24 October 2016

Theatre Royal Winchester 2015

A generous estimate of the correlation between an excellent CEO and excellent organisational performance is a coefficient of about 0.3 (a figure taken from Daniel Kahneman's work on the subject), meaning a good CEO enjoys good performance just 60% of the time.

Business writing normally consists of rise and fall narratives or comparison of individuals/companies to try and uncover a recipe for success; the importance of leadership is exaggerated consistently across both approaches. In part, this is due to the halo effect: aware of the success a business may recently have enjoyed, writers create illusory certainty by assigning success to the CEO. Alternatively, aware that a business is struggling, the writer condemns the CEO. The assumed causal relationship is that the CEO drives the business' success but the inverse is more often true: the business' performance causes a CEO to become revered or vilified.

Luck plays a vital role in the performance of any organisation. Observing success does not necessarily mean we are bearing witness to incredible leadership; the qualities of leaders cannot be accurately inferred from results. Even with perfect knowledge of a leader's ability, the performance of an organisation cannot be predicted with much more accuracy than a coin toss.

Rise and fall narratives offer simple causality and ignore luck.

"These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them." Daniel Kahneman.

* * * * *



Theatre Royal Winchester is one of several Grade II listed patent theatres in the UK but the last remaining example of a cine-variety space. It celebrated its centenary in 2014 and, according to the theatre's own website, is considered one of the most beautiful theatres in the south of England due to its Edwardian-style auditorium (capacity: 400, the smaller end of cine-variety spaces, some seating upwards of 3000). Cine-variety was an awkward moment in UK theatre history, involving film double bills, projection screens that could be lowered/raised, multiple variety acts, organs and sometimes entire orchestras. Admission cost about 50p (if that) to attend and many of those spaces ended up being bought out by cinema chains with the advent of 'talkies' because their overhead was too high: they ran themselves into the ground.

With Chief Executive Mark Courtice recently announcing his decision to step down at the end of 2016, it seems pertinent to examine what sort of impact his 5 year tenure has had on Winchester's Theatre Royal. The theatre itself is owned by Winchester Theatre Trust, who in turn lease the building to the operating company (The Live Theatre Winchester Trust). Where the following analysis mentions the 'Theatre Royal Winchester' (or TRW), it refers solely to the operating company unless explicitly mentioned.

Courtice's appointment as Chief Executive in 2011 was likely due, in part at least, to his experience of similar roles in similar theatres in similar parts of England, notably Chief Executive of Portsmouth's Theatre Royal (along with Administrative Director at Southampton's Nuffield Theatre). The first financial year for which Courtice was present at TRW was 2012 and the table below provides some key figures from his time in Winchester:


Top line analysis initially seems favourable, with income increasing ~40% over the period in question. Unfortunately, expenditure kept pace (increasing 34%) and TRW reported a deficit in three of the four financial years in question. Activity increased dramatically (performances up nearly 80%) but audiences less dramatically (16%), conveniently highlighting that there is no guaranteed causal relationship between increased activity and an expanded audience.

The erosion of cash on hand is an area of immediate concern and the effect of this steady decline on the organisation's liquidity is charted by the diminishing quick ratio. As a reminder, the quick ratio is a simple liquidity measure: a test of how likely an organisation is to be able to meet short-term liabilities using 'quick' assets (IE assets that are cash or close to being cash, trade debtors included). A ratio of 1:1 implies that an organisation has £1 in quick assets for every £1 in liabilities, a reasonable place to be for an arts organisation. TRW's 2015 quick ratio is 0.53, implying only £0.53 for every £1 in liabilities. An organisation can still operate with a poor quick ratio because the timings of cash flows are not taken into account but a ratio that consistently declines over time is a bad sign.

The number of staff employed at Theatre Royal Winchester is also worth flagging. Given the dramatic increase in activity, it is peculiar to see staff levels only increase by 1 over the 4 financial periods, whilst volunteer numbers practically double. The classic conundrum is that the sole trader (the most efficient model for any organisation) is not able to double their output by taking on an additional member of staff because increased complexity erodes output. Put another way, an arts organisation with 19 members of staff that increases their output by 80% would theoretically need to increase their staff numbers by more than that 80% (unless huge productivity gains have been made or economies of scope were previously being ignored). Rather than recruiting full-time members of staff, TRW appear to have taken up some slack by doubling the number of volunteers (valued at £45,624 in the accounts; additional staff would have likely cost 10 times that). It is worth considering that if staff turnover were particularly high, TRW would struggle to recruit quickly enough to increase the numbers of full-time staff appropriately. Whatever's happening, I suspect TRW has not been a pleasant arts organisation to work for over the past few years.

Before accusing Courtice of driving the car into the lake (and then climbing out the sunroof, jumping back to dry land without a splash on him and jauntily walking away to a life of consultancy), it's probably worth looking at some numbers from Theatre Royal Portsmouth during his tenure (performance and audience data was not available):



2005 was an exceptional year for the New Theatre Royal, largely due to ongoing capital works, hence large amounts of restricted funds were received in this period (this was prior to their 'back lot' project which was documented in more detail here). Note that once again we see a steady decline in cash and the subsequent erosion of the quick ratio as the organisation's liquidity dries up. By the time Courtice left the New Theatre Royal, the organisation had only £0.21 of quick assets per £1 liabilities. The quick ratio is not without flaw: it is based on the balance sheet (which is a snapshot in time) and it ignores cash flows. With this in mind, it's certainly worth examining TRW's most recent set of accounts to see exactly what sort of health Courtice will be leaving the organisation in.

