28 February 2016

New Diorama Theatre 2015

The New Diorama Theatre was built as a Section 106 planning requirement, a mechanism that makes a development proposal acceptable, in planning terms, that would otherwise be deemed unacceptable. Following consultation with residents regarding the redevelopment of Regent's Place, British Land added to the community's infrastructure by building the 80 seat New Diorama Theatre in 2010. The NDT's 2014 accounts were notable because of the lack of reliance on ACE (only 12% of the NDT's ~£270k income came from ACE in 2014). The 2015 accounts show another very solid year for the New Diorama, who continue to demonstrate that "sometimes it pays not to be funded".

Interestingly, 'lack of core ACE funding' has been removed from the 'major risks' section of the annual accounts. In the financial statement below, it's worth focusing on the Project Specific Funding line (where the NDT's ACE funding shows up) and keeping in mind that the New Diorama received only £25,863 from ACE in 2015. Of that income, £11,994 was specifically for captioned performances via StageText and £12,549 was a GFTA award that is being administered by the NDT to ensure it is spent and allocated correctly. The final £1,320 was the remainder of an organisational development grant received in 2014.

The most significant change in the NDT's 2015 Incoming Resources is the £29,121 growth in Voluntary Income. Several key relationships remained in place for 2015, with British Land increasing their support from £25,000 to £27,145 and Santander/Carat maintaining their combined season sponsorship of £20,000. However, Fundraising/Donations/Individual giving actually dropped from a combined total of £30,747 in 2014 to £24,472 in 2015. The substantial overall increase in Voluntary Income results from the NDT successfully securing a larger number of one-off grants from a variety of sources, none of which are over £15,000. A total of £64,166 was raised through these funding relationships in 2015, compared to £30,915 in 2014.

The fundraising success of 2015 should certainly be celebrated but could prove to be a double-edged sword in 2016. Funders often make only one annual grant to applicants so the relationships themselves need to be carefully managed. In practice this generally emerges as a 'one year on, one year off' rotation. The surplus shown in this year's account may also make it harder for the New Diorama to fundraise. The NDT are building on 2015's fundraising success by offering a fundraising masterclass. The demand for this masterclass of course resulting from the increasingly competitive funding environment in which organisations find themselves, which will in turn be heightened by the masterclass itself.

Such a competitive environment could potentially prove particularly problematic for the New Diorama and the nearby Camden People's Theatre. Due to their similar size and geographical proximity, funders could conceivably limit awards as they look to balance their investment (assuming both organisations will be approaching the same funders in the years to come). A textbook game theory problem (if only one organisation applies, their success percentage is higher than if both organisations apply; as a result, both parties will likely apply at every opportunity and reduce the overall funds received by both organisations), the optimal solution for both parties would come through rigorous collaboration.

Theatrical Income very much remains driven by venue hire (£62,214 in 2015, down from £77,060 in 2014), with the cafe/bar making an important contribution as well (up to £36,877 in 2015 from £30,000 in 2014). There was a £7,944 increase in fees/box office, up to a combined total of £32,343 in 2015 from £24,399 in 2014. It's important to note that the box office receipts only represent funds received for NDT's in-house productions, not for any of their 0/100% box office splits with artists. In those instances, the money doesn't actually flow through NDT and consequently isn't shown in the accounts (it would be fascinating to see annual receipts for all the work that flows through NDT and one must suspect it would put some larger venues figures to shame).

This highlights the central principle behind how NDT operate and why they're worthy of analysis. the organisation is incredibly lightweight; only 3 full-time staff members with total salary costs of £84,303, office overheads of  £68,778, some admin costs and some governance costs that total ~£20k.  This sets a relatively low platform from which to start presenting work. By working hard to fundraise to this level, NDT can then leverage their operations and their space to really benefit theatre makers. This has been formalised in the new Artist Development Programme.

2015's surplus of £44,510 seems an excellent result for the New Diorama but it should be noted that a large amount of deferred income was released in this accounting period (£63,400) and only £31,003 was carried forward (deferred income relates to box office and performance fees received in advance). Coupled with the administration of a £12,549 GFTA award, the surplus starts to look a little less spectacular but examination of the balance sheet shows that the New Diorama will be operating from a much stronger financial base in 2016:

The significant reduction in creditors is due to the previously mentioned reduction in deferred income and also 'Other creditors' falling from a liability of £30,851 in 2014 to £1,033 in 2015. This puts the New Diorama in an excellent position in terms of total assets less current liabilities. The depreciation of the fixed assets is also worth considering, particularly since the NDT do not appear to have made substantial additions to their equipment over the last few years. Given their new Artist Development Programme, we could expect to see capital additions over the next few years as the space will have to meet the expectations of the artists.

