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New artistic management has brought an expanded financial challenge along with its expanded repertoire. How does the finance side of the organization maintain its share of the orchestra's good reviews?
CFO.com Staff, CFO.com | US
February 8, 2006
The Boston Symphony Orchestra is making headlines these days. The Boston Globe recently reported that, since arriving in October 2004, music director James Levine has been "creating a new model for orchestral programming." But having Levine at the artistic helm comes at a price.
As a result of Levine's programming choices, the symphony has lost some of its traditional subscribers, and operating costs have increased by more than a million dollars a year. How is the business side of the country's most financially solid orchestra charting this new course? CFO.com assistant editor Lisa Yoon spoke recently with chief financial officer Thomas May.
How much more expensive is running the orchestra now than it was pre-James Levine?
We knew from the outset that Levine's artistic vision for the Boston Symphony [and] to consistently achieve a peak level of orchestral performance would involve an increased commitment to things like additional rehearsal time, expanded use of the world's greatest vocal artists for several large-scale works, and increased production expenses associated with presenting these major works at [Boston's] Symphony Hall, Tanglewood, and [at] Carnegie Hall. The additional incremental operating costs related to this new "artistic initiative," as we call it, are estimated to be $1.5 million per year.
Since you knew things would be more expensive under Levine, how did the BSO prepare for it financially?
The BSO's board of trustees recognized early on that the artistic vision articulated by Levine would require a new infusion of capital. As a result, the board is in the process of raising the additional endowment and directed grants for operations needed to fund the incremental costs of the new artistic initiatives.
[And] while inevitably there are patrons who would prefer that the BSO limit itself to the more traditional repertoire, James Levine's programming choices have clearly been exciting to many of our subscribers, as well as a new audience of listeners who've begun buying single tickets, and who we hope will be future subscribers.
The BSO makes up for lost subscriptions by marketing to single-ticket buyers. Is it harder for a non-profit to respond in a nimble way to changing business environments?
It probably goes without saying that it is much less costly to renew an existing subscriber than it is to find a new subscriber or single-ticket buyer. So the BSO makes up for lost subscriptions by marketing not just to single-ticket buyers but also to potential new subscribers. Each year, we sell about three to four thousand new subscriptions to help offset the natural loss of subscribers due to age, health, and other changes in circumstances.
We are now operating in an economic and cultural environment that demands that we challenge our existing assumptions and find new ways to remain relevant. While our product offerings may not be as adaptable to rapid change as, say, cell-phone designs, we regularly conduct market research and employ new marketing approaches in an effort to be responsive to audience concerns and to continually improve our customer service.
We often talk about CFOs as business partners to their organizations. But when the leader is a renowned artist like Levine, on whose creative decisions the business is based, the finance organization can seem more like a sidekick than a strategic partner. How does finance react and adapt to that kind of leader while still adding value — you know, instead of just writing the checks?
In a symphony orchestra, the managing director is the key person tasked with finding a balance between the orchestra's artistic goals and its need to maintain financial stability. I think the BSO benefits from the fact that managing director Mark Volpe possesses a unique combination of artistic roots and financial savvy. Mark grew up in the orchestral world, but he also has the depth of knowledge and experience with symphony orchestra finances, having successfully managed the Detroit Symphony through (and beyond) a period of extreme financial distress in the 1990s.
Mark and I first started working together 20 years ago at the Baltimore Symphony during a challenging financial period for that orchestra. It's been great to have the opportunity work together again in Boston and, as CFO, I couldn't hope for a managing director who understands and recognizes the importance of the financial side of things as well as Mark. At the same time, Mark's artistic background [Volpe studied music at a conservatory] equips him to work closely and collaboratively with the music director on matters of artistic programming.
This is a time when orchestras all over the country are struggling financially. Yet the BSO is the most financially healthy orchestra in the country. What's different about the BSO? What's been at the heart of its financial health?
While, on a relative basis, the BSO may be seen as healthier than many of its peer orchestras around the country, what matters to us most is our financial health as measured in an absolute sense, not in comparison to others. For example, we believe that we are undercapitalized, despite the relative size of our endowment [currently $318 million]. With an annual budget of about $74 million, the endowment is equivalent to about four years of operations. However, it's important to note that only about 10 percent of the endowment [or less than six months of operations] is unrestricted and available to the board for its discretionary use in times of financial challenge. We are currently working on plans to address the institution's long-term capital needs [both in terms of endowment and with the physical plant].
While we are not immune to some of the underlying cultural changes that are contributing to declining attendance for some orchestras, the BSO has for many years enjoyed a very sophisticated and stable listening audience, reflecting in part the large number of medical and educational institutions located in the Boston area. We also benefit greatly from the wisdom, guidance, and advice of some extremely knowledgeable and dedicated members of our board and board committees who are key players in the finance and business community.
The BSO has other "subsidiaries," if you will: Tanglewood and the Boston Pops. Has diversification contributed to the organization's financial health? Is there an underlying financial strategy for managing the three groups?
We certainly don't view Tanglewood or the Boston Pops as "subsidiaries;" rather, they are key components of our core mission. But there's no question that these activities have served as a form of diversification that contributes to the overall financial stability of the organization. Each of these activities draws a somewhat different audience, both demographically and geographically. The Boston Symphony, Tanglewood, and Boston Pops programs and their educational components, as well as the Symphony Hall and Tanglewood physical plants, are part of a fully integrated operation which benefits from coordinated fund-raising, marketing, production, facilities, and administrative activities supporting each of these programs.
Has the BSO ever been in the red? If so, when and by how much?
At various times over the course of its history, the BSO has struggled with deficits. Time magazine wrote about the BSO's deficits in the early 1950's. Harvard Business School published a case study of the BSO's financial challenges in the early 1970's. Most recently, after several years of break-even operations in the late 1990s and early 2000s, the BSO has once again experienced deficits in three of the last four years of operation.
The nature of symphony orchestra operations is such that, before any contributed support, the BSO generates an annual deficiency from operations of about $24 million. Said another way, what we are able to charge for concert tickets and fees is about $24 million less that what it costs us to present our performances and educational activities. In order to balance the budget, we need to generate annual support through contributions, fund-raising events, and the annual draw from the endowment to equal this deficiency. Each year, contributed support becomes a more important part of maintaining this equilibrium.
This is the second BSO you've worked for; before this, you were with the Baltimore Symphony Orchestra. Are you musical yourself? What advantages does an arts-oriented finance executive bring to the job?
I've had a life-long interest in music, having played trumpet in high school, college, and the Navy, and singing in choirs and choruses throughout the years. The first 12 years of my career was as a naval officer and then a civilian working in financial management for the Naval Nuclear Propulsion Program. Like so many before me, I followed that well-worn path from nuclear power to symphony orchestras. Seriously though, I was fortunate enough to be able to discover an opportunity to combine my financial management experience and my love of music in this work as a symphony orchestra CFO for over 20 years now.
I do think my musical background and orientation has definitely helped me to better understand the artistic view of what we do and, as a result, I believe it has allowed me to develop relationships with the players that are grounded in a mutual respect for each other's perspectives. In any case, the job of CFO of the Boston Symphony Orchestra remains a fascinating and exciting one for me.