How do MLB teams do Business? Is it the Best Way?

In what business would a company recruit one hundred employees and only have five of them perform the task that they were originally hired to do? Yet, this is the case in Major League Baseball (MLB) where a club will sign one hundred amateur players and expect that five of those players ultimately play in the major leagues (Goodman, 2008). Each season MLB clubs spend millions of dollars and thousands of hours of manpower attempting to find future major league talent with relative small returns on their investment. A general manager (GM) of an MLB team must be able to correctly identify organizational needs and provide solutions to problems that occur throughout the course of a season and offseason (Wong & Deubert, 2010). A GM is responsible for building the team with the resources that are available such as budget constraints, present talent, current staff and market size. Even the best GMs rely on the quality and quantity of other employees within their respected organization such as scouts, coaches, and other front office personnel when gathering the necessary information required while making decisions regarding a player or staff member. When attempting to address a need within the organization all resources must be considered (Wong & Deubert, 2010).  The goal of the GM is to determine by which measures to judge a player’s ability when using such factors as hitting, pitching, fielding, age, speed, intelligence, or fan popularity and then having the ability to place a dollar figure to each player and the individual tools he possesses (Bradbury, 2007).

The 2003 book Moneyball by Michael Lewis followed the 2002 season of the Oakland Athletics and general manager Billy Beane as he placed greater emphasis on statistical performance to evaluate players. The statistic which was highly valued for decision making was on-base percentage (OBP) because the Oakland front office believed that it could acquire players with high OBP at a discounted price as the ability to get on-base was being undervalued by other MLB clubs at the time. The key about Moneyball was not the system of evaluation in making decisions, but rather the fact that Billy Beane showed a willingness to challenge the status quo and implemented a new system. Billy Beane believed that by using more advanced statistical analysis of players the small market Oakland Athletics would remain competitive despite at an economic disadvantage over large market clubs such as the New York Yankees. The ultimate goal of the Athletics is to get more wins with a lower payroll or simply more value out of each dollar spent on payroll. The 2002 Oakland Athletics for example had an opening day payroll of $40,004,167 and the 2002 New York Yankees payroll on opening day was $125,928,583 (USA Today, 2011). However, both the Athletics and Yankees finished the 2002 season having won 103 regular season games, yet Oakland spent $388,389.97 per win when the New York spent $1,222,607.60 per win. Oakland thus got more value out of the payroll despite spending a significantly lower amount on the total payroll.

The main problem with the Moneyball system was that it discounted the hard work and many hours of labor that the team’s scouts had put into finding the next wave of Oakland Athletic players. When putting together the roster of the 2002 team Billy Beane relied on pure statistical analysis that came from the computer of Assistant General Manager Paul DePodesta and completely ignored the input of the Oakland scouting staff (Lewis, 2003). The reason being that Beane wanted to remain objective when making decisions and scouting is mostly based on subjective measures such as height, weight, body type, age, attitude, intelligence, and physical attributes such as a hitter’s swing or pitcher’s arm action (Lewis, 2003). In the world of baseball scouting, one scout can love a player while another can have a completely different opinion of the same exact player. Beane had issues with traditional scouting and wanted to eliminate the bias and preconceived ideas that existed about a player having to look a certain way in order to be a successful player (Lewis, 2003). In Beane’s own playing career he had the body and possessed all the physical skills that traditional scouting coveted and yet never became the superstar player that scouts envisioned (Lewis, 2003). He was unable to handle and adjust to failure which is extremely important in order to become a successful major league player.

The Moneyball system challenged the traditional thinking that existed in baseball and to a large extent still does (Lewis, 2003).  What has led to the popularity of Moneyball in popular culture is the fact that it asks questions that previously were not asked and definitely not put into practice in the baseball industry yet also could transfer into other industries and day to day life. In both business and life people continue to maintain the status quo by performing tasks the same way as always when those ways may not be the most efficient (Lewis, 2003). The organizations and individuals that are able to remain innovative are the ones that will be able to build and maintain a competitive advantage over their competition (Lewis, 2003). This is extremely important in the business and sports world.

