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wallet cash[Ed. – The following is a guest post from Jim Mumford, who offered to provide a perspective on the currency of baseball, particularly as it relates to the value of having huge dollars to spend, and vast young talent pools.]

As an engineer, with enough business management classes under my belt to make me dangerous, I know that it’s important to recognize the value, worth, and importance of resources, or assets, to a business. Be it your neighborhood tavern, a nuclear power plant, or a baseball team on the north side of Chicago, assets are king.  The difference, obviously, lies in what each industry’s assets are.

Baseball is not unique. A team’s assets can be fixed (something that isn’t easily moved), like Wrigley Field, or more, liquid (something easily moved or traded). Today, I will attempt to briefly explain interrelation between a team’s more liquid assets, including dollars, prospects, MLB ball players, and draft picks. The assets will be compared using WAR*, which is essentially the unofficial currency of baseball.

*Wins Above Replacement, or WAR, is a baseball statistic developed to determine the value of a player’s total contributions to their team derived from baserunning, batting, fielding, and pitching above a replacement level player. While WAR isn’t perfect, it is a common measurement across all ballplayers, which is perfect for the discussion at hand. I prefer Fangraphs’ WAR, so that will be the reference I use throughout.

A team’s personnel, and their subsequent payroll, can be categorized into several bins: free agent types, controlled younger players, and prospects.

Free agents are typically the most straightforward to deal with. A team can directly swap dollars for WAR (or vice versa), with a high degree of certainty.  For example, in 2013, the Cubs signed Dioner Navarro for $1.8 million. According to Fangraphs, he had a WAR of 1.7 wins. Pretty sweet for a backup catcher. Sadly Dioner, like all of us, can’t help getting older.  As free agent types age, their baseball prowess naturally fades. And yet, Dioner recently signed with the Blue Jays for two years and $8 million.  While it’s possible Dioner was slightly undervalued,  like so many free agents before him, his current monetary value is heavily predicated on the previous year’s WAR.  Such is the nature of the free agent beast; more often than not a team will pay for past performance, only to see a decline in production, and a swift increase in the $/WAR ratio.

The natural decline in performance over time makes signing new free agents all the more treacherous. Father time isn’t the only enemy in this battle. As Brett explained it previously: “…when a team signs a free agent who has been extended a qualifying offer (i.e., the best of the best free agents), that team loses its first round pick the next year [unless] that team picks in the top 10 picks. In that instance, all that is lost is a second round pick.”

This means that if you signed one of baseball’s best players as a free agent, you would be certain to lose a draft pick, which is a serious loss of a baseball asset / WAR. For example, FanGraphs calculated losing a number 16 pick to about $8.3 million, or 1.4 WAR! For comparison, Nate Schierholtz had a 1.4 WAR in 2013. In other words, signing that free agent today can lose you that cost effective right fielder in the future.

One subtle benefit of some lesser known free agents is their team controlled contracts. These sorts of players are the “one year, $1 mil” deals the Cubs oft sign. While these signings may help fill a team need or add bench depth, they serve another purpose. These players are excellent “sell high” candidates, whose meager salary can be turned into cash and or prospects (i.e. Scott Feldman). These are typically low risk signings that can turn into nice prospects down the line.

As you can see, while free agents look great at first glance, they aren’t what they seem, especially the big name types.  Aging, draft pick compensation, and salaries indicative of past performance equate to low $/WAR ratios.  In the Baseball Fruit Salad, free agents are like buying nice, ripe fruit, at a heavy premium with a short life span.

So if free agents alone aren’t the rocketship to the top, what is? A really, really solid start would be young, cost controlled players. These players are typically much cheaper than a free agent, but oft with rivaled production, especially as the player matures and develops. Unlike a free agent, who may have no trade clauses or limited contracts, a younger player is likely to be under team control for much longer, over more of the player’s most effective years. An extreme example? In 2002 and 2003, Alfonso Soriano had 10.5 WAR. Pretty good, considering his combined salary was $1.4 mil! Closer to home, Anthony Rizzo had a 1.7 WAR in 2012, with a meager salary of $500,000. Cheap and wildly effective, these sorts of players have immense value in the $/WAR department. Think of them as buying some fruit at the local farmers market; cost effective, homegrown, and once mature, good for a healthy life span.

So then, the Cubs should just go down to the corner store and sign all of the young, cost controlled players, right? Trust me, if such store existed, there would be 30 GM’s lined up every morning (and, likely, a very successful Starbucks next door). With the rare exception of certain international players, such players, before they are stars, are prospects within the farm system. Prospects are the trickiest of all of the assets discussed. The vast majority of all prospects don’t even record an out in the big leagues, let alone become a team’s cornerstone. Worst yet, projecting the worth of a prospect is a widely varying and maddening endeavor. Take Brett Jackson.  In 2011, he was arguably the Cubs’ best prospect. He was a lock as the future center fielder. Done deal, right? Now, in 2013, he is still in Tennessee at AA, and off of just about everyone’s radar. In the matter of two years, this asset lost significant value.

