Oftentimes, there is perceived to be a disconnect between making money and winning ballgames. This is perhaps inevitable, because it’s easy to see how expenditures on talented players can negatively impact a team’s bottom line, but more difficult to see how the extra wins those players generate can positively impact a team’s top line. But they do, sometimes profoundly, like when those wins lead a team into the playoffs or toward a championship.
I believe that professional baseball clubs should be run with the objective of maximizing long-run profits, but I also believe that there is strong alignment between this goal and winning championships. It doesn’t take long to look at the attendance turnarounds at places like Comerica Park or U.S. Cellular Field — or the vacant upper decks at Camden Yards and PNC Park — to see what I’m talking about.
Now, that doesn’t mean that reconciling wins and profit is easy, so teams need some kind of a framework to orient their decision-making. There are two fundamental ways to go about it.
The Payroll Budget: Maximize the number of wins, holding payroll constant. In other words: “Let’s build the best team that we can for $80 million dollars”.
The Wins Budget: Minimize payroll, holding wins constant. In other words: “Let’s build the cheapest team that we can expect to win 92 ballgames”.
The payroll budget is, of course, the more traditional way to go about it, and the way that the overwhelming majority of major league clubs align their decision-making. You’ll read all kind of statements in the press this kind of year like “The Rockies have approved a payroll increase to $65 million” or “The Red Sox want to keep payroll in the $130 million range”. But this is the improper framework. Payroll is not the thing that you want to hold constant.
The reason is that a fixed payroll figure does not tell you anything in the abstract. How do you set your payroll figure? It does not tell you how many games your team is likely to win. The Yankees spent $190 million last year and won 94 ballgames. The Indians spent $61 million last year and also won 94 ballgames. Nor does it tell you how much profit your team can expect to make, because it looks only at the income side, and not at the expense side. Perhaps the Blue Jays can spend $80 million next year and make $80 million dollars. Or, they can spend $90 million next year and make $100 million dollars. Which one should they choose? Well, the answer should be obvious to anyone with a fifth grade education. But it doesn’t seem to be obvious to a number of major league baseball clubs, who can’t see the revenue forest for the payroll trees.
The Wins Budget resolves this problem because the number of wins that we choose does mean something. For example, a “budget” of 90 wins means that a team is going to reach the playoffs as often as not, and a budget of 95 wins means that a team is almost always going to reach the playoffs. Moreover, we do have some idea of which wins figures tend to maximize profits. Generally, there are two equilibria, one of which comes at 90-95 wins where the team becomes very likely to make the playoffs, and the other of which comes at some much lower figure — perhaps 60 or 65 wins — where a club is fielding a team’s worth of “freely-available talent” (either players picked off the waiver wire, or players from their farm system whose salaries are substantially below market because they have not yet become free agents).
The concept of the Wins Budget looms large in the Hot Stove Preview that I just completed. As you’ll see from reading that series, setting a Wins Budget is not always straightforward. Teams are not just trying to maximize profits in 2008; rather, they are trying to do so over the long run. There may be times when some budget between the two equilibria makes sense. This might be because the team is moving from the 60-win pole to the 90-win pole but can’t get there in one off-season, or because there are certain inflection points at which a team’s product offering becomes credible or non-credible to its fans. Moreover, the Wins Budget is impacted by the strength of a team’s division, by the peculiarities of its fan base, and by the expectations that the team has established for himself. An Wins Budget of 88 would probably be fine (e.g. profit-maximizing) for the Brewers. It would probably not be optimal for the Red Sox. Nevertheless, for the most part teams should be gravitating toward one of the two equilibria: the “Playoff Contender” equilibrium and the “Rebuilding Year” equilibrium.
The Wins Budget was a particularly important concept my discussion of the Dodgers. Suppose that the Dodgers set a Wins Budget of 94 next year, which means that they’re almost definitely going to make the playoffs, and quite possibly be the best team in their league. (Let’s ignore for a moment the question of whether 94 wins is a more optimal choice than 88 or 71 or 102). What is the cheapest way that the Dodgers can build a 94-win team?
Well, it certainly does not involve Alex Rodriguez. The reason is that they already have a third baseman in Andy LaRoche who is (i) very cheap and (ii) could be pretty good. On the other hand, the center fielder is Juan Pierre, and the fifth starter is probably Esteban Loaiza, both of which are significant problems. Suppose that instead of spending $30 million on A-Rod, the Dodgers instead spent $25 million on Curt Schilling and Aaron Rowand. I would guess that when we run the PECOTA projections for those players in a couple months time, we’ll come up with something like the following:
3B Alex Rodriguez 70
CF Juan Pierre 10
SP Esteban Loaiza 5
Total 85Player VORP
3B Andy LaRoche 25
CF Aaron Rowand 40
SP Curt Schilling 40
The Rowand/Schilling bundle of players is not only likely to be a little cheaper than the A-Rod bundle, but also a little better, by a margin of about 20 runs (or two wins). This does not really have anything to do with A-Rod, but rather with the configuration of talent that is already on the Dodgers. For the Phillies, who have no kind of third baseman at all, bringing in A-Rod could well be the optimal strategy.
The point is that, once a team establishes its Wins Budget, there are any number of ways to achieve it. It’s not that the Dodgers should sign A-Rod because they shouldn’t try to win 94 games. It’s that there are more efficient ways to accomplish the same thing.