Opportunity Cost in football

Strategic choices for building winning teams.

The average fee for a Premier League starter is between £12-18m, wages are well above £50k a week, nudging nearer to £100k for first team regular players at top half clubs.

Everybody wants that ‘missing piece of the jigsaw’ that is going to turn them from also-rans to challengers.

The fear of missing out on talent leads to individual player transactions being vastly overvalued in comparison to the alternative uses of that money.

To use an angling analogy if the cost of one ready caught fish is greater than the cost of a rod, bait, and a net then it had better be a REALLY good fish to justify the cost differential.

We believe one of the big problems is football is a very difficult market. In economic terms you would say there is information asymmetry. The transfer market suffers from the famous lemon problem. Put simply the buyer can’t really judge the current value of players. This probably leads to too high a value being put on recent performance and too low a value being put on players who haven’t played recently or don’t have an established reputation.

In the used car business you mitigate this problem with guarantees and return policies. To a certain extent with loans with purchase options, and performance-based clauses football is adapting to the possibilities of risk-sharing in transactions. However, the pace of this is slow and often there appears to be an unwillingness to move away from simple winner/loser deals.

As ever, just as you would take a friend who knows about cars to a dealership with you, we recommend using a company like MRKT Insights to go into the football transfer market with you. The better the knowledge you have of a market the better value you will get in transactions. We can provide alternative options and information on suitable replacements.

There are many ways to value players. We look upon concepts from other sports to see where they can add value to our thinking.

One concept from American sport we see as interesting is ‘value above replacement’. What does a generic football player at various levels do? If you swapped a player in your team for that generic player what would be the impact?

So for example, if we say an average top 5 league striker is going to offer 14 G+A a season then clearly swapping them for Messi is going to have a much greater negative impact on Barcelona than swapping them out for Steve Mounie would for Huddersfield in 2018/19.

Messi would, therefore, have a ‘value above replacement’ score of +37 (because of ~51 actual G+A) whilst Mounie might be -9.

If you were valuing players you would see that Messi is worth a vast amount of extra points compared with a generic replacement but if Mounie demanded league average wages you may be better looking elsewhere.

The problem with very simple averages like this is the impact of teammates on performance. Does Messi at Huddersfield score more than Mounie at Barcelona? Probably, as it is Messsi, but it is also messy, football is a team game so we always have to factor this in.

There are lots of very cool models that try to solve these problems, valuing each action by whether it increases the chance of a goal being scored. The basic point is this, clubs need to consider whether a new player is really THAT much better than the players already on their payroll to justify the opportunity cost of that investment.

What do we mean by opportunity cost? The loss of other alternatives when one option is chosen.

So if you have £1 and go into Poundland the opportunity cost of that small Toblerone is the value you would have received from every alternative item priced at £1.

At £1 it isn’t so much of an issue.

But if you are buying a car, let alone a house, you will probably do a lot more research. You will look at alternatives, check the market to see all the options, and look for the best value you can get. If there are two identical houses next door to each other, both for sale at the same time you would expect them to be priced very similarly.

If one was twice the price of the other there is no way any rational person would purchase the more expensive alternative.

You have essentially just looked at the ‘value over replacement’ and made a rational decision based on data. Congratulations, you have a decision-making process that is more sophisticated than a lot of football clubs seem to have from an outside perspective. 

Where we think rational thinking could have the biggest impact on smart clubs is combining a proper value over replacement system with an appreciation of opportunity cost.

Example:
The club has £20m (plus £80k a week wages for 5 years) available to spend.

Scenario:
The club has identified a new midfielder. The manager and coaching staff think he is better than the alternative players already on the books. They think the money should be used to sign him.

Value over replacement: Look at all his key metrics, adjust them for the relative strength of the team he plays on, compare them with all existing alternatives already at the club and a generic “league average” player. How much better will this one purchase make the team?

Opportunity cost: What else could £20m (plus £80k for 5 years) buy? In 5 years’ time, what are the expected payoffs of either purchase?

Our view is that too many teams overvalue the novelty of the new over long term sensible planning. We seem to have lost sight over just how much money £20m plus £5m a year in wages really is.

As an alternative let us consider an alternative use of this £20m (plus £5m a year on costs):

Buy a Ligue 2 club: Cost £~10m.
Clear debts: £~10m
Cover deficit: £5m a year, including cost of a new management team to put a sensible structure in place, then run at break even.

So for the same price as one Premier League player you now own a debt-free Ligue 2 club with a history of player development and are running it at break-even level.

Sochaux had been available for this price for the last 2 years before recently being taken over. You could have purchased the club that has developed Ibrahima Konaté, Jerome Roussillion, Marcus Thuram, Jerome Onguéné, Lucien Agoume, Jeandro Fuchs, and many more over the last 10 years.

Keep up the current production rate of the academy, use the French work permit system to access markets in Africa unavailable to PL clubs, rebuild a great club.

In 5 years’ time, the smart club owner could easily own both a PL team and a Ligue 1 club and could have one of the best pipelines and player development pathways around.

To return to our fishing analogy you’ve just spent the price of a single fish on a lake teeming with fish and exclusive fishing rights for life.

Could it all go wrong? Of course, but so do a LOT of transfers. We see the risk as being far lower but the complexity being far higher. Are clubs prepared to take a long term approach?

How do you even find the best alternative uses of money or someone to help overcome the complexity?

That is where we come in.

MRKT Insights have produced models that examine the productivity of club’s youth systems, investigate the demographics of the club’s natural talent catchment area, and consider the work permit regulations of each territory, to identify the highest potential clubs in Europe for investment.

We have actionable plans drawn up from discussing the perceived value of capital investments with some of the most innovative clubs, visionary coaches, and active players around the world.

Only by properly assessing alternative uses of the vast sums of money demanded of PL club owners for very small improvements to the first team, will the middle tier of clubs actually be able to challenge for trophies.

And surely that is the point of it all?