Strategic Recommendations for Anne Ewers Regarding the Merger of the Utah Symphony Orchestra and the Utah Opera Company
Nanette Riggs 288311 JFT2 Task 2 28 May 2014

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A1. Financial and Leadership Strengths and Weaknesses of the Utah Symphony (USO). Financial makeup: The majority of income for the USO is generated through ticket sales, individual contributions, business and foundation giving, government grants, and endowment and investment income. The majority of expenses for the USO are orchestra salaries including related benefits and payroll taxes, as well as management costs, and fund-raising expenses such as bad debt charges due to pledges that went unpaid. Strengths: The USO has a historical budget of approximately 12 million dollars, with a net surplus of about $116,000 for years 2000-2001. The USO generates substantial revenue through strong ticket sales, resulting from over 200 performances on a year round schedule. Historically, this amounted to approximately 3.8 million dollars, with a projected increase in the coming year to over 4.5 million dollars. USO also realizes about 25% of its operating budget from grants, and while the amount is projected to dip slightly for the next year, it will remain close to 25% of the operating budget. During a time of financial hardship for the performing arts, the USO realized strong contributions from business and foundation giving of over 4.4 million dollars in the previous year, with projected contributions of over 5 million dollars during the next year. Historically, income primarily derived from box office fees and rentals has been below $4,000, but that is projected to increase to nearly $250,000 in the coming year. The USO also realizes strong income from investments, which is projected to increase by approximately 11% in the coming year to just over $900,000. These sources combine to generate a projected increase in revenue for the USO from 2000 - 2001 to 2001 – 2002 of about $1,365,000 (revenue is projected to increase from 12,398,548 to 13,763,674), or by about 11%.
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Weaknesses: The USO does have an operating surplus of over $116,000, however, this represents less than 1% of the total revenue, which is a very small margin. Additionally, although the revenue for the USO is expected to increase by about $1,365,000, salaries for the unionized orchestra members have been negotiated to increase by 12.9% between 2002 and 2003 and by 6.8% between 2003 and 2004. With 83 musicians scheduled to receive these increases, program expenses will increase by about 1.4 million dollars in 2002, which has a net effect of wiping out the surplus for that year. Estimated to be a mere $2,402 for 2001-2002, the surplus will be virtually non-existent, putting the USO operations in the precarious financial position of barely breaking even. With any dip in projected ticket sales, charitable donations or government grants, the USO could easily find itself facing a deficit. Leadership Profile: Keith Lockhart has been the music director of the USO since 1998. Scott Parker is the Chairman of the Board for the USO, but will be moving out of state to accept a volunteer position with his church in 2002. Chase Peterson has agreed to step into the role of COB. The position of President and CEO of the USO is currently vacant. Leadership Strengths: Lockhart has an impressive resume, having led numerous prestigious orchestras, as well as having created over 50 television shows. Lockhart’s main strength is his ability to lead orchestras and his creative genius, as well as his support of the orchestra members. Lockhart has continued the policies of one of his esteemed predecessors, Maurice Abravanel, and has kept the USO near the top of Tier II orchestras. He has also been a strong supporter of the well-being of the musicians, and has been involved in working to keep their status and security as full-time salaried employees.

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Parker also has an impressive resume, having overseen the mergers of several health care companies, helping them to realize economies of scale, while improving health care in their communities. He has been a board member since the early 90s and has been its Chairman since the 99-00 season. His long-time affiliation with the USO makes him intimately familiar with its financial history and current position. His previous experience in the corporate world has given him the expertise needed to run an organization with a several million dollar budget in an efficient manner. The combination of Lockhart as the musical director, and Parker as the COB makes for a very strong leadership duo, as Lockhart can manage the artistic side of the house and Parker can manage the financial side. Parker’s involvement

in discussing his succession with Peterson should help to ensure that the COB role is filled by a knowledgeable and capable leader. Leadership Weaknesses: As noted in the profile, the position of CEO is currently vacant, and Parker will be stepping down in early 2002 to fulfill other obligations. This results in discontinuity in the leadership of the USO prior to the merger. While the artistic vision will remain strong under Lockhart, without a CEO and with a new COB, the financial resource management of the USO is in a precarious position. Especially in light of the predicted lack of surplus funds for the coming year, without strong leadership on the financial end of the organization, the USO could find itself heading for financial ruin, leading to the demise of this renowned orchestra. While Peterson is a long-serving board member, and supporter of the merger, his skills as the COB remain untested. A1a. Key Steps for Addressing Financial and Leadership Weaknesses.

