Carriageworks can rebuild

On 6th May it was announced that Carriageworks in Sydney had been placed into voluntary administration. This is sad news, but not entirely unexpected during an enforced shutdown of our arts sector. The good new may be that Carriageworks can rebuild.

While many are expecting smaller organisations to fall by the wayside, few may have suspected an organisation the size of Carriageworks.

Despite being one of the 95 arts organisations funded by the Australia Council from 2021-2024, Carriageworks have indicated an unsustainable drop in revenue as a result of the enforced shutdown.

A look through recent annual reports for Carriageworks points to an underlying symptom. There isnt any money in the bank.

In the 2017 financial year Carriageworks generated revenue of $11.5M, expenses of $11.3M leading to a small financial surplus of $205,000. This is the only financial surplus in the five years from 2012. The following year, in 2018 a further $11.6M revenue was generated, expenses increased to $12.1M creating a yearly deficit of $550,000, effectively wiping out the profit of the previous year.

Of concern is the lack of liquid assets. At the end of the 2018 financial year Carriageworks had current assets of $1.5M cash and $850,000 in receivables. That might look like a lot of money. It isn’t! It’s sufficient to pay the operating costs of Carriageworks for 2-3 months.

We don’t have access to financial accounts for the 2019 financial year. One can only assume, given the decision to appoint administrators, revenue hasn’t grown from previous years. Considering the sector has been shut down for much of the second half of the 2020 financial year it would be safe to assume Carriageworks revenue for the current financial year has fallen by around 30-40%. The arts sector has been shut down for almost two months, it is likely those financial reserves are being eaten up way too quickly.

Carriageworks has fixed assets, in the form of equipment and inventory valued at around $1.5M. That’s good news; but not great, considering the size of the organisation, and the number of years it has been in operation.

Revenue at Carriageworks comprises 30% Government funding and 65% customer income. The remaining 5% is primarily donor funds. Clearly for the past five years customer income has been insufficient to bridge the gap between Government funding and expenses. This begs the question, what measures were taken to reduce non artistic costs? With the current shut down in place there is now very little customer income.

The low level of donor funds is a concern. We know building a family of supporters is critical to the sustainability of any arts organisation. This family does more than donate funds. They talk to each other, and to others about why supporting the organisation is a good idea. They purchase goods, services, tickets to events and they encourage others to do the same. Losses from previous years suggest support of Carriageworks by a dedicated base (family) of supporters was static at best; more likely falling, rather than growing.

Why hasn’t family support been there? Afterall Carriageworks is a recognisable brand. Again the financial report provide some indication. In the 2017 and 2018 financial years, only around 5% of revenue was spent on communications and relationship building. We assume that includes expenditure on marketing and promotion. It would be reasonable to suggest that any organisation seeking to generate the majority of its revenue from commercial activities should be investing between 10% – 20% of its revenue in marketing and promotion.

We know there is a direct, cause and effect relationship between marketing expenditure and growth of the family of supporters. The real purpose of marketing is to provide people with a reason to support the organisation. Low expenditure on marketing combined with static customer income in previous years suggests the family of supporters was not growing. More to the point it suggests those loyal supporters were given little reason to talk to others about supporting Carriageworks.

As is often the case, the reason organisations fail to engage in marketing is insufficient revenue, rather than a lack of desire. This appears to be the case with Carriageworks. The wanted to invest in marketing but were unable, or unwilling, to generate sufficient revenue to enable this to occur. At the same time, the lack of revenue meant they were unable to build a sizable financial reserve for a rainy day – or a national shutdown.

This now leads us to look at the artistic program. This is not as straightforward as analysing financial reports. Decisions on what makes great art are highly subjective.

Within the Carriageworks website, on the artistic program donor page it states “Carriageworks believes cultural institutions should be radical and participatory. They should provide pathways, lead social change and create and deliver on our individual and collective ambitions. Carriageworks commissions and presents a program that supports work across visual arts, performance, dance, music and film. In 2019, Carriageworks will commission and present 53 projects, including 7 world premieres, 25 international works and 36 new Australian commissions, supporting 850 artists.” Nowhere on that web page is there any information designed to provide potential donors with a reason to support this artistic program! The information may be elsewhere. Forcing a potential donor to search for reasons to engage is poor marketing.

