The Baseball Economist: The Real Game Exposed (13 page)

Table 15 ranks MLB organization according to the total value of play a team puts on the field. During this time frame, the top three teams reached the playoffs every year, while none of the bottom nine clubs reached the postseason even once. So, by the metric of overall
quality put on the field, the Red Sox, Yankees, and Braves have been the best, and the Royals, Devil Rays, and Reds have been the worst.

However, a team that puts the best players on the field isn’t necessarily the best managed team. Imagine two office managers who both want to buy the best personal computers for their workers in order to maximize the work done in the office. They both look up the latest computer ratings in Consumer Reports and find the best-suited PCs for the job. One manager goes down to the local computer store and buys the machines for $5,000 a piece. He figures it’s worth the expenditure since every computer will make each worker produce $10,000 more in revenue. His rival manager chooses a different strategy. She conducts a few Internet searches of computer sellers and negotiates a high-volume discount to acquire the very same computers for $2,500 a piece. It’s obvious who the better manager is. Simply purchasing the inputs that everyone knows are valuable isn’t the only component of a good management strategy. We ought to evaluate baseball teams according to the same standards on which we judge the office managers. Sure, you can purchase a winning team, making lots of fans happy, but there is more to it.

It’s no secret that Alex Rodriguez (A-Rod) is one of the best players in the game. When he became a free agent in 2001, he was able to play for any team he wished, and he ultimately signed a ten-year $250 million deal with the Texas Rangers. Despite A-Rod’s excellent play, the Rangers eventually dealt Rodriguez to the Yankees to free up some financial resources. According to his value listed in Appendix D, A-Rod’s offense was worth nearly $16 million in 2005, about $9 million less than his average yearly salary. Even if his defense—and A-Rod is an excellent defensive player—and other winning qualities make up the difference, that is still a lot of money to pay for his production. Dontrelle Willis of the Florida Marlins contributed an almost identical value of play on the field as Rodriguez; however, he did so for a measly $380,000— generating more than forty times his salary in revenue.

The Marlins were able to get such a great deal by exploiting the league’s collectively bargained reserve clause, which prevented Willis from offering his services to the highest bidder, like Rodriguez did in 2001. Willis could play for the team holding his reserve rights, or none at all. After acquiring Willis in a trade in 2000, the Marlins were able to pay “D-Train” any amount they wanted, subject to a minimum salary threshold. By identifying Willis as a soon-to-be star, which is quite a feat, the Marlins were able to get a $16 million pitcher for the salary of a washed-up utility infielder. The Rangers and Yankees, on the other hand, had to pay A-Rod a salary close to his expected value. Teams that have more Dontrelle Willises than Alex Rodriguezes are better managed teams. The next step in evaluating organizations is to identify the teams that are getting the most value from the financial resources they devote to player salaries.

Table 16 ranks MLB organizations by the average difference between total value produced and salaries paid out, and also lists the difference as a percent of each team’s payroll. This ranking looks much different from the one in Table 15. The Cleveland Indians top the list as the franchise getting the most
net value
(total performance value minus total player salaries), with Willis’s employer, the Florida Marlins, not far behind. The least efficient clubs were the Yankees, Mets, and Dodgers. The Yankees were so inefficient that the team actually paid its players more than the value they produced on the field. No one can accuse Mr. Steinbrenner being stingy.

But this list doesn’t tell the whole story. The Tampa Bay Devil Rays may run an efficient organization, but they put the second worst team on the field over this period. While the team generates some revenue by simply existing as an MLB franchise, this cannot persist forever. A club that puts bad teams on the field year after year isn’t going to be able to sustain itself, which may explain why the Devil Rays’ owners replaced most of the front office following the 2005 season. And certainly, other teams won’t be looking to follow their business model. Clearly, good management requires more than putting talent on the field that is worth more than you are paying for it.

To properly evaluate MLB organizations, we should consider the quality of the team and the efficiency with which it was constructed. Doing so is a bit tricky, but feasible. By adding the league ranks for total value and net value together, we combine each team’s relative strengths in both areas to generate an overall ranking. This means that teams get credit for being both good and efficient, relative to the other organizations in the league. Teams with lower summed ranks are both winning and generating bigger profits. Teams with higher summed ranks are losing and earning less than other clubs.