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Financial Weaknesses: There are at least 2 areas that Anne Ewers can focus on to address the financial weaknesses of the USO. Since public monies are drying up, Anne can focus on strengthening fund raising efforts. She has a strong track record of raising funds with the Opera, and should direct her expertise towards raising funds for the USO. Anne can use the same techniques she has used in the past when raising funds for the opera to encourage the public and corporations to contribute to the USO. Another area that Anne can focus on is the salaries of the orchestra members. Since they have union representation, it may be nearly impossible to renegotiate the contractual salary increases, but by presenting the financial circumstances to the union representatives, and explaining the potential for the salary increases to send the USO into deficit, she may be able to convince the union to bring the matter to a member vote. If she can convey the urgency of the situation by explaining that it would be better for everyone to have smaller raises and longer term job security, than one or two seasons of higher pay with the possibility the USO facing financial collapse the following year, she may be able to get the musicians to renegotiate the terms of their contract. Leadership Weaknesses: To address the vacancies in the COB and CEO positions, Anne can have Parker work with Lockhart and Peterson to help them understand the most critical aspects of the financial management of the USO. She can also grant Lockhart more autonomy and responsibility in making decisions related to the business end of the USO during the merger. She can assure Lockhart that he will continue in his role as an advocate for the USO, both during the merger and as she steps into the CEO position after the merger. She can also work with Parker, Peterson, and other members of both the USO and Opera boards for recommendations on how to merge the two boards, and how they
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would choose the COB of the newly formed BOD. To help support Lockhart, Ewers could work with the members of the USO to reassure them that the merger would remain transparent and that the benefits they enjoy as full time employees would continue. A2. Financial and Leadership Strengths and Weaknesses of the Utah Opera (Opera). Financial makeup: Like the USO, the majority of income for the Opera is generated through ticket sales, individual contributions, business and foundation giving, government grants, and endowment and investment income. The majority of expenses for the Opera are production costs, as well as management costs, fund-raising expenses, and losses on its rental program (sets, props and costumes to other opera companies). Financial Strengths: The Opera has an operating budget of about $5,000,000 with very

positive cash flow and strong reserves. The surplus for the current year was $582,409 or 12% of its operating budget, with a projected surplus of $473,002 or 9% of its operating budget in the coming year. The majority of the Opera’s income comes in the form of contributions from individuals, corporations, and foundations, making up nearly 50% of the revenue. The Opera also realizes income from performance revenues and government grants, which each make up about 20% of the total income. The Opera has the flexibility to adjust the size of the opera or eliminate projects that have not met their fundraising goals, preventing them from realizing a loss on individual productions. The Opera also has significant assets in the form of production sets, props and costumes and these assets are used to generate income through a rental program to other opera companies. Financial Weaknesses: Performance revenues are projected to decline in the coming year, which is most likely due to the trend of declining ticket sales for the arts due to a
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struggling economy. Performance revenues are projected to decline from $1,028,177 or 22% of the total revenue to $733,900 or 14% of the total revenue. Production expenses are also projected to increase by 10% in the coming year. The Opera is also incurring significant expenses from its rental program. For the current year, these expenses were nearly $350,000 and they are projected to increase to about $475,000 in the coming year. Leadership Profile: Anne Ewers is the General Director of the Opera and Leslie Peterson had been serving as the Director of Operations. The Opera is governed by a board of trustees, with Bill Bailey serving as COB. Leadership Strengths: Ewers has an impressive resume, having been involved with several prestigious opera companies, directing over 60 productions. She has a proven track record or retiring a $450,000 debt that she assumed from her predecessor at the Boston Lyric Opera and has grown the Opera’s annual budget from $1.5 million to $5 million during the 11 years she has been the director. According to Parker, Ewers “has a reputation as an outstanding artistic talent with a great business sense” (DeLong, 2005). Leadership Weaknesses: There are also some criticisms of Ewers, such as those from one of the skeptics of the merger, who expressed concern with her people management skills, autocratic style, and unilateral decision making without consulting her colleagues (DeLong, 2005). Additionally, Leslie Peterson, who had been serving as the director of operations for the Opera, resigned her position due to her concerns regarding the merger and direction management was taking. In addition to leaving a void in a very high position of the Opera’s operations, Peterson was the daughter of the Opera’s founder, and this internal opposition to the merger could cause strife and derision within the arts community and the