Additional consideration must be given to the New Diorama's Artist Development Programme and the possible implications. Given how the NDT is set up (lightweight, allowing work to flow through it), the programme shouldn't be particularly expensive to offer. However, given the attention garnered (25,000+ downloads and 'possibly the most exciting artist development scheme Britain has ever seen') it seems likely that the NDT will attract a huge number of applications. In turn, these will give way to relationships that need to be managed. Coupled with the addition of new space and the previously mentioned possible capital additions, the really tough question is going to be working out how much of a time sink the development programme will be to administer for such a lightweight organisation.

The 'Cash Flow Fund' strand of the NDT's Artist Development Programme has been lauded as a 'Bank for theatre companies' which might make for a catchy headline but is incorrect. The core idea of a bank is that it is licensed to hold customer's deposits; those deposits are then leveraged in various ways (the old 'savings + loan' model where customers took risk by depositing with the bank and in return the bank would pay out interest on those deposits). Since the NDT hold nothing on deposit, they cannot be called a bank and doing so does them a disservice given the reputation of the banking industry. This is not a banking model because it is an entirely one sided risk proposition (can you see a small arts organisation calling in the bailiffs to recoup funds?). NDT's 'Cash Flow Fund' is something very different, something much more humane. It's a formalisation of what venues have been doing informally for years: providing liquidity to emerging artists to reap artistic rewards rather than financial ones. Maybe this is 'social lending' and perhaps NDT's formalisation will eventually pave the way for something as radical as a large scale peer-to-peer social lending platform where 'investors' look for cultural or social returns rather than cash.

The New Diorama Theatre are implementing some fascinating strategies under the leadership of Artistic Director David Byrne. Some of them, such as the Cash Flow Fund, seemingly provide little benefit (or indeed, obvious cost) to the NDT in the short term but much very substantial benefits to artists. However, in the long term the New Diorama stands to make massive gains: is there an emerging artist in the country that wouldn't want to work with a theatre whose development programme has a clear trajectory, is financially transparent, provides a vibrant environment where artists outnumber administrators, attracts their peers and actively takes risks on their behalf?

With a solid financial base, a board that are clearly open to innovation and the Artist Development Programme likely attracting an array of exciting artists (and presumably, as a result, additional funding), the real challenges for the New Diorama will likely come from implementing the artistic development programme and ensuring that the organisation is not put under additional strain from an intensive approach to fundraising. One solution could be to look for additional commitment from a major funding partner: British Land finding a way to lower overhead costs or increasing their annual grant of ~£25k would certainly seem to make sense for both parties (property prices around successful theatres are notably higher so there's plenty of incentive for British Land). This would also be in line with similar arrangements between Wandsworth Council and BAC or the National Theatre and ACE.

An alternative, of course, might be to consider a NPO application.

21 February 2016

Aside: What's going on over at ENO?

It seems somewhat appropriate that the timeline on the 'About' page of the English National Opera website stops at 2012.

In January 2013 it was reported in the FT and other publications that ENO's 2011/12 accounts showed a £2.2m deficit. The article drew attention to previous cuts that were made in 2007 and ENO's statement “After two previous bailouts totalling almost £20m we are very clear that we will not be bailed out again.” The shocking 2012 results were attributed to a global slowdown in audiences and the difficulty of filling a 2,400 seat theatre. Below are ENO's audience numbers for the last 10 years (some figures vary depending on the set of accounts used):

The average capacity over the past 10 years is 74%. The average implied ticket price is £39.25. The average box office receipts are £9,158,900 and the average annual audience 234,545.

What's clear from this data is that ENO's box office receipts have been volatile. The average absolute YoY change in box office receipts is about £930,000 (or ~10% of their average receipts). This volatility makes demand forecasting difficult, which in turn makes supply planning harder (but not impossible). ENO's capacity numbers are not terrible but there is no doubt room for improvement. There is a strong argument that the average ticket price is too high (audiences pay more for quality but not if they feel they are taking a risk: volatile box office receipts being a signal that perceived quality needs to go up and/or price needs to go down). Getting that average price down may help stimulate demand, increase the capacity capacity percentage, get more people in the building and reduce the volatility of the box office revenues.

