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Salary Cap Management – Financial Planning and Analysis
- Teams compete on the field, but all the stakeholders know that sharing of information and data is critical to their global success as a league.
The decision-making process is becoming more statistical and increasingly automated. Teams are starting to use sophisticated statistical models to manage the salary cap and roster decisions with access to shared databases.
The league office is creating new technology for this and it's being built from the ground up.
This means that teams are able to have access to a lot more information – everything from player stats to injury information to scouting information to all the contract data – at a faster clip.
- Clubs, and the league as a whole, are shifting from current season views to much more strategic planning.
The larger teams may not be up against cash flow limits and are able to absorb the financial impact of costlier deals much more easily than other teams. So, some of these clubs may be in a position where they can focus on a shorter-term window when making decisions. The truth is that the salary cap doesn’t necessarily make it all equal.
The smaller teams have to incorporate more technology. They are shifting from short-term views to a much longer-term view to make immediate decisions and avoid over-committing on new deals. They are also renegotiating long-term contracts well before the term expires, providing more certainty in planning long-term costs.
The league, as a whole, is rolling out five-year planning on a regular basis. This allows all the stakeholders to get a better view of upcoming challenges.
- Long term deals are renegotiated well before they expire for highly productive players.
This gives a team leverage in negotiating the contract because, in theory, the team is taking on a certain amount of risk by extending the player beyond the original term. There is no certainty that the player will remain injury free or continue to be as effective.
But this also provides an ability to eliminate one unknown in future years with respect to financial commitments.
Often there are substantial guarantees involved in a contract like that. But, if you wait until the end of the term of the contract, the player is either a free agent or about to be a free agent and is getting ready to shop the market. This can ultimately bid up the value of that player's contract.
- Huge volumes of data and complexity in deals means technology and automation are a necessary priority.
It is a reality that decisions made today require an agility and efficiency to allow for the best possible long-term outcomes. The approach needs to be well thought out, structured and condensed to contain a ton of information and stats.
The challenge is incorporating all of that information into a fluid system and into something that’s easily manipulated and relates to all of the individual contracts and other moving parts.
Every team has its own way of approaching this, with some a lot more technical than others. Some are using simple Excel spreadsheets; others are relying on information on the NFL website.
And, still others are doing statistical modeling and are trying to calculate the productivity of players. They are creating grading systems that allow them to compare the value of each player. These teams are creating proprietary models and systems that integrate shared league-wide data as well as team evaluations of players and projected incentives.
- Salary cap management cannot be done in a vacuum and is most effective when partnered with a bigger picture view on the business.
It is becoming necessary for many clubs to establish more integration with corporate financial planning. Macro business planning allows the teams to translate salary caps to other metrics that are more meaningful to the entire organization for fiscal management, like:
- Cash flows
- GAAP income statements
- Balance sheets
This, in turn allows for an effective, integrated business plan.
- Cap spending is shifting somewhat from draftees and rookies to the veterans and proven players.
This has long been an issue that teams and players have been negotiating. In recent years it became common to see massive deals and even guarantees extended to new first-round draft picks.
In some cases, of course, this may ultimately prove to be well worth the investment and the risk – after the player delivers results on a consistent basis on the field over time.
However, it is a calculated risk that often turns out to be a mistake. Either the player doesn't perform at the highest levels, is injured early on and can't perform, or in, some cases, doesn't even make the final cuts.
With the new CBA, there are now agreed-upon limits to rookie deals that have effectively shifted much of the larger deals to the veterans and proven players.