people to their first symphony concerts ever.

  4. says

    You have my sympathy. The reactions you describe remind me of the horror that greeted William Schuman (who was then President of Juilliard), when he told the Rockefellers they had no business complaining that the arts would run a deficit at Lincoln Center: they should have thought of it before they built the behemoth.

    Structural deficits don’t come from the Structural Deficit Fairy. Sometimes, even an economist can figure that out.

    Cordially,

  5. says

    Greg,

    Thanks for this thoughtful commentary on a complex and strangely feared report. It’s a challenge to bring evidence-based analysis and emotion-based reasoning into the same debate (just ask any presidential candidate). But it’s so essential to bring data, rigor, and clarity to the public conversation — ESPECIALLY when we’re passionate about sustaining and advancing an art form or discipline.

    In fact, what’s lost in the larger kerfuffle over the Flanagan report seems to be that the ENTIRE POINT of academic analysis such as this is to be disputed. By bringing clarity and data to a complex issue, and forming a conclusion, we all have something more solid to respond to, dispute, and adapt.

    The cultural leaders I admire most EMBRACE insights and research that contradict their current understanding. They argue about it publicly, with respect and clarity. And they are humble in considering that their own conclusions are likely flawed as well.

    If we love our art forms, we should engage any opportunity to inform our thinking and challenge our assumptions. If we deny such opportunities, then we’re probably more motivated by our job than our love for the art.

  6. Nathan Kahn says

    So let us for the moment assume the relevance of the application of Baumol’s theory to symphony orchestras (which I do not). Let’s make orchestras more “productive.” To begin with, have less rehearsals, an issue over which musicians have very little control. That might mean that conductors would need to be more prepared for each rehearsal, and not waste rehearsal time. To increase ticket sales there would need to be more concerts, perhaps growing numbers of concerts that are more “popular” in nature, which would likely be to the detriment of education and outreach programs, new music commissions, less “popular” classical concerts, etc. and thereby calling into question “what is the mission of this orchestra in this community?”

    By extension, I suppose distinguished art museums across the country could sell off their expensive Impressionistic collections etc in favor of more “popular” exhibitions,and thereby become more “productive,” etc.

    Commercial television has set a stunning “productive” example and followed the almightly dollar and dispensed with good taste and education with cheap sensationalist crap. Is that what Mr. Flanagan would envision for symphony orchestras, and thereby other arts institutions in order to become more “productive”?

    To quote the Pittsburgh newspaper DUH!!-Arts and business practices do not always equate! Notwithstanding, there are orchestras in our industry that I have had the pleasure of working with who have achieved good balances between mission, outreach, ticket sales, development, and have extensive community involvement and relevance.

    Yes, clearly Flanagan is academic, but certainly not in the arts. How can any arts funding study dismiss the fact that throughout history, maintenance of art has, and will continue to require patronage? Why isn’t the Mellon Foundation studying and making examples of those orchestras that have achieved the aforementioned positive balances, instead of this useless study which will be used repeatedly by non-committed orchestra board of directors to further abrogate their responsibilities?

    In my opinion, if there is anything “cyclical” in this symphonic industry, it is the cycle of grossly distorted useless negative reports every 15 years or so. In 1970, UPI predicted the imminent demise of 10 top US orchestras. Guess what-they are all still here. In 1992 The Wolf Report said “thou shalt scale back and play only pops concerts.” Fortunately, that was ignored. Now, the Flanagan report. And yesterday, I learned that the despite everything that has happened, the Louisana Philharmonic in New Orleans is doing just fine.

    And by the way, what did Mr. Flanagan say about rising Executive Director and Music Director salaries relative to “productivity?”

    Nathan Kahn, Negotiator

    AFM Symphonic Services Division

    Nathan, I’m sorry, but what you’re saying here is silly. I’m especially sorry, since we had such a good conversation when I did that video interview with you for the Polyphonic.org website.

    Flanagan — have you actually read the report? — doesn’t say one word about orchestras improving their productivity, in any of the ridiculous ways you suggest. He simply states that there’s a financial squeeze. Your reaction, in my view, is a perfect example of the hysteria I mentioned. You’re so angry you can’t even see — or maybe don’t even care — what Flanagan actually says.

    Show me where in his report Flanagan says that orchestras should compromise their artistic quality.

    As for that UPI piece, did you read my post? I’ll grant that the Flanagan report is long, and difficult to read. But my post is, by comparison, concise and (I hope) clear. I dealt with that nonsense about the 1970 UPI story. There really was a crisis then. Orchestras really were up against the wall financially. And they evolved an entirely new funding structure to deal with the crisis. I wrote that, in reasonably plain English, and you apparently didn’t notice it. Are you too wild with emotion to even read what you’re commenting on?

