Only time will tell if the Mykhaylo Mudryk transfer from Shakhtar Donetsk to Chelsea FC is to become a prime example of how things should be done – or more likely – a lesson in how you should never, ever do transfers as a football club.
This interview is not about Chelsea, and AJ Swoboda, managing director Americas at Twenty First Group, didn’t even mention the above transfer when he spoke to Off The Pitch – probably because when the interview took place it looked very much as if the promising young Ukrainian offensive player was going to sign for Arsenal. But a last-minute intervention from Chelsea meant he ended up signing a 8.5 year deal with the Stamford Bridge club.
There is a whiff of desperation around this transfer Chelsea made when they were sitting 10th in the table and burdened with a long injury list. But ahead of the transfer being confirmed, Swoboda made a comment that stood out:
“It is not about WHO you sign – but HOW you sign players.”
The director of Twenty First Group explained that what he meant was the fact, obvious maybe, that behind every success in business or in football lay in the ability to hire the right people, establish the right processes, and learn from your mistakes.
“If you are good as an owner at hiring and setting strategy, then you will be successful. Your sports club must have a multi-year strategy to guide decisions, and an evidence-backed process to evaluate the degree to which each decision allows the club to progress along its strategy,” says Swoboda.
He explains that in recruitment and squad planning, this approach allows clubs to successfully move through transfer windows with plenty of optionality. It allows owners and executives to learn from past decisions. If a club does not have a proper strategy and process feeding into recruitment, the club exposes itself both to paying too much in transfer fees and wages, and to not learning from its mistakes.
“When it comes to recruitment, owners must understand that there is never just one player out there that can solve all your problems. There is no player with such unique skills that it is worth signing this – and only this – specific player at any cost.”
Actually, the interview with Swoboda was about how he and Twenty First Group, the B2B sporting intelligence firm founded 10 years ago, would begin to describe the reality for new potential owners of either Liverpool FC or Manchester United, since both clubs are currently up for sale. You can find several investment banks out there who can execute traditional due diligence work looking at the financial and strategic weaknesses and strengths of both clubs.
But unlike banks concerned with whether a transaction completes, Twenty First Group are concerned with what will happen for the years to come. So they provide unique sporting intelligence, which helps potential owners cast new light and perspective on the assets they might be willing to buy and own for years, if not decades.
According to Swoboda, for a start, every potential new owner of a football club needs to understand that they are not buying an asset which can be evaluated in a similar manner to traditional businesses. Sports clubs might have revenue streams that can seem rather predictable historically, but the commercial viability of those assets depends inherently on how well the sporting entities, the teams themselves, are performing on the pitch.
“I would argue that many investors, even sophisticated investors, don’t conduct sufficient due diligence prior to buying a football club. This isn’t their fault, as the majority don’t know where and how to look. In the case of Liverpool and United, you might have a unique and innovative understanding of all the business areas of a football club: the income streams from broadcasting, match day, sponsorship and merchandise,” he says and continue:
“But if you don’t explicitly understand how to build and run a successful football team in the best league in the world over consecutive seasons, then it doesn’t really matter if you are best-in-class at everything on the commercial side. You’ll be spending all your energy and money on matters that likely distract you from your original intentions with the asset,” he says and continues:
“The sporting product – which we analyse through our own models – is going to dictate your entire reality. So you better understand it thoroughly before investing. And then you better get it right once you’ve invested.”
Swoboda says that looking from the outside, Manchester United and Liverpool FC may seem like two similar assets. Obviously, there are differences, but both clubs are just 30 miles apart, both with significant training grounds, historic stadiums, global brands, and global fan bases to name a few.
“We don’t exactly view them as comparable. While the assets might seem similar, what an investor would be buying into is in fact complete opposite, and my view would be that they would attract two very different kind of investors,” says Swoboda.
In football, they have had the ambition to develop a nuanced metric capable of measuring how competitively a team is performing at any point in time. It is not enough to look at the league tables or build price-per-point calculations, as they don’t provide the kind of in-depth knowledge that club owners and investors are looking for in today’s modern world.
Twenty First Group is constantly developing its performance metrics and stress testing their predictiveness against the markets. Even though Swoboda wouldn’t “bet money via that metric and expect to make a fortune, I would definitely sleep well at night”.
It turns out that wage spend is a very strong measure of performance in football – and in fact has one of the best correlations with performance of any singular metric, much stronger than transfer spend. That said, it is not a perfect predictor of performance. There are clubs who ‘earn’ and ‘waste’ significant sums of money due to how they make decisions.
In this context, if you are considering buying either a minority or a majority stake in Manchester United or Liverpool FC, one of the most critical pieces of information to understand when walking into such an investment is the asset’s state of performance and wage efficiency, and how these compare to your appetite and ambitions for the future.