Reputational Risk Limits Upsides

Football is a uniquely pressured industry. There are very few jobs compared to the number of applicants. Almost ever fan thinks they could do better than the “idiots” running their club. Club owners are often inexperienced in sport, and even the most rational and logical owners can only accept variance (bad luck) as an excuse so many times before they want to make changes to their staff. And they will also be constantly urged to do so by fans, media, and people who want to do those jobs and believe they could do better. 

This constant pressure leads to fear. Fear of losing the job, fear of making decisions with even a medium term (1-3 year) payback period, fear of being seen as the idiot who got fired because he failed and having to get back into the large pool of people on the outside who want to break back in.

Fear seeps into every decision. The single best thing an ownership can do is remove fear.

Easy to say of course, much harder to do.  

Thinking in bets

A book that is recommended a lot in football is “Thinking in bets” by Annie Duke. If you start thinking in probabilities and pricing in uncertanties appropriately you can make better decisions. 

The problem in football is a lack of alignment between risk and reward.

Is is better to sign some older players to get a high finish this season at the expense of the ability to regularly finish higher in future seasons?

Let us say the choice is between 3 veterans and 6 younger players.

The expected output of the 3 veterans is far higher, taking the club from midtable to 4th in Y1, followed by a sharp decline to lower midtable by Y3. They are expected to have no resale value.

The 6 youngsters will see the club drop from midtable to lower midtable in Y1, midtable in Y2, and title challengers in Y3, Y4, and Y5. They are expected to have resale values of 10X the initial investment.

Any fan of the club would say they wanted the second scenario. It is clearly better for the long term health of the club.

However, anyone who has worked in a club environment knows that those first 2 years will be a living hell. Any poor performance will bring demands for change, the “naive idiots” in charge will be catigated, the manager will have “lost the dressing room”, pundits will say the plan has failed even if you predicted exactly the short term impact. 

It takes a lot of strength to resist this, and the only place that strength can come from is the owner.

Building a simple model

We need to consider both the risks and rewards of each decision we make. A simple matrix shows the possible outcomes.

The model is zoned in combinations of potential risk and potential reward.

But whose risk and whose reward?

The arrows represent time going forward.

In our short term “veteran” plan the risk starts low and the reward high, we are better in Y1, solid in Y2, but eventually end up in a no-win situation.

In the long term plan we start off with a lot of risk and low reward but end up in an ideal zone

Most people in football are looking for a better job all the time, they know they are a few bad games from being sacrificied. 

If you get fired in Y1 or Y2 of the Young Plan you are unemployable. But in Y1 or Y2 of the veteran plan you are the genius who took the club from midtable to a top 4 challenge with your savvy use of overlooked veterans. 

Clubs and Employees have different risk reward drivers

We forced the decision makers into the High Stakes and No Win Zone by making them gamble with their livelihoods and the scorn of thousands of fans.

A traditional risk matrix is based on the investment risk, but we have to factor in the fact the people making decisions have their own reputational and professional risks to consider

When people work in a high stress, high punishment environment they look for safe havens and overprice certainty. 

If clubs and multi-club groups in particular are to succeed they need to separate budgets used for generating a return from general budgets used to support the game by game first team decisions.

You need people incentivised to take risks and generate income. You cannot do this if reputations are risked as people will be too safe.

Long term projects with separate budgets

Most big football clubs are experienced with long term thinking and separate budgets. They run youth academies.

The chances of making it from a youth academy intake to a first team place are ridiculously low.

But we don’t sack academy directors if players don’t make it. 

Because the risk is low and the potential rewards are high.

A Declan a decade

The running costs of a category 1 academy are around £10m a year for a medium sized Premier League club. Some of the largest spend up to £20m.

95% of the players who represent the club even at U18 level will not provide financial value to the club. 

However the 5% who do make the first team could contain one player who covers multiple years of running costs.

One Declan Rice a decade will cover the cost of West Ham’s academy. Or a Harry Kane at Spurs.

First team managers are generally delighted to play high quality youngsters, the risk is low, the potential reward (reputationally and professionally) is high. 

Recruiting younger and being patient

One solution would be push the recruitment function away from the first team. The first team recruitment function would exist to plug gaps. To find the solid players, on favourable terms, who can support your young players.

Instead the reserve team / youth team / B team is given a budget to recruit players with resale potential. 

Rather than the first team being handed £20m to pay for a senior pro, or even £20m to buy 4 riskier players with first team potential, the club itself recruits 10 players to develop over 18 months, with the full understanding that most will fail to be resold for profilt.

The Ricotta Strategy

When making Mozzarella the finest curds are skimmed off and formed into cheeses. What is left is appears to be watery and of little value. But by leaving it a little longer and changing the environment you produce a second valuable product, Ricotta.

Likewise some obvious talent will emerge among our young players and can be easily identified and sold for profit. Some players won’t show their full potential in your club, a bit more time and a change of environment can create a valuable player. The more players you have, and the better links you can create with different clubs the better the chance you have of creating and capturing secondary value through sell on fees. 

Time Lags

We shouldn’t ignore are time lags.

Yes, mathematically it is better to invest in 10 players rather than 1, but we need a striker and we have a game on Saturday. 

It isn’t only Head Coaches and Sporting Directors who face pressure, it is the Owners. A much better ROI on player signings isn’t worthwhile if the club is relegated and loses tens of millions in yearly revenue.

Any such shift in spending patterns may need to be phased in over time so that the first team is supported as normal whilst the “pipeline” is built from cheaper, higher risk talent.

Conclusions

When betting on uncertain outcomes (individual human performance), and you are looking for a return on investment it is better to make many, low stakes but high return bets.

However we have seen that although this offers the best ROI on an organisational risk matrix (low stakes, high return) it is the opposite for the sporting staff. You cannot put short term appointees in charge of long term investment decisions.

Pressure is the biggest problem. The pressure to win the next game is immense, the pressure to derail the project will be huge. 

Owners with a long term outlook need to remove long term investment decisions from short term employees.

Categories: MRKT Insights

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