I really loved this Fangraphs interview with Dick Williams, the new General Manager of the Reds. [Side note: Fangraphs is the best specialty news site in the business. If only the real world had counting statistics as reliable as the ones in baseball.]
Williams is totally professional in his approach. He is systematic and thinks in terms of optimizing returns on investment and diminishing risk.
For small market teams, it’s not just about relative payroll:
Attendance tends to drop off more quickly for small-market teams in a rebuild period and that can have a big effect on revenues. Bigger-market teams… usually have a higher and more solid attendance base, so they can sort of weather the down times a little better.
Risk tolerance is also different:
“A lot of times, when you come out of a rebuild, you’ll start with what you might call ‘go-for-it signings.’ Smaller-market teams have less leeway in terms of hitting or missing on one of those. It’s more painful on a relative basis for us to miss on a big-dollar contract.
Williams also takes a systematic approach to the organization, deferring to decentralized expertise to optimize spend and priorities. The key is reallocating payroll expenses (marginal costs) to organizational investments (fixed costs) for better returns to scale:
We met with each department head and effectively examined where we thought dollars would have a better return on investment than at the major league payroll level. Then we went back to ownership and said, ‘This is our next couple of years, this is what we’d like them to look like, and this is where we’d like to take money out of major-league payroll and put it to use in other areas.’
Not surprisingly, if you’re trying to get more bang for your buck on the finished product (i.e. major league talent), then you need to get in cheaply on the ground floor. That means shifting resources further down the human capital structure and finding competitive advantage where you can, like emerging markets:
The highest dollar amount was allocated to amateur-talent acquisition . . . It was by far — I think it was three times — our largest annual investment. We had a high first-round pick [second overall], we had our biggest draft pool, and the money we spent in the domestic draft was our most ever . . . Internationally, we also exceeded our pool. When you add up our bonuses and penalties in the domestic and international markets, we went further than we’d ever gone. Add all of that together, and you get the highest amateur talent expenditure we’ve had in any year.
Again, on emerging markets, where good local intel offers huge risk/reward:
For the first time, we have a Pacific Rim presence. We have a coordinator who is based on the west coast — he’s in Seattle — and we’ve added an area scout based in Asia. We’re looking to add one more . . . Now, with more players coming out, and the acquisition costs coming down — and the fact that there’s a secondary market for players — there are more opportunities for us. We want to have a lot more information on these players.
Distressed assets too:
We have a plan in place to expand our scouting in Latin America. Like everybody, we’re working on how to be reactive to the situations in Cuba and Venezuela, and what opportunities are going to presented in each. Both have been made difficult, but that could change.
Williams goes on to discuss other investments in lower level coaches, training facilities, medical staff and, of course, analytics. These are all ways to “beef up the bottom end of the pyramid” that will ultimately yield better results at the top-end, i.e. the major league roster.
Of course, a tiny plug for the benefits of a relative outsider with good analytic skills, but little domain expertise:
My first job in the game came when I was 35. My jobs before baseball were in investment banking, politics, and finance, so I kind of started fresh with no preconceived notions about how things should be done . . . You can’t build a baseball front office with all people who come from outside the sport, but having someone come in who is willing to challenge the status quo can be a positive. It can help free people up to think outside the box.
Anyway, read the interview. Here is my contribution:
What’s striking (to me) is how much investment bankers and technocrats have in common. They both have a vision for the organization that will optimize returns. Banker/technocrats think systematically and break their organization down into its constituent parts. The most successful banker/technocrats are skilled managers with deep networks.
Most importantly, banker/technocrats determine where to allocate capital, in what amounts and at what cost.
A major difference, of course, is that baseball is walk in the park compared to say, something as complex as THE HEALTHCARE. Baseball is chock full of reliable counting statistics and is backed by relatively stable cartel. Even multibillion dollar mergers are relatively straightforward when compared to POVERTY or TRADE.
Even then it’s still really hard. Executives are basically guessing — educated guesses — but guesses (or wagers) nonetheless. And no one would be foolish enough to guarantee success or *gasp* have a single executive control all the deals, when a single deal is hard enough.
And therein is the biggest difference between i-bankers and technocrats: when executives guess wrong, it’s relatively easy to tell and the consequences are relatively swift. Their team fails to win (or the deal goes south), they get fired. Sometimes it’s bad luck — again, baseball/finance is really hard — but winning is a clear benchmark.
Technocrats, by contrast, don’t even acknowledge that they’re guessing and — even if they admit they’re losing — they just blame the other teams for beating them. What makes the lack of honesty and accountability even worse is that technocrats are gambling with everyone’s health, wages, working conditions, security, etc. (and not just their own team’s).
It’s crazy, if you think about it. Society’s hardest problems are reserved for the firms with the least incentives to solve them. And their services are not take-it-or-leave-it — there is no opt-out, or voluntary participation. That’s not an accident, of course. If there were opt-outs — e.g. a regulated livery (taxis) v. its cheaper unregulated alternative (Uber) — people might realize that “public” services are not nearly as good as their “private” equivalent. That’s not a risk “public” technocrats are willing to take.