I was reading an article by Nate Silver a few weeks ago when I ran across a paragraph that articulated many of the thoughts I’ve been having on how teams should approach their offseason plan. Essentially, Nate put my thoughts into words, and then expressed them in a way that made sense of the jumble I had going on upstairs. Here’s what he wrote under the context of suggesting moves for Walt Jocketty in keeping the Cardinals as contenders in 2007:
Set a wins budget, not a payroll budget. It’s my belief that most major league baseball teams go about their budgeting the wrong way. Sometimes it’s worth spending more than you might have been planning on if you can acquire a player who will get you over the hump and into the playoffs, since the financial rewards for making the postseason are substantial. Other times, your team is so far from making the playoffs-â€“or such a cinch to make them-â€“that paying market price for free agent talent just doesnâ€™t make sense.
Put differently, rather than figuring how much money they want to spend, baseball teams should determine roughly how many wins they’ll need to make the playoffs, and spend on payroll until that they have the talent on hand to realistically reach that goal. For the Cardinals, the magic number is probably 90 wins; it would be higher if they played in a tougher division.
This is a wildly different concept than most teams operate under. Because almost every major league team is run as a corporate operation, the baseball operations department is given a budget for player payroll that fits into a fiscal year line-item for the corporation as a whole. Essentially, the accountants tell the front office how much money they can spend and tell them to do as well with that as they can.
While acknowledging that there are some issues with what I’m suggesting, I believe this design for setting payroll is inefficient and could be vastly improved. Instead of trying to cram as many wins as possible into a preset number of dollars spent, teams should figure out how many dollars they need to spend to reach their preset number of wins targeted.
Basically, Nate and I (independently, as we haven’t talked about this) support a 180-degree change in the way the baseball operations departments interact with the organization’s accountants. Rather than handing the baseball ops people a similarly sized check every year, baseball teams would be better off going to requisition-style budgeting concept.
How would this work?
We’ve talked a lot about marginal win values on the blog. Essentially, the concept of marginal wins is that a team of league minimum players would win 50 games or so, and every dollar spent over the league minimum is being used in hopes of gaining wins 51 and up. These wins are the marginal wins, and the excess payroll is the marginal dollars spent. This kind of analysis allows us to look at the league as a hole and say that a marginal win is worth about $2 million in salary.
However, league wide averages of marginal win values start to lose some of their importance when applied specifically to one team. Every team has a different roster of committed salaries and budgets for the following season, and so each team will have a different marginal dollar amount to spend on building their roster. The Yankees can blow the $2 million per win number out of the water and not blink an eye, while if the Marlins tried to spend $2 million per win, the ownership would flip out and demand a firesale.
In a win-budget concept, a team would do a rational, honest evaluation of how many games the current roster could be expected to win if each additional hole was filled with a replacement level player, and then request a player payroll budget based on the amount of marginal wins they’re going to attempt to add that offseason. For a team that believes it has a 60 win team in the organization, spending $30 million to buy another 5-10 wins is pretty foolish. However, if a team has 90 wins sitting around, spending $30 million to make yourself a 95-100 win team is well worth justifying. A team operating on a win budget system would spend significantly more when their team is contending and significantly less when their team is rebuilding.
A move away from a fiscal year budgeting system would give the baseball operations department much more flexibility in their long term planning and allow organizations to allocate resources much more efficiently. Let’s use the Mariners as an example of what I’m talking about.
For 2005 through 2007, the Mariners are going to end up having spent around $270 million on their player salaries. They essentially spent it in equal chunks, with about $85 million going out in 2005, $88 million in 2006, and a projected $95 million or so in 2006.
If they had shifted to a win budget system after the debacle of 2004 and correctly analyzed the talent they had on hand, they could have fielded a 65-70 win team in 2005 for about $70 million. Last offseason, the goal was to get to 80-85 wins, which could have been accomplished on a payroll of about $80 million.
That would leave them with $120 million dollars, not including the accrued interest gained from the money not spent in prior years, to spend on the 2006 Mariners, the year that they’ve been mandated to win or lose their jobs. Would you like the M’s to have $120 million payroll next year? Yea, me too.
A win budget system systematically shifts payroll dollars away from years where the team is rebuilding and into years where the team is challenging for the World Series. It maximizes the impact of the wins the teams are paying for, and acknowledges that a 95th win in one season is worth more than the 72nd win in another season.
Someday, someone in a front office is going to convince their owners to shift to a win budget system. And their economic advantage is going to be staggering.