    As for the Wolf Report early in the ’90s, this raises a slightly different issue. Orchestras — and the orchestra world generally — tend to react to economic conditions. In the ’90s, when things weren’t great, they thought they were in bad shape. Then, late in the ’90s, during the boom, they talked as if they didn’t have a problem in the world. Then, early in this decade, they felt they were in trouble again, and that’s when the private talk about structural deficits arose.

    One virtue of Flanagan’s work is that he gets beyond what I’ve just described. He adjusts for economic conditions, and finds a long-term financial problem that’s independent of booms and recessions. You can dispute that, if you want, but random citing of a few times that orchestras — in your view — have cried wolf (sorry for the unintended pun, though I love it!) doesn’t even remotely constitute serious analysis.

  7. Paul A. Alter says

    But we need to address one question: What good is Flannagan’s study? How can we use it? What strategies can orchestra managements derive from studying it?

    Full Disclosure: I have not read the study. But from what I have heard, there is only one major point that has not been made before, according to the studies you cite from the 1960s and ’70s. That point is that money-raising campaigns are not economically productive; that is, they tend to cost more to conduct than is justified by the funds raised. But, that finding aside — and it may well be the most important point in the whole study, and it will certainly be the one most ignored by orchestra managements — how do we justify the expenditure of resources on this study when they are urgently needed for other purposes? It smells to me like another rediscovery of the wheel.

    I, for one, have been convinced for years in regard to the money-raising efforts. They are not as productive as they could be. It is self-evident; for example, even the Boston SO, with one of the largest endowments in the USA, became hard-pressed for working funds. All we had to do was look at the efforts of the orchestras compared to the funds raised to realize what Flannagan reports, without any need for an expensive report. Here is the point that orchestra managements need to focus one: what they have been doing is not as productive as it should be and may well lead to the demise of our orchestra; therefore, what new approaches are possible?

    But, considering the fierce hegemony that orchestras and their consultants display, that is not likely.

    Until you, and Drew, and Druckenbrod (who writes good reviews), and Midge, and Cushing, and other persons of influence, can bring orchestras to exercise some form of outreach, we’ll just keep on getting repititions of the Flannagan report.

    Here’s one more question: Why shouldn’t the Federal Government allocate funds to support a major industry, with thousands of employees and millions dollar payrolls? They do it for sugar producers, peanut farmers, milk producers, badly managed financial entities, farmers — both individual and corporate, airlines (but not railroads), barge lines, hunters, fishermen, oil companies, religious bodies, and on and on. Why not orchestras?

    Paul

  8. Ken Nielsen says

    “Outside the manufacturing-construction sector there have been very small productivity increases over the past 50 years.”

    Not really true – many service industries: air transport, hotels, banking and of course communication have improved productivity quite a lot.

    To me, a major cause of discomfort with arts organisations is the reduction in productivity due to the increasing percentage of funds going to administration. I understand that marketing and fund raising are very important but the ratio of music makers to admin is going down.

    Many orchestras have close to half as many administrators as players.

    That feels wrong to me.

    I spent my career in the consumer products business and learnt many times over to put as much as possible of the resources into the product: ingredients, quality, improvements and such. If you get this out of whack the market punishes you.

    I fear that arts organisations are putting less of their (scarce) resources into the product.

  9. Andrew Bales says

    I, too, wish to weigh in and congratulate you for your comments. Too often the messenger is assailed for their style or their fumbling of intuitive information and those trips are used to deflect serious review of the topic.

    I am a late emigre to symphony management from a career in performing arts management in other disciplines. I came to it having watched this partner field with some concern for the better part of a generation and thought I would like to try some other ways to imagine how to do this. In our community we did indeed have a symphony close, one with a very long heritage. I formed a new one and continue to strive to address, in a case study environment, the challenges that are outlined in this and in so many previous reports. In our very local condition we have found some success, but that can be measured differently by different witnesses.

    One item you noted, I read with some amusement, as that which is new is just old again. In our case we produce symphony concerts, employ artists, and strive to provide a public benefit through musician employment. We do so with no one on staff with a title that mentions marketing or development and with an overhead cost that our auditors tell us is 4% and fundraising costs of about 5% more. (We don’t actually count any of it that way.) In reading your comments it seems we must be at the precipice of the late 1960′s crisis. I hope to avoid catching up with the lastest crisis any time soon.

    Our individual case aside, I do think that part of the productivity conversation requires a fuller examination of the definition of our business in the first place. When I read that comment about Pops are our future, I recoil, knowing that we don’t segment the music we play into definitions that separates Pops from Classical. Being all things to all people tends to make one unable to do any of these programs well. If quality is our standard bearer and being a hallmark of excellence is our call on the resources of our communities, then we have have to be better stewards of that excellence mission. Last time I checked filling the day with more isn’t conducive to that outcome.

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