Baseball Signs Wall Street Heavy Hitters to Analyze Talent, Payroll, Swaps
By Danielle Sessa
January 19, 2006 -- The day former Wall Street executive Stuart Sternberg assumed control of Florida's Tampa Bay Devil Rays in October, he fired three men with a combined 55 years of Major League Baseball experience and put Harvard University graduate Matt Silverman, 29, in charge.
One month later, Sternberg, 46, a former managing director at Goldman Sachs Group Inc., selected one-time Bear Stearns & Co. analyst Andrew Friedman, 28, to engineer player trades, negotiate contracts and hire coaches. Silverman and Friedman had each worked in baseball for less than 18 months.
“You treat a baseball team like you would any corporation,” says Silverman, who had worked with Sternberg at Goldman Sachs in New York before joining the Devil Rays in 2004. “It's the same discipline, the same business and budgeting systems that you find at money-management corporations.”
No longer is baseball experience necessary to attain a front-office job overseeing players and coaches in the major leagues. New-breed executives with M.B.A. and Ivy League degrees are joining the old guard of former players and scouts in running the sports side of teams as record player salaries make investment analysis more valuable to baseball franchises.
The reigning world champion Chicago White Sox count Rick Hahn on the team's baseball operations staff. He has a degree from Harvard Law School in Cambridge, Massachusetts, and a master's degree in business administration from Northwestern University in Evanston, Illinois.
Jeff Luhnow, a graduate of the University of Pennsylvania with an M.B.A. from Northwestern, is vice president of player development at the St. Louis Cardinals. He also brings experience as president of a software company, Emeryville, California-based Archetype Solutions Inc., and formerly worked as a management consultant for McKinsey & Co.
Cornell, Harvard and Penn are among the U.S. colleges in the elite Ivy League.
The three men Sternberg fired in October started in baseball scouting departments, charting the arm strength and fielding skills of prospects. General Manager Chuck LaMar won World Series titles with the Cincinnati Reds and Atlanta Braves during his 20-year career. Assistant GM Scott Proefrock began with the Pittsburgh Pirates in 1987. And Cam Bonifay, director of player personnel and scouting, joined the Pirates in 1988 and was Pittsburgh's general manager for eight seasons.
“We are trying to look at the proper allocation of funds,” Sternberg says. “We have got guys in there who can weigh out the variables and say the chance of success is 5 percent versus 95 percent.”
Major League Baseball doesn't limit how much clubs can spend on players. In the National Football League, the National Hockey League and the National Basketball Association, where team salary caps are imposed, owners often have executives dedicated to assembling a team within the cap's limits.
The New York Yankees led the major leagues with a record $208 million opening-day payroll last season, while Tampa Bay had the lowest at $30 million.
“What can make or break a team more easily than marketing campaigns or ticket promotions is how they spend money,” says the Cardinals' Luhnow. “Traditionally, the people who decide how they spend money do not have business training.”
The responsibility of assembling a team often fell to players lacking the athletic skills to make it in the major leagues or field managers promoted to the front office.
Branch Rickey spent 14 seasons riding trains and buses to ballparks around the country as a marginal player and manager before moving to the front office and eventually signing a black player, Jackie Robinson, to a contract with the Brooklyn Dodgers in 1947, breaking baseball's color line.
Jack McKeon found more success in the dugout and front office than on the field as a player. He was general manager of the San Diego Padres when the team went to the World Series in 1984. “Trader Jack,” as the cigar-chomping McKeon was called because of his tendency to swap players with abandon, eventually returned to the bench and won the world championship managing the Marlins in 2003.
“The economics of baseball today are such that teams are focused more on making money,” Hicks says. “People know there's limited dollars you can spend for payroll.”
Hicks didn't always feel that way. He gave Alex Rodriguez the richest contract in baseball history at $252 million over 10 years. The Rodriguez signing in 2001 failed to help the Rangers as the team finished in last place in each of his three seasons with the club. Rodriguez now plays for the Yankees.
The similarities between valuing assets in investing and in baseball were highlighted in Michael Lewis's 2003 book “Moneyball” (W.W. Norton & Co.), which chronicled how Oakland Athletics General Manager Billy Beane analyzed statistics on players and game situations to assemble a first-place team on one of the sport's smallest budgets.
Lewis is a columnist for Bloomberg News.
None of the teams using so-called “Moneyball” methods have won the World Series. While the Boston Red Sox captured the championship in 2004 with the help of baseball statistician Bill James, the franchise also had the second-highest payroll in baseball.
Luhnow of the Cardinals relied on a database that tracks what happens after every major league pitch to recommend signing shortstop David Eckstein before last season. Eckstein didn't appear to have a strong arm and his range fielding ground balls was limited, according to scouting reports. Yet Luhnow's statistics indicated that Eckstein played above-average defense.
Eckstein finished the season tied for the fifth-highest fielding percentage among National League shortstops.
Hahn, 34, the assistant general manager in Chicago, joined the White Sox without any training on how to identify flaws in a pitcher's motion or a hitter's batting stance. General Manager Kenny Williams had Hahn shadow the club's director of scouting, Duane Shaffer, to learn about judging talent.
“I had more familiarity with the objective and statistical side of the evaluation,” Hahn says. “The void I had was on the scouting side. I got a crash course on that side of the business.”
While Tampa Bay may be gambling on the marriage of baseball and Wall Street, the franchise has little to lose. The Devil Rays finished in last place in the American League East seven of its eight years in existence and had the lowest home-game attendance in baseball last season, an average of 14,000 fans per game.
Tampa Bay executives are working on a five-year plan to invest money in the franchise and win back fans that starts with free parking next season. A yellow “under construction” sign joins the team's logo on the Devil Rays' Web site, foreshadowing more changes to come.
Sternberg says he doesn't expect his baseball team to be profitable anytime soon.
“As a business, I wouldn't get into it unless it was called baseball,” says Sternberg. “While you might expect low returns or no returns for a period of time, there are other benefits.”