ENO staged only 115 performances in 2012, had a higher average ticket price than the preceding few years and consequently suffered a very low annual attendance. They did receive less funding from Arts Council England so perhaps it's understandable that low audiences and the cuts were blamed. The major problem actually seems to be that those 115 performances had an average cost of £303,000 each, substantially more expensive than the 134 performances staged in 2011 at an average cost of £247,910 each. This represents a 22% jump in production costs. ENO's spend on productions over the last decade is shown below.

It may be stating the obvious, but reducing the number of performances makes it much harder to amortise those increasing production costs.This can be seen most clearly by comparing 2012 to 2015 in the table above. The spend on productions is equivalent at £34.8m but 32 additional performances in 2015 make the cost per performance much healthier. 2015's attendance was higher than 2012's, the capacity % was lower, average ticket price lower but ultimately box office receipts were up.

ACE Chief Executive Darren Henley's recent article implies that ACE has lost patience with ENO and it's easy to see why. ACE has been pouring money in but liabilities have increased, unrestricted reserves remain low and ENO reaches relatively few people. ENO receive a similar core annual grant to the National Theatre but the two are worlds apart in terms of reach and financial performance (despite productions involving Hytner and Norris at ENO).

ENO need a very rapid turnaround if they are to make it through the next few years. They clearly cannot survive without the full support of ACE but are in a situation where the Chief Executive is publicly declaring that they must "adapt or die." The outward signs are not promising, with cost cutting and a reduced programme appearing to be the leadership's dominant strategy. There are several things ENO needs to do urgently:

1) Stop the flow of negative press.
2) Get the chorus onside: don't trim the chorus, find more opportunities for them to perform.
3) CEO Cressida Pollock needs to step forward as a prominent, positive spokesperson with a plan. Generating hope and excitement are key.
4) Appoint (and retain) an exciting Artistic Director.
5) Focus marketing on showing ENO's value to London, the UK and the rest of the world in an attempt to reverse the feeling that they are an elitist drain on the public purse.
6) Fund-raise fiercely off the back of these things.

Anyone would think it's the first time an opera house has had such problems.

20 February 2016

Aside: ACE investment: 2018 and beyond

"In the long-run, we are all dead." - John Maynard Keynes

Keynesian economics asserts that boom and bust cycles are to be expected, markets are not completely efficient (being subject to short term irrational fluctuations) and that public financial institutions can and should intervene to rebalance the economy. The quantitative easing implemented by the Bank of England, the Federal Reserve and the ECB from 2008 onwards is rooted in the work of John Maynard Keynes. Broadly speaking, Keynes argued that when business cycles were in a lull (bust) then governments should spend to stimulate the wider economy, getting into debt if necessary.

There is, of course, another side of the coin: Milton Friedman believed and taught that governments must play a lesser role; never interfering, removing regulation, allowing the market to dictate terms and staying out of the affairs of business.

One of these economists was founding chair of the Arts Council (and on the dark side of that coin, director of the British Eugenics Society).

Keynes' involvement in what became ACE (yes - the Royal Opera House got most of the initial public funding and of course London got the rest) is worth keeping in mind when considering ACE's future plans (read more about Keynes and ACE).

ACE's proposals for 2018 onwards are available here. I don't know enough about funding museums or libraries so what follows is theatre-centric.

Whether we consider it  'subsidy' or 'investment', ACE's various streams are stimuli for the arts. Classical economics dictates that stimulating supply will fuel demand (if you build it, they will come) and prices will thus stabilise. Keynes believed this may be true in the long run but that in the short run prices could be very sticky (the duration of long and short run is debatable: the short run could in fact be several years). For example, an unemployed actor is never going to ask for a pay increase - they will instead take work where they find it. This means that with an abundance of unemployment amongst actors, production costs remain depressed, contrary to Baumol's oft-stated economic dilemma (which was of course that performing arts need to be subsidised because wages go up but productivity gains cannot be made (unless of course you go holographic!)).

 In times of depression, governments can adopt a Keynesian approach by either increasing spending (borrowing to do so) and keeping taxes neutral (the approach favoured by the left) or reducing spending and decrease taxes (the approach favoured by the right). Lowering taxes and increasing spending has been done by both sides, mostly when starting a war.

