In Deloitte's Art & Finance Report 2021, Adrian Ellis is featured as an Expert Voice writing on new business models in the cultural sector, why they are more talked about than acted on, and why this matters. Download the Art & Finance Report 2021. See page 171 for So much talk, so little action... 

Whenever the cultural sector - museums, performing arts centers, concert halls, orchestras, theatre companies and the like - experiences financial difficulties, there is usually talk about the need for new business models. This is prompted both by the reality that new sources of income are needed if the sector is to continue in its old ways , and by the laxative effect that the rhetoric of financial reinvention can have on philanthropic and government funders that are otherwise leery about ‘doubling down’ on commitments to troubled assets. Supporting ‘new business models’ offers them the possibility of an exit strategy, of generating wider ‘lessons for the sector’, and of branding that associates their financial support with innovative thinking.

But new business models—transformational ways of arranging assets to generate new sources of income, to increase significantly existing ones, or to transform the cost base of an organization—are relatively rare in the non-profit cultural sector. This article explores why and suggests some ways forward.

Some Impediments To Business Model Innovation

The most obvious reason for a lack of business innovation in the cultural sector is that failure tends to be punished – in terms of reputation, career advancement, etc. – more vigorously and publicly than success is rewarded, and this asymmetry builds in a systemic bias toward the status quo. The structures of non-profits— unwieldy non-executive boards, restrictive regulatory frameworks that are the corollary of their tax privileges, adverse tax implications for ‘unrelated business income’, and pay structures that cannot easily accommodate financial incentives—all push in the same fiscally conservative direction.

A second reason is that cultural institutions rarely have the financial stamina to build reserves of risk capital for business development in the same way that they more commonly do for artistic development. Their balance sheets are unable to support investment without ‘betting the house’. But any potential initiative that requires them to secure third-party funding tends to be seen internally as ‘crowding out’ potential funding for other purposes regarded as less speculative and more urgent. Risk capital for business development therefore needs to be very obviously only available for that purpose, which is why funders interested in encouraging innovation often create clearly earmarked sources of funding that are not fungible.

A third contributory factor is the priority that has been afforded to capital projects over the past few decades. This has left the sector with a high fixed cost base, in both real estate and often unionized labor, at a time when many other sectors, from publishing to taxi-cabs to music production, have pushed an agenda of technologically-driven disintermediation and sought to enjoy the nimbleness that comes with low overheads. We, meanwhile, tend to see an expanded fixed cost base as synonymous with growth—and growth as synonymous with impact.

Finally, of course, cultural executives are often conservative by both instinct and training— much of the sector’s raison d’etre is, after all, to conserve tangible and intangible cultural assets. This fosters a particular cast of mind and disposition that is suspicious of gratuitous change.

For these reasons, cultural organizations’ responses to severe financial challenges often tend to be political in nature—i.e. focusing on lobbying for resources to support the status quo—rather than economic—i.e. seeking to reengineer the business model to accommodate changed conditions. Where an organization is too big or too important to fail, this is a wholly rational strategy. Countless memoirs of arts leaders recount with satisfaction how they have lobbied governments and courted donors; while for the same reason numerous advocacy reports attempt to map the instrumental benefits of the arts on health and wellbeing, social cohesion, and the night-time economy.

There are however grounds for thinking that political responses may have diminishing returns. The universe of politically underwritten cultural institutions is shrinking as they experience multiple legitimacy crises around restitution, diversity, challenged funding sources, employment and investment strategies, and as alternative calls on philanthropic and public resources mount. At the same time, the overall financial demands of the sector have grown with its physical expansion.

Much organized philanthropy is moving away from the support of cultural organizations outside the context of their contribution to addressing specific social issues. US foundations have adopted the term “legacy institutions” to describe cultural organizations that represent historic commitments in their funding portfolios rather than current priorities. And while individual giving is larger than foundation support in the US, the latter is resonant in terms of thought leadership and influence. Emergency public sector support for cultural organizations—especially in the EU—has been generous during the pandemic, but this resurrection of counter-cyclical neo-Keynesian economic policy will inevitably be reigned back. Emergency funding is a stock not a flow.

The cultural sector is therefore emerging from COVID-19 with lots of talk of the need for new business models, but less action. The digital pivot is a good example. Cut off from live audiences during the height of the pandemic, arts organizations moved content online to retain—and expand—their contact with audiences. The results have been remarkable, and it probably represents a lasting adjustment to the programming agendas of many institutions. But digital capture and distribution require new investment in skills and equipment and almost none of this artistic and technical innovation has been matched by a supporting business model—the content is mostly free and, where not, income streams are generally anemic. The model is programmatically exciting and financially unsustainable.