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Opera personnel. Additionally, Peterson may have been one of the drawing forces for private and corporate contributions, as she provided a strong connection to donors, and her departure may trigger a decline in support. A2a. Key Steps for Addressing Financial and Leadership Weaknesses. Financial: Financial weaknesses could be addressed by addressing the two main financial weaknesses, declining ticket sales and a net loss in the rental program. Since production costs are expected to increase, Ewers would be justified in raising ticket prices to compensate for the increased costs. Ewers could also investigate the reason behind the declining ticket sales and adjust marketing campaigns or production choices to better reach or expand the Opera’s target audience, which should boost ticket sales. Since the expenses for the rental program exceed the revenue it generates the program is operating at a net loss of approximately $20,000 for the current year, with a projected loss of over $100,000 in the coming year. Expenses need to be examined, and if all are found to be critical to the program, then the rate the Opera charges for the use of its assets needs to be increased to negate the loss. Leadership: Ewers needs to address the departure of Peterson. To fill the position, she can look to promote existing talent from within the Opera, which will help maintain continuity between technical aspects and personnel relationships. Since Ewers is well respected in the arts community, she needs to work within the community to reassure them that the identity of the Opera will not be consumed by the larger USO. This might be achieved by inviting key supporters into the merger process, to allow them to voice their concerns and to see that the identity and mission of the Opera will not be lost. She could also work to create

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joint performances of the Opera and the USO, to help blend the organizations into one stronger entity that recognizes the creative visions of each, which may also serve to enhance unity and boost ticket sales. A3. Analyses of the Balanced Scorecards The business scorecards for the USO and the Opera are tools used to convey strategy and provide a platform from which leaders can discuss cause and effect relationships between factors. USO Balanced Scorecard: Financial - The USO wants to remain financially stable and profitable. The USO will use profitability and the annual surplus to measure the success of this aspect. Keeping ticket prices the same as last year is the critical success factor. This aspect of the scorecard shows that the USO is aware that its profit margin is very low and that it needs to be improved going forward. Customer – The USO is intent on maintaining its performance standards and providing world-class performances to its patrons. In order to do this, the USO will need to be able to attract and retain top quality talent, and will measure its success on this aspect through feedback from exiting patrons. This factor is indeed in line with the vision of the USO. It could be strengthened by adding quantifiers to the measurement aspect. For instance, the measurement should indicate what percentage of exiting patrons rate the performance as “Outstanding” or “Excellent”. Customer feedback is critical for this factor, but identifying a

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goal for the feedback and quantifying it will help the USO determine how close it is to meeting the goal. Internal Process - This factor lists having flexibility in decreasing expenses due to fundraising gaps as the strategic goal, with renegotiating contracts with musicians and improving profitability as its critical success factor and measurement. This doesn’t seem to be in line with the USOs culture or business model of protecting the salaries of the orchestra members. Also, the measure is not quantified, as it was for the Financial aspect of the scorecard. USO should reexamine the critical success factor to see if there are alternative ways to reach the goal and should also better quantify what they want to use as a measure, for example, “Improve profitability by 100% per year over the next 5 years”. Learning and Growth - The strategic goal is to increase the variety of symphonies offered to appeal to a more varied audience. The critical success factor is to have a successful marketing campaign that reaches a younger audience. The measure is having improved ticket sales and returning audience. By increasing the variety of symphonies, and marketing the variety to the appropriate audiences, the USO may be able to improve ticket sales and profitability, which ties into the Financial aspect of the scorecard. The measure for this aspect again needs to be quantified and should also be expanded and brought in line with the goal. Having a returning audience doesn’t indicate that the marketing campaign was successful. If the critical success factor is to reach a younger audience, the measurement should be able to determine if that was accomplished. The measurement may be revised to “improve ticket sales by 10% per year for the next 5 years and expand the percentage of attendees in the audience by 15% each year in the 18 – 40 year old demographic”.

