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.

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Since this was a 'quick' response to a question on Twitter, this post may be revised or added to
2/2/2016