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Projections Deep Dive: Re-levering with a Team Performance Model
Analyzing the "Value Chain" to identify where club activities interact with player talent to affect results and contributions
Previously On “Absolute Unit”
We were lifting the financial valuation framework over to player recruitment in a football club. At a high level, the financial world estimates the “value” of an asset as (i) the projected future cash flows it generates, which are then discounted, to price it relative to the amount, risk, and timing of similar assets' cash flows using (ii) the concept of a “required rate of return.”
To (i) project future cash flows the basic steps we agreed on were:
Adjust the historical results for noisy, non-recurring items to create “pro-forma historical results.”
Take those pro-forma historical results and project them forward into the future in some kind of documented, evidenced-based manner based on the information publicly available.
Layer in any proprietary information you may have related to the thing being valued.
Apply individual judgments not already included above.
In last week’s er the most recent post, we tackled an soccer-analogized steps 3 & 4 above together as we continued to walk through the five layers (not to be confused with the 5 steps above) of projecting player contribution rates, with projecting player contribution opportunities to follow, the two components together comprising the total projected player contribution over his contract term (steps 3-4) above in the total player projection process. Below are the five player contribution rate (or ability) layers, including the fourth upon which this post focuses.
As for these layers, we started with the player historical accounting records we had obtained in Step 1, and normalized in Step 2, and then last week we discussed stripping out team effects from the player’s past contributions, then growing what was left up or down a player development and aging curve, giving us a team agnostic projection for the target player’s contributions over a proposed contract term. But because the point of this exercise is not to assign a theoretical value on a player’s contract, but it is to potentially sign the player onto our team, and because our organizational objectives are set at the team level (e.g. achieve a goal difference of +37 next season), we cannot ignore the effects of the player’s natural contribution abilities interacting with the rest of the team’s abilities, its players, it’s coaching staff, it’s technical staff, it’s ideas, etc when trying to project a forecasted contribution to team goal difference (and that is what we’re doing here — we’re trying to put together a team who we can project will meet our organization’s competitive objectives).
Just like the other problems we’ve tackled in the last several posts, this one is difficult. To understand fully how the various activities and components of a club come together to create superior performance is to understand fully something that is not entirely knowable as far as I understand. Nevertheless, if you’re leading an organization you have to put forth some sort of a proposal for how this works. And this would be broadly what I might call a “team performance model.” It’s difficult trying to pinpoint exactly where to begin here, so as is often the case on this website, we’ll start in the business world, specifically in the “business strategy” arena.
Porter’s Value Chain Analysis
One of the fundamental building blocks of any “business strategy” literature is Michael Porter’s “Value Chain Analysis” which he introduced in 1985. The idea is that a firm’s business process includes a series of internal activities it undertakes towards the pursuit of earning a profit. He theorized that a firm can either achieve excess profits by 1) producing its product at a lower cost allowing it to either sell it for a higher profit margin, or to achieve a higher market share by selling it at a lower price than its competitors, or 2) differentiating its product from its competitors allowing it to either sell the product for a higher profit margin or to achieve a higher market share by selling the superior product at a similar price. So to optimize your business strategy along one of these two lines, you would take a close look at all of the activities you engage in (together the “value chain”), to either 1) judiciously pull out costs from each activity to lower the overall cost of production or 2) identify which activities are the primary differentiating factors, value-creators, and strong bonds and links between the various activities that create the strongest product with the most features for the customer, respectively. While there are always some opportunities for a differentiated product to achieve cost savings or vice versa, generally the firm is picking one of these two competitive approaches to go to market. A way to think about it is to imagine two firms with equal economic resources. They have to figure out the best way to allocate those resources to achieve high profits, and generally the more efficient way is to focus your “strategy” along one of these paths. By dabbling in both, you lose some efficiency and clarity among all your various managers and employees.
At any rate, the “value chain” is a general model (part of why it’s stood the test of time and continues to be used today), and includes 5 “primary activities,” which can be thought of as primary steps in the production and delivery process (inbound logistics, operations, outbound logistics, marketing, and service) and then four broad “support activities” (firm infrastructure, HR, R&D, and procurement) which are the sort of general activities that support the primary activities at any company. I’m not sure why he put the “support activitie” above the primary activities in the below diagram (don’t supports go on the bottom?), but alas. Here it is:
The value chain analysis is a step by step investigation into each of these activities with the noble goal of identifying the primary value-generating activities that align with your business strategy, and then producing an action plan that improves them to further increase profits.