This example highlights the treachery of prospects. Any value gained by their relative low cost is parried by their inherent risk. This is one reason why teams hedge their bets and keep several prospects in the same position (think of the stable of Cubs 3rd base prospects). This gives insight into why a team will spend millions into offseason training facilities, all in an effort to raise the value of the team’s prospects. Think of these facilities as the crisper drawer in your fridge; a place to help your underripe fruit mature in a slow, controlled method until they are ready to shine.

While it is difficult to accurately estimate the value of a prospect in the future, this doesn’t mean prospects don’t have current value. This is best highlighted with the trade of Matt Garza to the Rangers for third base prospect Mike Olt and pitching prospects C.J. Edwards, Justin Grimm, and Neil Ramirez. In baseball currency terms, a pitcher who ended with a WAR of 2.2 in 2013 was swapped for two top pitching prospects (Edwards and Ramirez are in most Cubs’ top 10/15 lists) and Olt, who is candidate to be the 2014 3rd baseman.  To the Rangers/Cubs, these four prospects’ current value (and potential future worth, low cost, etc) were equal to the current value of Matt Garza. I don’t have a crystal ball, but I would bet my prized BN t-shirt that, in 2016, the combined worth of the prospects will eclipse Garza’s. Simply put, the Cubs traded a few WAR today for potentially many more WAR tomorrow. This is a great way teams, especially ones with a fixed budget (read: not the Dodgers), accrue value in their assets without spending a dime. Think of prospects as picking fruit from your tree out back. The chance of getting great fruit is low, but the price is right, and there’s a seemingly endless supply to choose from. And who knows, if you know what to look for, you could just find the cream of the crop.

While there may not be a young stud ballplayer store, there are vehicles by which teams acquire prospects: the domestic draft and the international free agent pool. As I’ve stated above, a team’s draft pick/international spending money has real value, as highlighted in the FanGraphs article above. Draft picks and/or signing pool dollars are direct assets to a team, and (in some cases) can be traded like prospects, or lost in signing free agents. This again is an avenue where a team can convert their meager dollars into a large amount of baseball currency, both today and tomorrow.

So, as you can see, it is paramount for a team to diversify their baseball currency. A team full of free agents will be expensive, and success will be short lived.  A farm system of prospects is great, in three years. A team full of young studs with great $/WAR ratios exist only in an executive’s dream.  The perfect organization will have several young, cost effective players, a deep farm system (both for now and later), all sparingly supplemented by free agents as needed. Just like in fruit salad, a successful team needs a mix of the right parts, maturing at the right time, with the farm well stocked to reload as required.

  • mjhurdle

    Great article. Well done Mr. Mumford

  • itzscott

    Jim –

    Believe it or not, a baseball franchise is pretty analogous to a large pharmaceutical company.

    A pharmaceutical company spends copious amounts of money on research (scouting and drafting), spends even more on trying to develop many drug candidates (coaching, training and development), yet out of all that research & development very few of those new drugs (prospects) make it past the FDA (Theo & Jedd) to actually make it to market (the big leagues). Even fewer of those drugs that do make it to market (the big leagues) positively impact the company’s bottom line (a winning team).

    So in essence, aside from being a sport…. baseball is a business pretty much like any other when looked at in a different way than casual fans usually do.

  • Funn Dave

    tl;dr

    • http://www.bleachernation.com Brett

      Even if joking, a nicer comment is no comment at all. It also reflects better on the commenter.

      • itzscott

        Agree…

        That was mean.

        It’s nice to be nice.

        • http://www.bleachernation.com Brett

          The absence of rude would be plenty for me.

          • hansman

            [img]http://landofodd.files.wordpress.com/2011/10/lowered-expectations.jpg[/img]

      • Funn Dave

        ts;dr

    • D-Rock

      Dave, that wasn’t very funn at all. Next time you feel that way, just don’t comment.

      • Xruben31

        I don’t understand his comment.

        • Jon

          tl;dr = “Too long, didn’t read”

          • Patrick W.

            ur;db

            • Edwin

              I don’t get it.

              • Patrick W.

                Pm me

          • Xruben31

            Thanks Jon. Dave most of us around here appreciate Brett’s hardwork and if you want to be rude you can try to find a different Cubs blog.

  • DarthHater

    So, a well-balanced roster is a nice fruit salad; free agents are expensive, ripe fruit with a limited shelf-life; prospects are less expensive, locally-grown fruit that is still ripening; training facilities are the refrigerator crisper drawer; and the farm system is the fruit tree in the backyard. But what’s that piece of moldy old cheese sitting in the back of the fridge? ;-)

    • Edwin

      Ian Stewart.

