How Can Procurement Help in Making a Sport Franchise Profitable?

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Spend Matters welcomes this guest post from Deepesh Jethwani, consultant at GEP.

If you had a genie in a magic lamp and you were allowed three wishes, what would they be?

For me, owning a professional sports team or franchise would be right on top of that list. I have been following cricket, football and tennis since my childhood, and the prospect of owning Manchester United, Mumbai Indians or Indian Aces is exciting enough to dream about.

Have you also wondered about the cost of owning a professional sports team? This blog is an attempt to identify those costs and to understand how a professional sports franchise can limit costs wherever possible.

Major Cost Components of a Sports Franchise

  1. Annual payout of franchise: The cost to buy the franchise rights of a sports team constitutes one of the biggest payouts. Depending on the nature of the league, the owner (or group of owners) must shell out the complete payment up front or through an annual fee to continue its association with the league.
  2. Employee expenses:
    1. Player expenses: Any professional sports team wants the best players possible, considering the budget it has allocated for the team. Player costs consist of salaries (player wages) and bonuses (based on the team’s overall standing in the league or the player’s performance, as applicable). In addition, the franchise might also have to pay a fee to the player’s agent and their current team (in case of a transfer), to the league (in case of an auction) and penalties (in case of an early release as per the player’s contract).
    2. Staff compensation: This mainly includes salaries of managers, coaching and scouting staff. An interesting addition to this over the last few years has been data analysts and statisticians, who provide key insights related to a player or team’s performance. Teams must also insure their players and staff against injuries, risks and other fatal events. This adds up to the overall franchise costs.
  3. Travel expenses: With so many matches to be played across different cities (and possibly countries), players and staff must travel extensively over the duration of the league. Thus, a lot of money is spent on air and road travel, which goes under operating expenses.
  4. Hotel expenses: Traveling to multiple locations for games implies overnight stays, and hence a team has to stay at different properties (mostly hotels). Add in other expenses like food and usage of facilities like the gym, and you are looking at costs escalating unless managed correctly.
  5. Marketing and promotional initiatives: To promote its team, a franchise must incorporate media buying so its ads are shown on different media channels. To take this to the next level and increase engagement with its fan base, a professional sports franchise should spend money on digital marketing and content management. Distributing merchandise and other freebies in the stadium to create a home atmosphere for the team also comes at a cost.
  6. Stadium costs: A professional sports team needs a stadium for its matches and practice. It has two ways to solve this need — it builds a stadium of its own (something football clubs do, as the league is active almost the entire year) or it procures the stadium services on lease. The lease could be an operating lease or a financial lease, for one year or multiple years. The franchise may also incur maintenance charges for using the stadium.
  7. Equipment costs: While this component is significantly lower in magnitude, a professional sports team spends money throughout the league duration for necessary equipment.
  8. General and administrative costs: Sports franchises need legal services for player contracts, sponsorship rights, broadcast rights and the like. They tend to have an in-house accounting team that handles the financial aspects of the franchise. They also need recruitment agencies to provide the manpower for other administrative purposes. On top of this, there are other variable costs like food catering and security services on match days.

Procurement Strategy

  • No professional sports team can compromise on quality. However, instead of spending millions solely in the transfer market or player auctions, the franchise should also invest in scouts who can identify talent from a young age and groom them to become world champions. Players from such youth academies always come at a cheaper cost and hence provide a valuable return on investment.
  • Teams should aim for players to sign multi-year contracts, so the uncertainty over player salaries in the future is resolved and players don’t come up with ad-hoc demands after a strong performance over a season.
  • Travel and hotel expenses can be controlled by conducting a strategic sourcing exercise to identify national and global suppliers. For air travel, it is beneficial to procure a contract with a global aviation supplier, instead of having multiple ones, if the team is expected to play across different countries. Rate cards can be established for different types of properties (budget versus luxury) depending on the requirement, so that the franchise doesn’t have to pay premium charges at the last minute. Hotel contracts could be created for all-in charges, which would include charges for rooms, food, usage of gym, pool and other facilities.
  • A professional sports franchise works with multiple marketing agencies for various services. To get better rates for merchandise manufacturing, it is always beneficial to consolidate demand and use one or two suppliers rather than work with multiple agencies for their requirements. For the digital space, it helps to have a global supplier/agency that understands various markets (as the fans of a professional sports franchise are generally across the globe).
  • For stadium costs, the franchise should conduct a lease versus buy analysis to understand what would be beneficial in the long run. In case the franchise also needs to sign an annual maintenance contract for the stadium, signing a multi-year contract can be used as a negotiating lever to further reduce agency costs.
  • While a franchise likes to continue with its existing suppliers for general and administrative services, it would be beneficial to conduct a strategic sourcing process to evaluate the costs of incumbents and negotiate with them when you have better offers from new suppliers.

While owning and running a professional sports team is a Herculean task, controlling the bottom line of the franchise is definitely possible. After all, there is nothing better for a professional sports team than winning matches, maintaining an emotional connection with its fans and continuing to improve its financial health.

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