Subsidized B2B Fees Or Non-Subsidized B2B Fees, That Is The Question

Recently, I spoke with David Hendricks from the San Antonio Express-News about some current issues at the San Antonio Symphony (SAS) and one fascinating topic that came up touched on something we’ve never discussed here. Specifically, should an orchestra be willing to accept a fee for fee based services that is lower than their out-of-pocket costs.

In the SAS’ case, Hendrick’s article reports the musicians assert that the orchestra is losing potential revenue by charging local arts groups hiring the orchestra to provide live music for productions less than actual costs to use the ensemble.

Adaptistration People 041Not unlike many income/expense items, this one is anything but straightforward.

On one hand, it isn’t unusual for orchestras to be hard-pressed when finding enough services to fill the musicians’ minimum employment guarantees in a way that maximizes revenue, or at least marginalizes any negative income.

Outside of events related to their regular concert season, groups can generate performance income by renting out the ensemble to other arts organizations. One of the most common buyers are local dance and opera organizations that need live music during their productions. In that B2B relationship, a winning revenue formula is nothing but straightforward:

(Labor $ + Operations $) < (Service Fee $)

But that decision becomes increasingly muddy when an organization considers the following equations:

(Labor $ + Operations $) ~ (Service Fee $)

(Labor $ + Operations $) ≥ (Service Fee $)

(Labor $ + Operations $) > (Service Fee $)

Should they turn down any of those three scenarios?

We’re Just Getting Started

Let’s assume an organization is faced with one of the latter trio of options and the board decides an acceptable option is to offer the renting organization, let’s call them Ballets-r-Us, a service fee that is 35 percent below actual costs.

The orchestra’s executive leadership is fully aware that means they must fill that revenue gap directly but after all, raising 35 percent of event costs is still 65 percent less than if they had to fill the time with a self-produced event.

But those questions are most applicable at the onset of B2B relationship, the dynamic considerations kick in as time marches on.

For example, let’s say Ballets-r-Us has been receiving the 35 percent off rate for a decade while any increases have paralleled the rate of inflation and/or to offset any rise in labor costs via the master agreement.

But what happens if the orchestra’s financial picture begins to degrade or they simply have a board that isn’t happy with making up the 35 percent difference via unearned revenue.

Do they pass along a 35 percent price increase to Ballets-r-Us? Do they attempt to force musician concessions to lower the labor costs part of the equation to cross a ≥ threshold?

Let’s make this more applicable to SAS where the musicians are being asked to absorb wage and service reduction concessions. It isn’t difficult to see how they could interpret the 35 percent revenue gap as a situation where the buck stops with them. Why should they be asked to sacrifice instead of trying to make up that revenue gap through increased service fees or increased board contributions?

In the end, it doesn’t become difficult to see just how complex all of this can become.

About Drew McManus

"I hear that every time you show up to work with an orchestra, people get fired." Those were the first words out of an executive's mouth after her board chair introduced us. That executive is now a dear colleague and friend but the day that consulting contract began with her orchestra, she was convinced I was a hatchet-man brought in by the board to clean house.

I understand where the trepidation comes from as a great deal of my consulting and technology provider work for arts organizations involves due diligence, separating fact from fiction, interpreting spin, as well as performance review and oversight. So yes, sometimes that work results in one or two individuals "aggressively embracing career change" but far more often than not, it reinforces and clarifies exactly what works and why.

In short, it doesn't matter if you know where all the bodies are buried if you can't keep your own clients out of the ground, and I'm fortunate enough to say that for more than 15 years, I've done exactly that for groups of all budget size from Qatar to Kathmandu.

For fun, I write a daily blog about the orchestra business, provide a platform for arts insiders to speak their mind, keep track of what people in this business get paid, help write a satirical cartoon about orchestra life, hack the arts, and love a good coffee drink.

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