And some reasons why they are needed

All this suggests a sector that may not be ideally positioned for the changes in the wider operating environment that it is facing. These are formidable. The West has entered a potentially extended period of rapid, discontinuous and unpredictable change with a now well-rehearsed catalogue of drivers, most of which are resistant to technocratic solutions. These include:

• Rolling low-level pandemics and their fallout for international travel, public expenditure priorities, and patterns of social behavior;
• The accelerating impact of the climate crisis on supply chains, migration patterns, civil unrest, and therefore funding priorities;
• Increased political volatility as the consensus that representative democracy is a morally and functionally superior model of governance erodes, in the process deepening divisions around the appropriate place of social and racial equity on civic and cultural agendas;
• Technologically-fueled changes to the labor market and leisure time (e.g. the impact of AI on automation, the impact of digital commerce on the high street and the town square etc.); and
• The impact of social media attention—and especially ‘digital swarming’—on inter alia the perceived legitimacy of board members’ sources of wealth, sponsors’ relationship to extractive industries, and the appropriate composition of institutional endowments and the subsequent chilling of the appetite for board service and financial support from historically significant sources.

Each of these has a clear potential impact on the business model of cultural organizations. A shorthand term for all this turbulence, coined by the US Army War College in the 1980s, is VUCA—Volatility, Uncertainty, Complexity, and Ambiguity. And the consensus is that the appropriate strategic response to a VUCA environment is to foster optionality, resilience, and an agile-responsive organizational culture. If you don’t know what is coming around the corner, then you want to be able to keep your options open, with a business model and an organizational culture that helps ride out the next bout of turbulence rather than one inflexibly molded to the current environment.

From diagnosis to prognosis to prescription

A default prognosis would suggest a period of retrenchment in the face of challenges that the sector is not well-equipped to handle, with programmatic vigor sapped by the high fixed cost base that we have created for ourselves. This would be accompanied by reluctant consolidation, an increasingly strident ‘political’ response to financial challenges, and with artistic and operational innovation mostly bubbling up outside the administrative apparatus of established, but overburdened institutions - a period of Schumpeterian creative destruction but one played out in slow motion because the absence of an integrated capital market allows inefficiencies to remain for prolonged periods. Some closures can reasonably be anticipated, but more common will be institutions for which the agendas subtly shift from their stated mission, grounded in the public good, to one of organizational survival. We already see this in the field of opera, where smaller, lighter companies dominate the creative agenda and traditional behemoths struggle to keep the show on the road.

This scenario would be a profound loss to society and economy, and an authentic exploration of new business models that are mission-congruent and that significantly increase new sources of income or radically cut costs is needed. But this first requires a prescription that addresses the organizational obstacles before identifying candidate business model options.

Stakeholders—boards and funders—need to address explicitly the incentives to innovation and support informed risk-taking and its occasional failure; performance assessment needs to be more mature and objective and to reflect progress toward compelling strategic goals; arms-length enterprise subsidiaries with greater entrepreneurial freedoms should be the norm; and the unthinking linking of physical expansion to increased impact should be challenged.

The usual context in which future options are explored—and capital projects dreamt up— is that of ritualistic ‘strategic planning’. This needs a radical rethink. Strategic planning in nonprofit cultural organizations tends to afford little opportunity for substantive reexamination because it is designed to produce ‘outward facing’ rhetorical documents, heavy with spin and virtue signaling. The plans are intrinsically ‘political’ in the sense described above. And they emphasize concrete – sometimes literally so – ambitions that can have simple eye-catching metrics attached to them. Lighter touch planning processes with greater analytical rigor and focus on organizational adaption to changed operating environments are badly needed. And increased reliance on earned income also begins to free organizations from coercive philanthropy in which funders’ strategic objectives trump the organization’s own.

And the models themselves? Cultural institutions can and do have transformative impact on local and regional economies— the rationale for much recent investment. But these benefits are externalities that the generating institutions are unable to capture. Countless new arts buildings for example have made many adjacent property developers wealthier, but this is not incorporated into their business model as the capital gains cannot be captured. If one is looking for new sources of funding, then there are devices outside the cultural sector that have been developed to capture these externalities—tax credits, landbanks, special assessment districts. They require collaboration between the public and private sector and need to be baked into strategies early, but they do offer a plethora of possibilities.

With respect to earned income, it is obvious that the conventional sources of earned income – admission charges, food and beverage, inhouse retail, rentals – are unlikely to have the growth potential to transform the business model. They are also, critically, not best viewed from a purely commercial perspective as there is a mission-related component to their pricing and management, relating to broadening access and enhancing the visitor experience.

The most promising areas for significant earned income are therefore in partnerships where the brand and expertise of a cultural institution is focused on a specific asset—e.g. art hotels, branded online retail, consultancy— and pursued in a framework that separates it from the core business. It may be argued that the skills required for increasing earned income in adjacent areas are difficult to secure and harness and distant from the core skills of a museum. But then, thirty years ago, one could have said the same of fundraising.