Tag: Chelsea

The team around you

Back in 2016, footballer Oscar, then of Chelsea, was bought by Shanghai SIPT for a (then whopping) GBP 60M, with a salary of about GBP 20M a year.

Around the time the deal got announced, we were having our 10th year reunion at IIMB. During that a professor told us that one reason Shanghai had to pay Oscar so heavily was the quality (or lack thereof) of teammates he would have to deal with in Shanghai. He was then playing for Chelsea, who had won the Premier League in 2015, and would win it again that season (2016-17). And he was leaving that quality of teammates to join unknown teammates in China, and that meant he would have to be compensated heavily.

During and after last nights’ Manchester Derby, a friend and I were talking about Andre Onana, now the Manchester United goalie. Onana has been an extremely promising goalkeeper, excelling for Ajax and Inter (apart from one doping ban). He is a brilliant sweeper keeper (one reason he got chucked out of the Cameroon national team during last year’s World Cup), adept at playing with his feet and with great positioning sense.

And who does he have in front of him at ManYoo? The former Leicester defensive pair of Harry Maguire and Jonny Evans! They absolutely lack pace which means they can’t play a high line. That means Onana’s sweeping skills are grossly underutilised, and he ends up getting judged based on his shot-stopping skills, where he is nowhere in the same league as his predecessor David De Gea.

When we get into organisations, things we evaluate are the kind of work we do and what we are getting compensated for it. The thing we tend to overlook is who we need to work with, and whether they will elevate us or drag us down. Sometimes, the organisation (like Shanghai SIPT) recognises that you have to put up with suboptimal colleagues, and thus pay you a premium for your services.

Often, though, the organisation will be more like ManYoo, which doesn’t really recognise that the team around you may not be optimal for your playing style. And not everyone is willing to accept a premium in exchange for suboptimal colleagues. So, if you end up like Onana, you are not only frustrated because of the quality (or lack thereof) of your colleagues and peers, but you also end up getting judged on axes that are not your strengths (and what you have NOT been hired for).

Over the last decade, hiring at Manchester United has been curious, to say the least. There have been half-hearted attempts at changing the playing style, and almost everyone brought in to play the new style (I assume Erik Ten Haag wanted to play a more high-press style when he bought Onana) has been frustrated and unable to perform to potential.

Related to this, going back to something I’d written earlier this year, every company has an optimal rate of attrition, which is non-zero. If you end up paying too much of a premium to loyalty, you risk stagnation. If your Onana has to put up with Maguire and Evans, he won’t perform to potential. And then you go back to setting up the way it is optimal for Maguire and Evans.

Trading and liquidity

Every time there is some activity in the football transfer market, you are likely to hear one of two things. Either a particular player was “a steal” or the buyer “overpaid”. You seldom hear that a player was bought or sold at a “fair price”. What drives this?

Note that the issue is not perception – if you look at the transfer dealings, you are likely to find that the general opinion of whether the transfer fee was too high or too low is in most cases fairly accurate. Even if it is not accurate at the time of the transfer, it gets borne out in the subsequent year or two after sale.

Two weeks back I took a class in introductory economics for a bunch of people who hope to get elected to the Bangalore Municipal Council (BBMP). Teaching them about demand and supply, and trade, I mentioned that in any voluntary trade, both the buyer and the seller are “winners”. For example, if Liverpool sold Fernando Torres to Chelsea for GBP 50 million, it means two things: One, the value that Liverpool placed on the future contribution of Torres to the club was less than GBP 50 million. Two, the value that Chelsea placed on the future contribution of Torres was more than GBP 50 million. If either of the above conditions were not true, the deal would not have happened.

So why is it that football transfers usually end up costing too much or too little? The answer lies in “liquidity”. Liquidity is a concept that is normally used in financial markets as a measure of the depth of the market. It measures how many people are willing to buy and sell a particular commodity at a particular point in time. The theory is that the greater the number of buyers and sellers for a particular commodity, the better is the price discovery. I’ve said this several times before – it is unfortunate that the concept of liquidity doesn’t find as much traction in mainstream economics literature.

Coming back to football – why is it that players are typically either undervalued or over valued? Because players are unique, and that makes the market illiquid. Let us go back to the deal that took Torres to Chelsea. Let us say that the value Chelsea placed on his future services was GBP 50 million, and the value that Liverpool placed on his future services was GBP 35 million (numbers pulled out of thin air). Given that Liverpool owned him, this deal could have taken place at any value between these two numbers (note that at any price between 35 and 50 million, both Liverpool and Chelsea would be willing to trade)! So why did the deal take place at one end of the spectrum?

It was a consequence of how badly the two clubs wanted to do the deal. While Torres had lost form and hadn’t been performing in the 2010-11 season, Liverpool were quite happy holding on to him – they were not desperate to do the deal. Even when offered an amount higher than their valuation of the player, they sensed Chelsea’s desperation in doing the deal. So Liverpool’s game here was to hold on long enough until they knew Chelsea had bid an amount they were unlikely to improve on, and then they sold.

Sometimes fans like to sing something like “there is only one Fernando Torres” (typically when he scores). And that is the precise reason that Liverpool was able to get a premium on his sale. There was a certain kind of player whom Chelsea desperately wanted to buy, and Torres was the one who fit the bill perfectly. Given the lack of comparables, and the desperation of the buyer, it became a seller’s market and Liverpool were able to profit from it.

So we have seen here that when the buyer is more desperate to do the deal than the seller, the deal takes place at the higher end of the “value spectrum” (I just made up that phrase at this moment). It can go the other way also. When Liverpool sold Torres, they (rather unwisely) invested most of it buying a player called Andy Carroll from Newcastle United. Carroll turned out to be a dud – he was increasingly injury prone, and when a new manager Brendan Rodgers came in, he found him to be not suitable for the style of football Liverpool wanted to play.

The presence of Carroll in the squad, however, would put pressure on the manager to play him – largely a consequence of the fee that had been paid to purchase him. To this end, Rodgers decided that it was better to cut his losses and remove Carroll from the squad, rather than play a suboptimal brand of football just so that Carroll was played. Rodgers correctly decided that the money that had been spent in buying Carroll was a “sunk cost”.

Now, in his year and a half since his arrival at Liverpool, Carroll had done much to convince people that he was overvalued. His injuries and lack of form meant that clubs were unwilling to value him highly, and given Liverpool’s determination to sell, it was a seller’s market. The GBP 15 million that Liverpool extracted from West Ham for the sale was perhaps exactly the value that Liverpool had placed on Carroll.

To summarize – you sell if the price is higher than your valuation. You buy if the price is lower than your valuation. The buyer’s and seller’s valuations together determine the “value spectrum” along which a sale can be done. Presence of comparable commodities means that people can go for substitutes, and so that shrinks the value spectrum. In case of footballers with few comparables, there are no factors compressing the value spectrum, and the full extent of it is available.

In a large number of cases, one of the buyer and seller is much more desperate to do a particular deal than the other. And that pushes the price of the deal to one of the edges of the value spectrum. Hence people end up either significantly underpaying or significantly overpaying for footballers.