The 2011 book The Extra 2% by Jonah Keri is a detailed account of how the Tampa Bay Rays went from being the worst run franchise to one of the best both on and off the field. The transformation of the Rays is attributed to new owner Stuart Sternberg, President Matt Silverman, and General Manager Andrew Friedman who all previously worked in the financial sector on Wall Street in New York. They view players much like the stock market in which one must analyze past performance to better predict future output. Ideally they want to get the most out of each player before the individual price of that player becomes too expensive. When trading with other teams they want to try to sell their own players high and buy other players at a low much like a stock broker does when diversifying his portfolio. A good stock broker will cut his losses on some investments while turning a profit on his overall portfolio as he realizes that some stocks perform better than others.  The Rays today are a prime example of a team that has been able to remain highly competitive on the field while remaining at a financial disadvantage off it. The Rays have made the playoffs in three of the last four years and won the American League East Division title in 2008 and 2010 despite having a payroll that annually ranks near  the bottom of the league (29th-2008, 25th-2009, 19th- 2010, 29th-2011) (USA Today, 2011).  The 2008 Rays lost in the World Series which was something that the Oakland Athletics of the early 2000’s were not able to accomplish.

Each season a number of free agents sign on with new clubs for large amounts of money. Prior to the 2001 season Alex Rodriguez signed a ten-year, $252 million contract with the Texas Rangers becoming the first player in MLB history to make over $20 million per season (CNNSI, 2000). In December 2007 Rodriguez signed a ten-year $275 million contract with the New York Yankees (Associated Press, 2007).  Barry Zito signed a seven-year, $126 million contract with the San Francisco Giants in December 2006, which at the time was the biggest contract even given to a pitcher (Associated Press, 2006). The New York Yankees signed pitcher CC Sabathia to a seven-year, $161 million contract in December 2008 which equals $23 million per year (ESPN, 2008).

In the case of all four contracts listed above it is difficult to justify both the length and total salary of each player from a pure economic standpoint if one factors in the marginal revenue product (MRP) of a player, which is the dollar value (in millions) of what the player is worth to the team in generating revenue (Bradbury, 2007). In a competitive market for talent, player wages should equal the gross MRP minus the marginal resource cost of putting the player on the field (i.e., training and equipment cost) (Bradbury, 2007). In simple terms a player should be paid based on his contribution to the team and should not have a salary higher than the amount of revenue that he brings to the club. In the 2009 season the top MRP among all of the position players in MLB was Albert Pujols of the St. Louis Cardinals at $27.43 million, the top MRP among all pitchers in MLB was Tim Lincecum of the San Francisco Giants at $19.01 million (Bradbury, 2011).  In comparison in 2009 Alex Rodriguez’s MRP was $9.55 million while his salary was $33 million, thus his performance did not equal how much he was getting paid. The was the case with Barry Zito ($6.06 million MRP-$18.5 million salary) and CC Sabathia ($10.52 million MRP-$15,285, 714 salary) who both were paid higher salaries than revenue they generated for their  respective clubs. It is clear that all three of these players where overpaid for what they produced during the 2009 season. If one breaks down the total contract with all years included it becomes apparent that all three players cost their respective teams more in salary then they produced in revenue over the long term. Ideally, a team wants to pay a player less than what they ultimately produce for the club, an example would be Tim Lincecum ($19.01 million MRP- $650,000 salary) in 2009. Realistically a team will have some players finish the season with a positive MRP and others with a negative but wants the overall roster to finish any given season with a positive MRP. The 2009 Giants overpaid Zito but underpaid Linecum so if you combine the two players the Giants had a positive MRP of $5,920,000.

It is much more difficult to determine the appropriate amount of money to be spent on signing amateur free agents and draft picks due to the uncertainty that surrounds young unproven players who have never played in MLB.  In the 2011 draft, for example, MLB teams spent $228,009,050 on signing bonus and a total of $236,059,050 in guaranteed money (Callis, 2011). On average each major league team will signed 30 players meaning a total of 900 players will join a MLB organization. Based on the current industry standard, of the 900 players signed it is expected that 45 play in the majors for an extended period of time. This means the average cost (minus development costs) per player that plays in MLB is $5,342,575.67.

In MLB teams mismanage the resources that are available to them be it when acquiring players. It is not unusual for a team to improperly value players which results in a waste of money and time. In order to remain competitive small market clubs such as Oakland and Tampa Bay they must get the most out of their limited economic resources. The New York Yankees pay more per win than any other team in the MLB and routinely overpay players when attempting to win. Each season teams spent millions of dollars signing amateur free agents and draft picks when the odds of them playing in the major leagues are 5%.  It is clear that the MLB industry as a whole  has to ask the simple question “Is the current way of doing business the best one?”


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Tags: 2011 MLB Draft Albert Pujols Alex Rodriguez Barry Zito Billy Beane CC Sabathia MLB Moneyball New York Yankees Oakland Athletics Tampa Bay Rays Tim Lincecum

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