Thanks for following along so far and for sharing. This wide lens installment is an opportunity to zoom out from the serial explanation of the player-recruitment-as-financial-valuation theory we’ve been building towards in the other newsletters, and take a read through an outline of the overall theory in one post. Originally I wrote this draft as the introduction post but scrapped it. If you want to know where this whole thing is going, you’ll want to read this one and hold it in you mind as we wind our way through some more analogical corporate finance stuff in the coming weeks. Let us make haste.
Planes of Existence
For any football club, there exists two planes upon which its management must assess and make critical decisions concerning “value.” One such plane is the financial or business dimension, where the soccer results and operations of a team are converted via commerce into actual cash flows and profits. The other more exciting plane upon which a football club must engage with the idea of “value” is the footballing realm. The competitive plane of value is the primary value generating activity for the football club, where success on the field is measured by the trophies raised, the results of matches, and the goals scored and conceded. The organization pursues success on the field to satisfy its customers, thereby growing and/or maintaining a solid revenue base that feeds back into the overall commercial objectives.
For the purpose of this exercise, the president/board of directors at a football club makes the critical and existential decision as to the trade-off between the level of capital or operating investment the club makes and the level of on-field success expected of and charged to the General Manager (or Technical Director etc), coaching staff and players. For the purpose of establishing our framework, we accept this highest level decision as a fixed constraint.
If the Board sets the level of economic investment and the footballing objectives, this leaves the General Manager with the singular material focus of optimizing the on-field success or reaching the required level of success (depending upon their charge from the Board), with a given, fixed level of economic resources at their disposal. This is a blessing and a curse — a curse because they are not in control of whether these two rigid sums, the level of investment (measured in the local currency) and the expected level of on-field success (measured in some combination of trophies, standings, points, and goal difference) are realistically aligned (although they can provide input through the budgeting process). It is a blessing however because it allows them to narrow their focus to identifying and realizing competitive value while rationing their allocated budget.
As it turns out, this idea of identifying, estimating, and allocating “value” is exactly why the fields of finance & accounting exist, and the gambit of this project is that they can contribute something important to football. Basic principles of corporate finance can provide for much needed structure here if mapped properly over to the soccer operations, establishing the interface through which football insights generated by club experts map over to the most important decisions a club makes.
If there is something provocative then about this newsletter, perhaps it is the assertion that money principles can apply to non money things.
Units of Account
If we assume that the GM is charged with his club meeting a certain on-field level of achievement, then from here we can reduce in a few short steps that there is a single unit of account that matters on the competitive plane: the unit of Goal Difference. For all important decisions, a GM should be equipped with an estimate of the marginal impact (and range of outcomes) that a given decision will have on their team’s Goal Difference over some discreet period of time. You might call this “expected marginal goal difference.” While I’m not aware of many public examples of a wholesale adoption of the methods proposed in these newsletters, it certainly appears as though I’m not the first to prioritize incorporating a common currency into the club’s discourse around player personnel decisions.
Similar to a CFO facing a capital budgeting decision or an investor choosing between investment vehicles, a GM needs a robust framework within which to estimate the value of a player contract or a front office decision. Importantly, when we talk about the value of a player contract to a club, for the purpose of this exercise, we are most concerned with the value as denominated in goal difference, something the GM must assess first, independent of the market value of the player contract (in the local currency). The primary mission charged to the GM is the achievement of on-field success, not direct economic success, so it would be a mistake for him to think and act primarily in terms dollars instead of goals. That is what the budgeting process is for.
By taking the estimated value of the player contract (in marginal goal difference) and bumping it up against the GM’s now fixed relationship between expected footballing success (in goal difference) and the available budget resources (applicable currency), they can quickly determine whether or not to move forward with the transaction based on its impact on and relation to the overall objective of a target team goal difference.
Discord & Harmony
The implementation of soccer analytics within football clubs to date has been impressive but not without its struggles. It has its skeptics and its critics, and some criticism is merited. One shortcoming of the use of analytics in the mainstream is the extent to which its outputs exist without a robust valuation framework to sit upon. There is a tremendous need then for a global unit of account within which to denominate the results of robust soccer analytics work, and I propose that this global unit of account match exactly the unit of account a GM uses when assessing the impact to competitive values of certain decisions. This necessary and simple alignment of the GM’s decision making unit of account with the soccer analytics unit of account immediately transforms the persuasive power of analytics in the recruitment process, while not only allowing for but demanding input from scouts and other non-analytics subject matter expertise. In other words, if a GM demands an answer denominated in “goal difference,” — and I allege they must — any inputs into this answer that are robust and naturally denominated in “goal difference” will be difficult to ignore, regardless of the GM’s politics around statistics. Converting the outputs of analytics into the absolute unit of goal difference is significant, but it doesn’t get us all the way there. When it comes to signing players, we care more about their estimated future contributions to the team than their historical contributions. Thus, we need a robust forward-looking valuation framework and then feed our footballing insights into it.