The financial reports for 2017/18 show the level of expenditure on the artistic program is in line with Government funding. This suggests any financial surplus was expected to come from customer income through commercial activities. Government funding is designed to cover costs only. Leaving aside creative accounting, this funding is not designed to deliver any significant financial surplus.

So we have 30% of funding going to cover the cost of an artistic program. There hasn’t been any significant growth in the level of government funding. At the same time there hasn’t been any growth in commercial revenue and there hasn’t been any growth in donor funding. Despite best intentions it is unlikely there has been investment in great art.

An artistic program designed to meet the requirements of providing pathways, leading social change and creating and delivering on our individual and collective ambitions would require long term planning and planned investment from financial reserves. Clearly such an investment was not possible.

The Cycle organisational model for arts organisations is based upon great art being promoted through marketing that provides the family of supporters with reason to engage with the organisation, leading to increasing revenues and financial surpluses that can be invested into even more great art.

In the case of Carriageworks it is doubtful the artistic program was good enough to generate interest on its own merit, without significant investment in marketing. The family of supporters does not appear to have been supportive of Carriageworks and wasn’t willing to spend sufficient money as a result. In all aspects of The Cycle, management of Carriageworks appears to have failed.

Can Carriageworks rebuild? Yes it can. It will take some courageous decisions. There is some talk of other suitors such as Sydney Opera, taking over the operation of Carriageworks. Whether this occurs, whether other decisions are made around bailout funding, cutting costs, mergers, in an effort to keep operational, the past will have to be recognised more for its failures, than its successes. There will have to be change. A future board and management group will have to begin again with a blank sheet. Some sacred cows will need to be despatched to the meatworks.

A rebuild of Carriageworks must include a review of governance and management. For the past five years the Board has overseen a failing organisation, and whatever strategies the Board had in place were based upon false premises. The shutdown of the industry sector was not the cause of Carriageworks demise; it was simply the event that exposed the fundamental issues within the business. The Board cannot be blamed for the shutdown. They must however be held accountable for the lack of an effective strategy for the past decade. With the benefit of hindsight many may ask questions about the Board’s risk management oversight.

Any Board that has overseen the demise of an organisation over the past half a decade should be replaced, or at least some of them. A review of governance would be a good starting point.

Current management don’t escape culpability either, though CEO Blair French has only been in the hot seat since August 2019, barely time to acquaint himself with true state of affairs considering the devastating impact of the bushfire season and the coronavirus crisis. As CEO, the time has arrived for Mr French to begin asking some very serious questions of his senior management team.

If Mr French was recruited by the Board as a result of some great ideas on how to resurrect Carriageworks or based upon his ability to implement a new strategic direction that we are not privy to, then he should remain in the CEO role. If Mr French’s mandate was to maintain the status quo, then there are some question marks over his appointment.

Assuming the Board of Carriageworks has the willpower to rebuild, its single biggest challenge must be in deciding how to invest in an innovative, cutting edge artistic program that is so damned good people will flock to support that program.

Management should be planning for the next five years. It takes time to contract artists, schedule events, prepare art and generate revenue. The best artists do not come cheaply and are booked well in advance. Whatever costs are cut, and that will occur, those cuts should not be made to the artistic program. Without good art there is no family and no commercial income.

This doesnt mean the planned artistic program for 2021 and beyond, for which funding has been promised should be retained. A thorough independent review, involving feedback from the family of supporters, of the planned artistic program will help with decisions on what to keep and what to change.

I believe there are good reasons for Carriageworks to rebuild. It is an established and recognisable brand, despite half a decade of losses and a fragile balance sheet, Australia Council elected to maintain funding for a further four years. Based upon previous funding this may be around $12M over the next four years. Shutdown of the sector will cease in the foreseeable future and while 2020 is a write-off, there is no reason to not believe the next four years cannot be better.

Let’s apply The Cycle lens over the Carriageworks version two –

Great art, marketed to a growing family of supporters generates increased revenue, leading to financial surpluses that are then reinvested in even more great art . . . . and so The Cycle continues with incremental improvements year upon year upon year.

John Coxon is founder of art4u.australia, a consulting agency helping arts organisations to become viable and remain sustainable through application of The Cycle, an organisational model based upon successful arts organisations. If you would like to discuss the future of your arts organisation shout out to John.

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