Momentarily consider ACE as a pseudo-government and 'cultural footprint' the equivalent of 'real GDP' (I acknowledge that ACE cannot borrow more than it has so this is flawed but please stay with me).

Is this theoretical arts economy operating at full potential? I think not.

Is there excess capacity to create more art? I think so.

I struggle to see how continued focus on supply side subsidy will get the ecology where ACE wants it to be. There must surely be stimulus on the demand side as well, not just the supply side?

One way of doing so would be to put absolute faith in the power of the market, cut all subsidy and instead provide each citizen with an annual £11 voucher for the arts. This was a serious proposal from the Adam Smith Institute and absolutely not something I'm in favour of.

Perhaps there's something instead in the 'Cycle to Work' scheme. Introduced to reduce pollution and increase health, the government's scheme allows employees to loan bicycles from their employer as a tax-free benefit. The bike industry as a whole has certainly benefited from this government incentive to get more people riding bikes more often, why couldn't this be the case for the arts? There are some interesting art incentives that sit squarely on the demand side such as Art Pass or Own Art.

There is of course some risk to stimulating demand because it's incredibly hard to remove that stimulus once injected. If you overdo it, prices will soar. We'll then be in a situation where every article in every publications is rightfully about Baumol's visionary dilemma but for the time being though, I think there's more to learn from Keynes.

2 February 2016

Aside: Lessons for small orgs from the NT

If the National Theatre really is an entirely different beast, what can smaller organisations learn from the NT's success?

What's happened at the NT during Hytner's tenure was neither rocket science nor dark art. It was a mix of vision (see the quotes from Hytner's 2004 report in my previous post), good leadership (showing an appetite for 'good' risk and then selling the rest of the organisation on it) and luck (Nick Starr has previously made it clear that 'hit' shows were not premeditated and that it was instead a case of finding ways to extend the life of work that had potential).

There are plenty of lessons for smaller organisations in the above paragraph alone (the value of a clear vision, excellent leadership and the importance of making great art) and all of them warrant extensive discussion. However, a large body of work already exists for all of these so rather than contribute to the noise...

The most important lesson small organisations can take from the success of the NT is that there are benefits to actively seeking out opportunities to take on 'good' risk. Boards are traditionally considered risk averse, so developing an organisational understanding of, and appetite for risk can be a challenge.

Risk should not be considered a binary. Often in theatre, risk propositions are reduced to Yes/No answers: "Will this show sell enough tickets to break-even?" The question that should be asked is a lot more detailed so the reduction is understandable: "What are the possible outcomes, the probabilities of those outcomes and the expected value?"

Taking the NT's decision to produce the transfer of The History Boys in 2005 as an example, Starr has stated that in the worst possible case the NT would lose £200,000. Let's arbitrarily assume the probability of that happening was 25% (or a failure rate of 1 in 4 if you prefer). Let's also assume that break-even occurs 50% of the time and a £200,000 gain occurs 25% of the time. What you have is a completely neutral risk proposition: the EV (expected value) is zero.

Expected value is simply the outcomes multiplied by their probabilities and added together. So for the example above:

Worst case: -£200,000 x 0.25 = £-50,000
Break-even: £0 x 0.5 = £0
Profit: £200,000 x 0.25 = £50,000

You can see that those three amounts add up to zero.

This is actually the traditional risk proposition small organisations are exposed to on a regular basis: losses are known and limited but so are the gains.

War Horse was making around £3m annually in the West End alone so if instead we use that figure as a best possible case and assign a probability of 0.0001  (a 1 in 10,000 chance if you prefer) and make the break-even percentage 0.4999 (always sum to 1) then we actually end up with a total expected value of £300. As soon as the total expected value turns positive, you have 'good' risk.

There are only really four types of risk proposition:

1) large potential losses, large potential gains (volatile and hence undesirable)
2) large potential losses, small potential gains (the worst sort of risk)
3) small potential losses, small potential gains (not so volatile but no chance of growth)
4) small potential losses, large potential gains ('good' risk)

There are plenty of opportunities for small organisations to seek out better risk propositions and numerous examples immediately come to mind from this blog: Paines Plough and the creation of The Roundabout, The Gate evolving their production model with Grounded and of course the National producing their own transfers.


Since this was a 'quick' response to a question on Twitter, this post may be revised or added to