Table 17 ranks the organizations according to the summed ranks of both categories of value. The table includes five categories of organizational
ratings, ranging from Excellent to Poor. Three organizations stand out above the rest: Florida, Cleveland, and Oakland. All three of these clubs received much more value from their players than they paid out in salaries, while at the same time they put quality teams on the field. Let’s look at how each club accomplished what it did.

The Florida Marlins averaged about eighty-six wins a year and won one World Series title from 2002 to 2005. Florida is often criticized for using its roster as a weapon to garner political support for a publicly financed stadium. It’s an ugly strategy for which I have little sympathy, but that shouldn’t distract us from what the organization has done on the field, which is quite impressive. The Marlins have done an excellent job of finding good players for cheap. For example, in 2005 the Marlins had five of the top 50 most valuable players in major-league baseball—four of the top 15. Only the NL champion Houston Astros had as many top 50 players. The Marlins were stocked with good players, while paying them only a fraction of their value.

As Table 18 shows, these five players generated just over $70 million in value, but the Marlins paid these players just under $11 million. That is quite a steal! Not only did the Marlins reap the rewards from these players’ on-field accomplishments, but it freed up resources for the club to spend on other needs. One of the most interesting players on the list is Carlos Delgado, whom the Marlins signed to a four-year $52 million deal before the season. The team structured the contract so that it paid Delgado only $4 million in the first year of the contract, with higher salaries in the following seasons. Following the 2005 season, the Marlins traded Delgado to the Mets for three good prospects.
Even with the $7 million the Marlins sent along with Delgado to the Mets, the team still got much more out of Delgado than they had to pay for him. While the Marlins have done well at exploiting the reserve clause, they are also one of the most financial-savvy teams in the league.

The Cleveland Indians are the least successful of the top 3, having played .500 ball during the sample. However, the amount of money the Indians have spent on salaries over this span would make you think they’d played much worse. The Indians paid about $30 million a year less than organizations that put similar quality teams on the field. Furthermore, the Indians have been an improving team, winning sixty-eight, eighty, then ninety-three games from 2002 to 2005. In 2005, they missed the playoffs by one game after losing an exciting pennant race to the eventual World Series champion White Sox. They have a core of young talent that is relatively cheap, which should lead to a much better ball club in the near future. The general manager, Mark Shapiro, locked up many of his young players with long-term guaranteed contracts just before the 2006 season. By giving these players some long-run stability, the Indians will be paying less for them when they become eligible for arbitration and free agency. It’s the same strategy the Indians’ previous GM, John Hart, used to lock up Jim Thome and Manny Ramirez, who took the Indians to the playoffs for five straight years in the 1990s.

You may wonder why locking up players to long-term deals is a good idea. After all, there is no such thing as a costless choice. The potential pitfall is that if a player ends up playing worse than expected, the team will be stuck overpaying him. However, the strategy works because individuals tend to value stability more than organizations do, which allows teams to pay players less than their expected performance value. For example, let’s say a player projects to generate $5 million a year for the next three seasons. He might play better or worse, but $5 million is the best guess. On a series of one-year contracts, when he plays better he gets more; when he plays worse, he gets less. Would you fault the player for signing a three-year $12 million deal even though he expects to be worth $3 million more than that over that span? Of course not, because the guaranteed contract gives the player some stability that a series of one-year $5 million contracts does not. If the player gets injured, or simply loses the ability to play, he’ll still have plenty of money with the long-term contract. In this case, the team expects to get an extra $3 millon in value over what it pays out over the course of the contract. Furthermore, by signing several players to long-term deals, the team diversifies the risk of overpaying a player who under-performs. If the expectations about future performances are not biased up or down, we should expect some players to exceed their expected value, while others will fall below it. In the long run, the performances above and below expectations ought to cancel each other out, leaving the team the financial benefits of signing players for less than their expected value.

Thanks to the book
Moneyball,
by Michael Lewis, we have a detailed portrait of things that the Oakland A’s do to succeed. The A’s rely heavily on statistical methods to evaluate players, in order to acquire undervalued players and trade away the overvalued. Though the team has only managed one playoff appearance from 2002 to 2005, it averaged nearly ninety-two wins a season. Lewis was right to claim that the Oakland A’s have been one of the best managed teams in major-league baseball.