I had a professor in business school who would furiously scribble lines of linkage between the value chain activities in the above diagram, and he would use darling companies like Starbucks and Southwest Airlines to illustrate the exercise. To be honest, I was constantly rolling my eyes — it just felt a bit hand wavy and soft to me. It’s ironic then, that I’m about to use this framework as a way for us to contemplate what creates competitive value within a soccer organization.
To even imagine applying team-specific adjustments to the player contribution projections we developed in the last couple of steps, I feel like we just need to swim around in these value chain concepts for a bit. What I’m really after first is just some open and honest reading of the following questions:
1) At a high level, what is the basic scale of the elements of what produces sustained competitive performance (measured by goal difference) for a club? Is it the players? The coaches? The analysts? The physios? The training facilities? The fans?
If you squint, how do those team-agnostics player projections drive the overall projections versus these other elements, and how are we as a club doing at investing in these other elements? Should we boost our expectations for the luxurious new training facility we just built or did we sign a coach with an excellent track record of developing young players? Should we bring our expectations about a player down a peg because of our lack of a player liaison to help players from other countries integrate?
2) How does a coach’s “Game Model” interact with the individual ability of players to contribute to “goal difference” and how should this interact with player recruitment processes?
Does our target player’s “playing style” fit with the specific instructions and requirements that the manager’s game model, and if so, how many goals is that sort of “harmony and alignment” worth?
3) Further outside of the immediate scope of the player recruitment process, can a team use some sort of a value chain analysis to better identify an overall footballing strategy for them given their competitive goals and the resources at their disposal?
It seems to me like if you can answer those questions and you have a good idea of how your club operates, how it aims to generative sustained competitive performance, and also how important all of this is relative to the simple importance of the level of talent you are trying to put together, then you are in a good spot to apply some team-specific adjustments to your player projections, rounding out the “player contribution ability” phase of the projection steps. And I would propose a good place to start is to analogize to Porter’s Value Chain Analysis and build a “Team Performance Model.”
Team Performance Model
Above, I analogized to Porter’s Value Chain analysis and took the liberty to sketch out what the diagram for a club’s competitive value chain analysis might look like at the highest level. Again, the original value chain analysis envisioned by Porter is used to identify the activities that create value that leads to margin or profit, and this is not that. Every football club should probably also perform that true value chain analysis on that more business-y level, the commercial plane of existence, where they’re identifying the primary activities that create profits for the owners (which we briefly and informally summarized in one of the first ever AU posts for the purpose of setting the scenes). Indeed to connect the dots, if they performed that true business value chain analysis, they might very well identify the “soccer operations” as one of the primary activities, along with sales & marketing, matchday operations, and so on.
But if we were to zoom slowly into the “soccer operations” activity of this for now abstract football club business value chain we would suddenly find ourselves in a new dimension, with a new value chain organized around the competitive operations of the club and identifying the primary soccer operations activities that the club engages in in the pursuit of competitive excellence, which we’ve already defined as some target objective of team goal difference.
I would encourage each club to build this from the ground up based on how they see the game and how their club operates or they intend to operate it, but for the purpose of illustration, I’ve gone ahead and identified primary activities of Scouting/Recruitment, Game Model/Tactics, Training/Man Management, Continuous Analysis, and Game Management, which sort of mirrors the flow Porter lays out from inbound logistics to operations to outbound logistics, service etc but for scoring goals and not conceding them. Within these activities I’ve sketched out tasks and/or inputs that I think would be useful in exploring and identifying as areas that you might either identify as a primary differentiator or value driver for your club, or an area that is necessary but is difficult to create excessive value from, or perhaps an area that could use more investment. A good analysis (which I have not done here in the abstract) would include annotating each of these tasks to explore, understand, and articulate how the club performs each tasks, and the ways it goes about performing these tasks, working towards the goal of putting a highly competitive team on the field and then executing on matchdays.