Despite having a capacity of 400, an income of £1.7m and an audience of over 50,000, TRW does not operate a separate company for trading activities, meaning they are legally constrained to ancillary trading. The figures show the effect of this, with ~£150k of income derived from bar/catering/FOH, meaning an audience member spends, on average, an additional ~£3 per visit. There can certainly be good arguments for limiting operational complexity and Leicester Curve rejecting capital funding for a brasserie springs to mind. However, that decision was rooted in a stable organisation looking to add value elsewhere. Whilst I'm sure there's no need to link to yet another article about how some theatres are now more bar than theatre, it's also galling to look at a theatre the size of TRW and not see any immediate evidence that the organisation considers itself a destination. For a very loose comparison, Theatre by the Lake (Cumbria Theatre Trust) also has a 400 seat main house (and 100 seat studio), 70 employees, 237 volunteers but a turnover of roughly double TRW's. Theatre by the Lake operates a subsidiary trading company (TBTL Services) with a turnover of ~£650k. Stated audience numbers were 70,000, meaning TBTL has an additional spend per audience member of ~£9, triple that of Theatre Royal Winchester (note, Theatre by the Lake was picked for comparison purely because it has a 400 seat main house, it may be over/under performing itself but that's another post).


The makeup of TRW's 2015 income was 27% Voluntary, 9 % Commercial and 64% Operating. The growth in operating income accounts for the largest year-over-year change and this was largely due to increased ticket sales (audiences creeping up to ~51,000 from ~43,000 and 40 additional performances). Unfortunately, the increased activity was matched by increased operating costs, with production costs growing by nearly £200k. Box office costs also increased as the result of the year's increased activity (up to £15k from 6.5k), as did things like printing/postage/stationary (up to £19k from £7k - that's a lot of printing).

One of the most significant contributors to TRW's financial pain appears to be Hat Fair, the annual street art festival held in Winchester. In 2015, Hat Fair's production costs were £246k and Hat Fair income was stated as £132k for a total deficit of £114k. The previous year, Hat Fair lost £121k, so 2015 was an improvement of sorts. Hat Fair used to be a standalone NPO with a ~£140k annual grant (and standalone financial troubles) but joined with Theatre Royal Winchester in 2013 to alleviate their funding concerns (or preserve their artistic output, depending on how you look at it). The grant from ACE followed Hat Fair and the scale of the event seems to have been preserved for the time being. Hat Fair's annual results as a standalone organisation were actually fairly robust:

2013: -£19,073
2012: £30,344
2011: £39,611
2010: -£2,866
2009: -£34,935

Hat Fair relied upon a series of funds from regular supporters (ACE, local authority, stall holders etc.) and income was consistently around £300,000 prior to 2014's festival (the first in conjunction with TRW). It seems Hat Fair's reported income halved as the result of a move posited as securing the future of the festival. The most likely cause is that the festival's income was not actually reduced but the NPO grant (which of course comes in as unrestricted funds despite being initially awarded to Hat Fair) is now accounted for elsewhere by TRW. A highly cynical reading would be that the merging of Hat Fair and TRW was actually a move by TRW to secure unrestricted NPO funding, show Hat Fair as a loss-making exercise and then phase it out but retain the funding.


Those still paying attention may have noticed that TRW's balance sheet throws up a couple of points of interest. Firstly, it doesn't include any restricted funds.This is unusual in a NPO organisation, particularly one where the ACE grant makes up only about 8% of total income. This either means TRW are not pursuing any grants related to specific projects or are not following the principles of fund accounting. The former is alarming at a period in time where local authority funding is dwindling (TRW receives a combined £275,050 from Winchester and Hampshire County Council) and the wider funding environment continues to contract. However, the latter would contravene the Charity Commissions SORP and 'alarming' would be something of an understatement. TRW was a successful applicant for a weather damage grant in the 2016 accounting period we should expect the £5,000 awarded to show up as restricted funds in the next set of accounts.

Sadly, it appears there is further evidence of poor financial practice. The University of Winchester have a relationship with ZEPA (European Zone Artistic Projects) which supports exchanges between universities, allowing students to participate in artistic events throughout Europe. TRW have collaborated with the University of Winchester as part of ZEPA but it appears that the university identified a 'shortfall of income against expenditure'. At the time of the accounts being published, discussions were ongoing but TRW's maximum liability is listed as £23,000 (not included as part of the balance sheet as far as I can establish). Without knowing more about the project, it's difficult be specific but one must assume that either disputed expenditure was listed by TRW under the ZEPA project or restricted ZEPA income was reallocated by TRW.

TRW's previously discussed liquidity problems are emphasised on the balance sheet by the presence of increasingly negative unrestricted funds. Whilst an organisation can operate with a negative fund balance, it's an extremely precarious position to be in. The only way it works is if the organisation knows that funds will soon be received to carry the balance back to black. The problem is that the funding streams TRW is relying on are not reliable and it likely won't take a great deal to bring down the house of cards. Without a cash flow statement (larger charities will finally have to compile cash flow statements for 2016+ accounts) it's difficult to see exactly how close TRW are to the edge of that lake. The 2016 accounts will give us more of an idea but...

My guess is close.

And not because Mark Courtice has been unlucky.