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Utah Opera Balanced Scorecard Financial – The strategic goal is being financially stable with an increasing reserve fund, with the critical success factor being to raise additional funds and having endowments realized, and the aspect will be measured by improving the reserve fund amount. The goal ties into the business model very well. The critical success factors

and measures should be more specific and should be quantified. For instance, “increase endowments and reserve funds by 10% per year for the next 5 years”. Customer – The strategic goal is to have regionally and nationally acclaimed opera performances. This ties in very well to the vision for the Opera as well as the business model. The critical success factor of excelling in quality performances might be improved by adding an indication of who would be rating the performances. Also, the measurement of having sold out or nearly sold out performances seems to be more tied to the financial goals rather than being customer oriented. The measurement should be based on customer feedback. Ticket sales may be based on marketing strategies and not accurately reflect the level of performance of the Opera. Internal Process – The strategic goal is to maintain financial stability and to attract top talent, with the critical success factor of having successful negotiations with selected performers which will be measured by profitability and reviews of performances. This seems to be a combination of a Financial goal and a Process goal. The critical success factor might be improved to read “successful negotiations with 100% of sought after talent.” While financial strength is needed to attract top talent, it seems that finances are playing too big a part in all other aspects of the scorecard. The measurement should also be quantified, such so that the staff knows what they are aiming for. For

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instance, cash reserves at 20% of the operating budget and exceptional reviews of performances” may help the Opera ascertain whether they are meeting this goal. Learning and Growth – The strategic goal is to ensure production of approximately 5 performances a year. This ties in very well with the vision and business model for the Opera. The measure and critical success factors of having capital need covered by revenue from ticket sales and measuring endowment fund growth and increased ticket sales do not seem to tie into the goal very well. It would seem that endowment fund and ticket sales are more related to marketing campaigns than to the quality of performances. While delivering top performances can drive ticket sales, tickets are usually sold in anticipation of a great performance, and should not be used to determine how good the performances were. Likewise, using capital funds as a measure of high quality performances, when the majority of revenue is not coming from ticket sales does not seem likely to provide an accurate measurement of the quality of the performances.

B. Balanced Scorecard for Merged Company Vision: The vision for the merged company is to be a world class performing arts organization. Business Model: The business model is to provide high quality performances, including joint presentations, and to produce sufficient revenue through ticket sales and contributions to ensure the longevity of the organization. Financial  Strategic Goal: Achieving financial stability and increasing reserve funds to a minimum of 10% of the operating budget.

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Critical Success Factor: Increasing ticket sales and endowments to allow ticket prices to remain constant for the next 5 years.

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Measure: Increasing reserve funds by 25% per year over the next 5 years.

Customer  Strategic Goal: Provide patrons with a variety of world class performances by renowned artists  Critical Success Factor: Acquiring top talent in all aspects of production from performers to technicians.  Measure: Achieving a 95% or better rating of “Excellent” by exiting patrons, and “Excellent” reviews of performances by respected critics. Internal Process  Strategic Goal: Being able to provide long term job stability for employees who are retained on a year-round basis and attractive compensation to temporary employees.  Critical Success Factor: Having successful salary negotiations with all employees.  Measure: Reduction in production costs of 10% per year over the next 5 years

Learning and Growth  Strategic Goal: Developing a program targeted at increasing the number of performances aimed at the younger population to ensure long-term patronage for the organization  Critical Success Factor: Using the combined forces of the Opera and the USO to expand productions in new directions.

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Measure: Increasing the percentage of first time attendees in the 18-40 year old range by 10% per year over the next 5 years.

C. Strengths and Weaknesses of the Proposed Merged Company. Financial Strengths: The Opera brings large reserve funds (approximately $500,000) to the merged company which should help offset some of the program expenses. Both of the independent companies had significant revenue derived from ticket sales and contributions, as well as investments, which should enable the merged company to continue to with operations. Additionally, having Anne Ewers inject her fundraising expertise towards the patrons of the USO should significantly increase contributions from that arm of the new company. Financial Weaknesses: The USO brings a negligible reserve fund along with high expenses for production costs due to salaries of the orchestra members. These large fixed expenses will have a negative impact on the surplus revenue of the new company and will drain the reserves brought in by the Opera if fundraising efforts are not able to offset them. Customer Strengths: Both organizations have a strong customer base, as indicated by the percentage of revenue generated from ticket sales. Increasing the number and variety of performances and including performances aimed at a younger demographic can help build and perpetuate a strong and loyal customer base for the new entity. Customer Weaknesses: While both organizations were performing in the musical milieu, they have very different atmospheres. The challenge will be to provide