Introduction to “Value” in Corporate Finance
Soccer needs a robust valuation framework, and it can build one by borrowing principles from corporate finance. The most common academically recommended valuation framework in the corporate finance and investing world is the discounted cash flow method, which suggests that the value of an asset is nothing more than the sum of the future cash flows generated by the asset, discounted to the present through time at the appropriate required rate of return given the risks and opportunity costs. When estimating the value of a business for example, the process comprises the following steps:
A financial analyst first obtains reliable, standardized (and incomplete by design) accounting records for the business, which have been compiled into audited historical financial statements to serve as the foundation of any future projection.
Next, they layer in pro-forma adjustments to strip out the noise that exists within those historical financial statements, leaving only the most recurring, predictive results intact, bolstering this foundation.
Then they apply sound financial projection techniques and assumptions used to convert pro-forma adjusted historical records into future projections based on available public data and industry best practices and then enhance those projections with non-public information, trade secrets, or other reasonably supportable proprietary insights.
After supportable evidence-based projections are developed, an analyst must assess the required rate of return on the project given its risk profile and the opportunity cost of investing in this business versus another. This involves understanding risk-free rates, capital structures, entity and project specific risk factors, etc.
Next, there’s some math to calculate the present value of this fresh set of future projections discounted appropriately to account for opportunity cost and risk using the required rate of return that was just determined.
After a few last steps, considering control premiums and sensitivity analyses, a CFO or an investor has an estimated value denominated in the unit they care about, the local currency (cash) in present value terms, with which to make a decision or recommend a decision to the board.
Making the Connection
For each of the above steps in the valuation framework, one that is found in all corporate finance textbooks and has withstood the test of time, there are connections to be made to what a player recruitment valuation approach might look like. For the GM, expected marginal goal difference now replaces the local currency that an investor might use as the unit of account. There are some rather compelling analogies to be drawn between the two:
Soccer event data in its current form is a rich but incomplete data set and in this way, it is a lot like financial accounting data. The main critical difference is raw soccer event data is missing a global unit of account — one that we can supply it with using an “expected possession value” model to quantify the change in a team’s expected goal difference for each of the thousands of actions a player takes in a season. Having done this, we have a nice set of historical “accounting records,” now with a marginal goal difference unit of account attached to them, to use as the foundation of our player value. Alternatively, a data-skeptical approach (that I would not advocate for) includes conceptualizing the qualitative scouting reports as the underlying accounting records, and then supplying a “marginal goal contribution” unit of account to these some other way. This is more reliably achieved with the more objective soccer event data.
Because chance abounds in soccer and the future may differ from the past, we can also use insights from club experts to determine which of the historical data points derived above (whether they be quantitative or qualitative) are unlikely to recur if the club were to sign the target player (e.g. finishing variance, set piece contributions, penalties etc), and “pro-forma adjust” these events out of our historical data to arrive at a solid chunk of only the most predictive data to serve as the foundation of our projections. One helpful view of this now more predictive information it to calculate a player’s historical open-play contributions on a per game basis, or a per minute basis (e.g. per 90 minutes, per 96 minutes).
We can then use insights from club experts to determine how a player’s historical contributions (on a per minute basis) and other inherent attributes (age) fit into our overall model for projecting a player’s future contributions. This must be a comprehensive model of team performance and how individual player contributions factor in and/or are modified by other individual contributions within the club (e.g. tactics, development opportunities through training, squad composition etc) as well as external factors (e.g. chance and time). How many minutes might the player receive in his first year, second year, etc? Whose minutes will he steal from? Inherent in the use of this framework is the need for the club to develop it’s own “Team Performance Model” that articulates how the organization goes about creating exceptional performance (as measured in goal difference). This is a separate concept from a “game model” which a manager, coaches and analysts develop to flesh out the team’s tactical identity on the pitch, but this “game model” may very well be an input into the larger organizational “team performance model” in the sense that it interacts with how players and the rest of the organization contributes to on-field success.
