Managing Sports for Success

Background:

Fans tend to focus on the players on the field or court, but that is only the tip of the sports business iceberg. Sports are entertainment first and foremost. Entertainment is a profit-generating business and the players are hired mostly for that purpose. Often, fans of spectator sports ignore the financial purpose of a sport and try to focus on the game itself and its participants. However, in professional sports business, the primary goal is to make money for the owner and not necessarily win games. While these two goals may be related, since winning generates more interest in the team, other factors are involved. And for some sports teams, there are crucial moments when opportunity and risk are both high – like this year’s situation for teams in the Women’s National Basketball Association (WNBA), the most prominent women’s professional basketball league in the United States. For many reasons (especially higher fan interest), WNBA teams are hoping to evolve from risky startup businesses into major entertainment enterprises by taking advantage of increased media attention, new team franchises, larger venues, and a new digital platform to increase revenue. The owners in that league need to use sports analytics to succeed on the court but also use financial modeling to achieve significant financial gain in the bottom line of their business’s profit sheet.

Should players (and other employees of the team business) in a sport get paid more for their performance that produces wins or for their contributions in turning a profit for the team owner? Sometimes, a player’s sport performance is directly related to profit, but not always. Some players may attract fans based more on popularity than performance. These players may generate ticket, parking, concession, and jersey revenue much more than players with higher levels of performance. Financial and sports analytics models need to connect to create good team decision making.

In the emerging field of sports analytics with various kinds and amounts of performance data, there continue to be challenges to build statistics that quantify the value of player talents and performances (what statistic to measure, how to measure it, when to measure it). Some players are injured more frequently than others. How does that affect player value? Some have personalities that lead to more popularity and appeal that lead to financial gain. Context and timing matter in the sense that some players, even those with average performance, come through at important moments of the game or critical times in the season. There is a temporal element that must consider the measure of future potential of a player/employee on achieving the goal of the team. Some roles may be performance or skill-based and other roles are accomplished more by hard work and perseverance.

The player or team perceptions, popularity, timing, and marketing can play major roles, in addition to the location of the team. Teams in large markets often have different sports situations and goals than small-market teams. Those differences impact how owners achieve profit and recruit their players and employees. Can modeling help an owner establish methodologies for setting offers, negotiating, and writing contracts?

There are many team issues that are strictly or mostly financial, just as there are issues that are mostly sports. In many cases, professional sports teams are franchises that are part of the league enterprise and often operate with additional rules and constraints set by leagues or governments on their player salaries and contracts. These are intended to make the game competition fair with some reasonable amount of competitive balance. Some professional sports have systems that regulate salaries with caps or taxes. Every season, the owner must decide how much to finance with debt versus equity and whether risks in the form of seeking better team performance with associated additional costs are worth taking. In the sports business world, conditions such as revenues, salaries, injuries, trade opportunities, taxes, fees, and interest rates change over time. Sports teams are now seen as premium assets, with values in many sports soaring far beyond historical norms due to financial and market factors such as lucrative media deals and accumulation of vast data streams and intellectual property.

As a modeling group for a sports team, your ICM team can use publicly available sport and finance data for a team of your choice (the team you select must consist of at least 5 players that play cooperatively at the same time and be a member of a professional league) and build a business and management model for the team for the coming or next season.

As was mentioned earlier as an example of how this modeling work can be extremely valuable, the WNBA is undergoing significant financial changes -- record viewership, rising franchise values, and significant player benefit expectations. Currently, negotiations and demands over the revenue-sharing agreement between teams and players are sticking points. During this coming season, team owners have an opportunity to remake and improve their business or succumb to risks that may cause them to sell or take on substantial debt. These issues create a situation where solid financial and sport modeling can make a big difference for the current and future owners of these teams. You may use a WNBA team if you care to, but you are not required to do that.