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performances of the joint company that can appeal to patrons of both types of patrons to ensure community support for the merged organization, and to continue to maintain the separate artistic identities of each of the individual companies. Internal Process Strengths: The new company will have strong leadership provided by both Ewers and Lockhart. This should provide for the continued artistic vision of both aspects of the merged company. Also, the merged company will have a large group of dedicated musicians coming in from the USO, which will be an asset for the new company. Internal Process Weaknesses: There may be feelings of inequity among employees as they had vastly differing compensation packages under their old entities. Additionally, if salaries are opened up for renegotiations, a feeling of mistrust and being sold out may develop among the musicians. Learning and Growth Strengths: The merger of the companies will bring a wide range of talent to the new entity and an influx of new ideas to both of the former companies. This may aid the new company in developing a variety of programming that can appeal to a wider audience. Learning and Growth Weaknesses: There may be some difficulty in assimilating the artists and other talent from the two previous companies into the new company, as their backgrounds and artistic sensitivities may vary greatly. It may be difficult for them to agree with the new philosophy of the merged company and to accept the change in leadership and artistic direction.

D. Probable Issues Resulting from the Merger with Suggestions for Mitigation

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Finance: The USO is coming into the merger with close to no expected revenue and significant operating expenses. The Opera is projecting declining ticket sales. This combination can have the net effect of driving the merged company to operate at a deficit if it is not carefully monitored and actions are not taken to mitigate the direction the finances are heading. o Mitigation: As head of the new organization, it is up to Ewers to work to overcome the financial situation the company will face. There are three areas she can focus on to help alleviate the condition. First of all, she can work to address fundraising for the orchestral side of the company. While both of the previous companies had a significant portion of revenue generated by contributions, 46% of gross income for the Opera came from contributions compared to 36% for the USO. If she can direct her efforts to bring the USO fundraising goal to match those for the Opera, the USO may see an operating profit of about 1.25 million dollars, instead of barely breaking even. The second area Ewers can focus on is the area of declining ticket sales for the Opera. If the 25% projected decline in ticket sales can be avoided, this can add another $250,000 to the revenue for the merged company. It will be critical to determine the reason for declining sales, whether it be poor marketing or uninteresting programming, or some other factor, it can’t be addressed until the cause has been determined.

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The third and potentially most volatile area for Ewers to work on is the salaries for the orchestra. If Ewers can be transparent with the bargaining unit regarding the impact the salary raises and compensation package may have on the overall viability of the organization, and if she can bring Lockhart in as a supporter, she may be able to reopen salary discussions and get the orchestra to agree to slower increases to ensure the long term survival of the business.  Human Resources: In order for the merger to have a positive impact, reorganization will need to occur. This means the elimination of redundant positions and the potential for outcry from supporters of each of the previous entities. Additionally, there may be a degree of discontent on behalf of the Opera employees, as they realize that the USO employees are receiving compensation packages that they have not enjoyed. o Mitigation: These are both issues that must be handled delicately. While there will be no way to placate terminated employees, there can be efforts to counsel and assist them with job placement and career development avenues. She can also discuss moving more of the Opera personnel into full-time permanent positions as the merged company realizes certain levels of success that would make this move possible. Hopefully, these two strategies can help to alleviate some of the angst caused by the merger.  Customer Satisfaction: There has already been a degree of dissatisfaction expressed by the arts community over the merger. Patrons of both entities

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have spoken out publically against the merger. Patrons of the Opera are worried that their artistic direction may be swallowed up by the larger USO and their identity may be lost. Supporters of the USO are worried that orchestra members lose the benefits that Abravanel and Lockhart have worked for years to secure for them. If the merged company loses its customers, it may result in declined ticket sales which would be very detrimental to the survival of the new entity. o Mitigation: Ewers must work to bring the community together in support of the merger. By openly communicating the vision of the new company and enlisting support of key patrons and community members, Ewers can help the customers comprehend the benefits that both organizations can realize from the merger. An aggressive marketing campaign aimed at assuring patrons that each of the previous entities will remain true to their artistic directions, while combining efforts to introduce new and exciting productions, can help win over the community. The more information Ewers can disseminate regarding the merger and the more reassurance she can provide to the community, the better the chances for the customers to both remain loyal to their previous patronage, while embracing the change brought about by the merger. By staging combined performances, Opera patrons may discover that they enjoy symphonic performances, and USO patrons may find out they were opera lovers all along.

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References Delong, T. and Ager, D. (2005, August 8). Utah symphony and Utah opera: a merger proposal. Harvard Business School. 9-404-116.

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