Once we have projected out a player’s future contributions to the team, we can then look across our team and across the league to determine the appropriate benchmarks or baselines of “goal difference” contribution by position and/or roster spot and measure our target player’s projected contributions against these baselines. We can then determine whether in expected value terms, signing a player would improve or worsen the team’s overall performance relative to other available players.
Other adjustments could be made to this base value. For instance, the extent to which a signing or a trade harms a competing club could be seen as analogous to a “control premium” in the financial world and should probably be taken into account. The GM should also look not only at the expected value generated from this process, but also the range of outcomes — perhaps through a sensitivity analysis.
A GM or Sporting Director would then have a reliable estimate of a player’s contribution to the team’s future performance, denominated in the universal “goal difference” unit of account (and how this individual contribution fairs in relation to the overall team objective (in goal difference), to keep in mind as he makes the final turn towards “budget rationing” and negotiating an agreeable wage/transfer fee in the market that fits his budget. In fact, he might find that imagining the team performance model and the marginal goal difference unit of account extended to the global soccer macro-economy helps him to conceptualize a theory of transfer fees: What are they? How do they arise? How can he cleverly manage his club’s interaction with them?
Include all insights from your experts
Once the overall team framework is laid out and the analogies illustrated, it becomes painfully clear how important both data analytics AND professional scouting are as inputs into such a platform, confirming the essential role both play in the front office of a soccer organization. This itself isn’t a new point, but I hope that in this context it shines through in a more practical and conceptual way. This framework does not replace club experts, it empowers them, and highlights their importance. It frankly demands further investment into scouting and analytics and performance analysis.
There are a great many publicly available analytics resources that I find most fitted for serving as the accounting foundation and first step of any robust player valuation framework, and the one I’m most familiar with and fond of is the latest creation out of American Soccer Analysis: the “Goals Added (g+)” model, one of the few public expected possession value models in the wild.
Toward an Integrated Approach
Not only can the overall approach be applied to a front office evaluating transfer targets to sign to the club, but it should also be used as a first cut at evaluating all players on the club’s roster (with some periodic update process stood up to mimic less precisely the detailed analysis performed for potential signings). By having a summary value for each player denominated in the same “Marginal Goal Contribution” unit of account, a decision maker is able to evaluate all opportunities as they arise, whether they be transfer-in opportunities, transfer-out opportunities or other unforeseen events that require agile responses.
Also, there are some corporate finance concepts around portfolio management theory and the practice of minimizing the overall variance of a portfolio through recognizing and managing the covariance of individual investments against one another. Perhaps we can explore these and the extent to which they do or dot teach us something about our holistic squad-building framework.
Further, to the extent a front office is tolerant of placing more reliance on data analytics, this process can be extended at an even less precise (but more efficient) level by way of automation to all players in the club’s domestic league, or to all leagues for which adequate data is available. Again, the benefit might be to be able to respond quickly to high value opportunities as they arise before their windows of opportunity close.
Disclaimer and Reminder: While these posts often use financial and economic terms to analogize to player recruitment decisions, I stand firmly against the idea that people are assets or resources, or investments, cogs in a wheel. Football players are not bought and sold, harvested or divested. They negotiate employment contracts for compensation in exchange for their extraordinary skills. The concepts here are to aid a General Manager to optimize his decision making and the overall organizational processes for generating and organizing insights to support the important decisions of which players to recruit and extend said contracts to.
The fortunes of most clubs rise and fall based on player recruitment decisions. Having the best information readily available to aid the decision makers through these often existential bets is necessary but not enough. Success also requires a structured process whereby the front office’s singular footballing objective is cascaded down to each of these decisions. By converting that overall objective into a structured rubric to guide significant moments, decision makers can hold themselves and their teams accountable for making smart choices. Further, the most analytical-intensive information, often where the largest chunks of value are gained or squandered must be transformed into units of account that slot perfectly into this cascaded rubric and that are immediately interpretable by the decision makers. Such a process is attainable by borrowing from textbook financial valuation principles and building something world class with these materials. This blog builds the necessary connective tissue that allows soccer insights, data insights, and business insights to come together in a way that allows for clear and valuable decision making.
Beyond the Infinite
I will not run out of related topics to discuss should these posts find an interested readership. If you make it through the first set, I suspect those of you still standing will not exhaust your interests in these topics either.