Organizational Scale

In July 2008 I particpated in the Harvard Business School's Social Enterprises Executive Education program Strategic Perspectives for Nonprofit Managers (SPNM). It was one of the best and most transforming weeks of my life.

Here are all of the links and topics for posts from SPNM:
Overview
Inspiration
Capacity
Leadership
Scale
Strategic Service Vision
Mission and Strategic Triangle - Legitamacy & Support / Organization / Mission
Value Chain
Market Research
Measuring Impact


Just finished chatting with members of my living group. I have to say the way this program is set-up is BRILLIANT. It is so interactive and we are really building a community here.

Today started with the head of the program Dutch Leonard working through a case about replication in a nonprofit or "bringing it to scale" and for-profit ventures within a nonprofit. Of course this brings up sustainability, but was great was relating it into scalability.

It brought up a lot of interesting ideas - first and foremost what in the world would bringing it to scale mean for theatre? Can we "franchise?" Would co-productions, touring, or moving a show be a type of franchising in the theatre? Is the Playhouse operating at the right scale? Do we know the right scale for the Playhouse as a year round theatre? Or has it not been a long enough period of time? Or have we been so busy trying different things that we don't have any real idea of what the scale should be? And a somewhat ominous question how much of the scale at which we produce was determined by the building renovation rather than the organic needs of the institution?

The case study led to an interesting concept regarding budgeting for social and profit oriented ventures. Now, I think most people know that for a nonprofit sustainability is not based on the ability to fund the organization through "commercial" activities (but I put it out there since it is important to the next ideas). Sustainability and scalability go hand in hand.

Of course when budgeting you have to budget for all costs (including in-kind). But the organization in the case study separated their costs by social and "business" ventures. In this case they were not very accurate about what went into each column. This is important because the discussion we had today was about should an organization have an aspiration that certain costs will be covered by certain revenues? If you mush all of the funds together, do you have accountability. If you match up certain revenue to certain expenses it helps define the scale of different parts of your organization. It can also help you decide if you need to run with a surplus or deficit on different programs based on their relationship to the mission.

This certainly isn't shocking concept - we have talked around it in finance committee meetings and board meetings at every theatre I have worked at it. But, believe it or not this is a radical idea if is actually were applied to a theatre's budgeting process. All performing arts agencies have been trapped by the idea that your revenue should be 60% earned and 40% contributed for decades. What if you threw that out the window and said some expenses have to matched to certain revenue?

Should our box office revenue cover production expenses? Should marketing expenses be included in that? Should they be broken out by show marketing and institutional marketing? If you do this, you can't do it by show since they have different needs, can you? The process of accountability would require constant and rigorous assessment of revenue and expenses (this would be a very good thing). How expenses should be broken out is a common discussion between board members and myself. Which expenses you count in which column can tell you whether a show or program pays for itself. What would the effect be from a constant tension between sales and programming? Wait, who am I kidding there is a constant tension between sales and programming, could this help balance it?

But if you play this idea out...

Should our building rental income cover the building and systems expenses? Should contributed income cover full-time staff expenses, administration and fund-raising expenses? What about the other alternative revenue streams? I leave out should education income cover education expenses because it actually does (go Debra and Laura S.).


This system could be a key factor in making sure an organization doesn't have mission drift (taking on random activities), mission creep (taking on seemingly related activities that are really outside of the mission) or mission sheer (systematic pushes away from the mission). I can see how it works for many organizations. I can see that it might be a real key in breaking down our budget. It is certainly worth thinking through.

We went on to talk about the balance score card for businesses (easy definition - thinking about how different perspectives are related to one another).

We looked at the relationship between value/mission, support, operational activities (capacity in motion [love that phrase]), customers, learning/growth, finances. Of course, strategy is embedding in the relationship between value/support and capacity. Needless to say everything serves the value/mission. But the interrelationship of the others is fascinating to map out. It really is more of a loop for nonprofits with finances at the base. Big question is how the relationship between customers and mission and if there is a link between customers and activities (hint - for theatre there sure is). How things are connect though help develop how we measure it! Note if one of the relationships is out of scale - the model breaks...


Of course for-profits it is (top to bottom, hierarchical) finances, customers, operational activities, and learning/growth.

Back to sustainability and scalability.


First in our 7:30AM discussion group (still not a good time for a theatre person). We talked for a while about the definition of sustainability. As leaders of nonprofits, we noted the need for resources to fulfill your mission (appropriate capacity), a strong management plan, guiding principles and values, working capital, etc. No one mentioned breaking-even or surpluses. It was also noted the organizations aren't infinite.

Scalability offers a couple of different strategies:

1. Get support for fixed costs (and maybe semi-variable costs), and have variable (and maybe or semi-variable) costs covered by earned income.
2. Franchise.
3. Engage in partnerships (or even possibly mergers).
4. Create a subsidiary of a commercial business (many ways this could apply to the Playhouse).


Now I have said for years the "model" of producing in a nonprofit theatre is broken. We have put so many expectations on productions that is exploding our expenses to try to meet them (by "we" I mean the staff, the board, the artists, the audience, the reviewers, the crews - everybody.) I also think the model of how and what we produce needs some work. I took the job at the Playhouse because I was intrigued about working on this very issue. We are a 78-year-old start up with a one-of-a-kind history, but we have so much opportunity on our doorstep. There are a lot of great things happening in theatres across the country (nonprofit and commercial), but there are a lot of bad habits/bad practices too and even more that can be improved upon. This is why I embrace the transition we are in at the Playhouse. We have a chance to forge our own way, to LEARN from others, and to be INNOVATIVE. We can actually create a new model.


It may be a bumpy ride, but I know that when we arrive at our destination, we will have created something amazing for our community and for the world of theatre. Care to join me?