Connecting it back into projections
But back to how this integrates back into our player projection framework— we’ve already taken a player’s historical performance and adjusted out a proxy for his current/prior team effects based on some top-down model a smart analyst has created or will create, then we used aging/development curve concepts and sound projection techniques to forecast the player’s performance absent of any team-specific effects over the proposed contractual period. At this point, if we’ve gone through the exercise of building a robust “Team Performance” model in the template of Porter’s Value Chain analysis and spent some time exploring the various activities and inputs that our club engages in or with to put a better product on the field, then we might have created some insights about team-specific effects to apply to the player projections.
Many of these activities we will properly determine are immaterial to the overall estimation here, but there are several inputs or tasks that I could imagine having a non zero impact to a team-adjusted player projection. For instance, a team’s track record with developing young players might suggest some team-specific effect related to how a player’s aging curve is steepened or flattened. Historical records of players integrating into the club culture if coming from different cultures (or the expected ramp time) might suggest we can hold his past performance constant to an extent. We might identify any number of other club-specific synergies based on strong linkings in the chain, but the one that jumps out to me first has to be the interaction between a player’s unique set of skills or talents (i.e. his play style) identified as part of the recruitment process and the skill requirements inherent in and required by the manager’s game model or his conception of how his team is to play.
This concept of a “game model” is something we haven’t delved into too deeply yet, and it’s probably something that we should cover in its own post to fully illustrate this interaction and to contrast it with perhaps more mainstream ideas around play-style and recruitment. But quickly to summarize what this is, I’ve seen at least one FA presentation that described the primary purpose of a team’s “Game Model” as clarifying the overall tactical structure for a player, reducing their uncertainty and thus allowing a player to react faster and harness their creativity to its fullest possibilities in game moments. So we’ll cover that in further detail in the next post. First, this description of the game model, and it’s focus on this idea of adding a half second back to the player’s decision making moment to moment, an improvement that stems from the player’s already-baked-in familiarity with the overall team plan is something I quite like and leads me to my last comment for today:
Closing Thought: What is the point of all this complexity?
As I pause for a second on this whole newsletter, it strikes me that this all might at first seem too complex to be easily implemented for a club. After all, player recruitment decisions often need to happen quickly. While a “ready, fire, aim” strategy could be existentially costly to a club’s finances or competitive ability, a “ready aim aim” strategy may well not land it the player deals it needs to strengthen the squad before the windows of opportunities are closed. And here I am shedding thousands of words with each installment and then often before we move onto the next phase or step, we have to dive deeper and expand a given phase into… like 5 more layers, or introduce new analogical frameworks with which to explore the overall concept…
As a response, one way to think about what is at times a byzantine conceptual framework for a soccer operations department, is to say that the point of all of this structural or conceptual rigor, all the layers, the analogies, (the power point slides for God’s sake), is to affirm the interdependent nature of many of the club’s (or the sport as a whole’s) activities and to clarify for everyone in the soccer operations organization the overall strategic structure of the team performance model and the player recruitment process, allowing a GM or Sporting Director or scout or analyst to react faster in the moment and to harness their creativity to its fullest possibilities, to apply judgments and to embrace uncertainty, to accept risks and understand them.
In the same way that a player is asked to invest his time in understanding the manager’s ideas of the game, his game model, principles, sub-principles, phases of play, tactics etc. so that in the moments that matter most he can execute with decisiveness and creativity to achieve an optimal outcome, the technical staff as a whole should be investing time in fully fleshing out these processes and theories of value for their club— and this means investing the time in exploring the ideas but also investing and setting up the infrastructure (processes, trainings, databases, cadences etc) needed to operate the department at its highest level. If you have a great front office staff, then there is real value in letting them focus their day to day on generating new and unique insights that help you win, and not having them rethink the entire organizational value premise whenever there is a difficult decision or opportunity, or having to constantly defend the conceptual basis for their insights, or worse making critical decisions having never even considered these concepts.
Before all is said in done, I’ll try to sketch out in a flow chart what properties of this overall framework could be automated as a first step and thus requiring little ongoing conceptual maintenance, literally then saving time and mental energy for the decision makers, and which areas are best left blank, open to professional judgments and disagreements. But hopefully I can convince you that there is merit in building up this conceptual framework deliberately and at times circuitously.
I appreciate your patience between the last couple of posts. Life is at times less patient!