      • On The Farm

        Which you traded someone else in return for your fruit that fell off your tree in the backyard that already had a few worm holes.

        • Edwin

          Cause you thought “Hey, maybe this cheese isn’t so bad, and I can just cut off some of the moldy part and it will still be good”.

      • DarthHater

        That was my first thought, too. :-D

    • http://www.bleachernation.com Luke

      The old Japanese posting process.

      It stunk.

  • Edwin

    I think it’d be an interesting study to see how much real $ are added through more WAR. It would obviously depend wildly on each individual team, each individual market, where the team is at in the win curve, and other variables.

    After all, the amount of $ each team has to swap for FA, or to put into the farm system, is in some way related to how the current team performs.

  • brainiac

    this is a pretty nice objective evaluation of the logic of “the plan”, i think.

    it also nicely frames the current logic of baseball – that players are commodities, that quantifying players will increase the bottom line, and that saving money is imperative for a team unless there’s the appropriate soup of commodified quantified player profiles. outside of a business board room, where the motto is usually cut and run more than build and sustain in legacy, we call this bad faith sportsmanship.

    i do like how this post points to the futility of relying heavily on prospects to save the team, and how this points to the “lottery” like atmosphere in baseball where some GMs want something for nothing so they can look smart, and others want to use team resources to win, because no one remembers in 5 years that the ricketts saved 3m by not losing a draft pick.

    • mjhurdle

      “So if free agents alone aren’t the rocketship to the top, what is? A really, really solid start would be young, cost controlled players”

      yep, he really, really dismissed the idea of relying on your minor league system…

  • CubsFaninMS

    It’s interesting how Mr. Mumford applies business management practices to the baseball industry and to, specifically, the Cubs. I can relate. My job is to measure risk and typically see the risk side of everything, including managing that risk with one of my greatest interests, the Cubs. Great explanation and good analogies to present an effective dissertation on player value/investing.

    • Jim

      Thank you; exactly what I was going for.

  • MightyBear

    Very good article. Hopefully the whiners will get a better idea of what the Cubs are trying to do. I read a similar article that said Theo and the front office believe the greatest currency a baseball franchise can have in the current environment is:

    1. Young, cost controlled players and

    2. Payroll flexibility

    • brainiac

      notice that the word “winning” only comes up as a convenient afterthought to the business logic. it’s not a surprise that the cubs are very, very bad at their sole intended purpose. their priorities are different than sports priorities.

      • Jim

        Winning really wasnt the focus; asset management was. The theory is the better asset management a team has, the more successful (as in, more WAR’s) they are.

  • Sect208Row8

    Please convince me that the Chicago Cubs, from all the Rickett’s to the front office don’t come to work every day wanting the team to win. I’m to believe they are there just for the paycheck. I was lucky enough to have had a private tour of the new facility in Arizona last week and I must of missed the old evinrude in the horse trough. These guys are winners.

  • cubs2003

    Nice article, Jim. I’m not a huge sports fan, but I am a huge Cubs fan. What draws me to baseball is that it kind of mimics regular life, as well as nature(cheesy as that sounds). It’s just under a microscope all the time. A million analogies could be be made and most of them would be true. That’s what I love about baseball.

  • Robbo

    Nice article, enjoyed the read.
    I also enjoy the music made by you and your sons Mr. Mumford.

  • mosconml

    Nice article, Jim. One thing that I hope to see with future contracts across the MLB is a greater acceptance of de-escalating free agent contracts. It would help budget-conscious teams remain competitive during the years where a player’s value is likely to decrease. From the player’s side I could see this being a detriment, as it increases the likelihood of a trade, but you could mitigate that with a No Trade Clause (which I know Theo and Jed don’t like, but I could see there being exceptions).

    Edwin Jackson was a good example of this, with his signing bonus. I hope to see this continue.

    • Edwin

      In general, it’s not a good way to build a roster through front-loading contracts. For starter’s, it costs more overall, since $1 today is worth more than $1 7 years from now. If a team has enough money to front load a contract, then there are probably better ways to invest it to make the team better in the short and long run than just the long run.

      Frontloading also means you’re getting less surplus value out of the deal, which makes it harder to improve your team in the short term.

  • EQ76

    So basically this article is saying “this is why the stupid Cardinals are always good”.

  • cubinal

    It’s a nice article, but it is too smart by half. The goal of baseball is to win the World Series. The goal of a business is to make money. A team like the Cubs need to worry less about acquiring the most cost efficient assets (even if one is to buy into the WAR values) and more about acquiring assets that will help them win the most games. Look at the vast majority of teams in he playoffs each year. Those teams are not the most efficient, they are among the teams who spend the most dollars wisely and sometimes unwisely… to win.

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