Profitability Improvement in Professional Football

Profitability Improvement in Professional Football

Recent evolution of professional football in Italy

The world of professional football in Italy is changing, and it needs to. Gone are the times when renowned magnates such as FIAT owner Mr. Agnelli, Mediaset owner and former Prime Minister Mr. Berlusconi and oil tycoon Mr. Moratti invested their personal fortunes to buy worldclass players (e.g. Zidane, Shevchenko and Vieri) without considering the financial impact. In the past, Italian football clubs managed to generate financial losses despite being highly successful in the sports arena. This was (and to an extent still is) primarily due to the high cost of players‘ salaries, an inability to differentiate and expand revenue sources, and outdated infrastructures.

Today this model is being challenged both by regulators and the financial crisis. UEFA, the European football board, decided to introduce the so-called Financial Fair Play, a binding rule that prohibits professional clubs from spending above their revenue if they want to participate in European competitions such as the Europa League and most importantly, the Champions League. Furthermore, the financial crisis throughout Europe, particularly in Italy, has affected the results of those corporations who were providing funds to cover the debts generated by football clubs. This situation has been further aggravated by a general mood of austerity in the branch, driving owners to avoid any overspending.

As a consequence, clubs now have to not only achieve sports results which satisfy the expectations of their ever demanding supporters and presidents, but also need to generate nonnegative financial results.

The business of football

If we look at the big picture, we can understand the complexity of this business. Clubs need to achieve good financial and field results, manage and expand their supporter base, create a strong corporate image and plan wisely for long-term investment.

These goals must be pursued simultaneously in an environment of varying high risks:

  • Fluctuating performance and injuries of key players
  • Risk of unethical behavior of some internal employees / agents
  • Risk of losing confidential information
  • Risk of performing incorrect player evaluation (current and future)

On the bottom line, we can see how the challenges for football clubs are similar to or even greater than those of same-size companies in “traditional businesses”. To effectively overcome them, specific skills and the right managerial approach are required.

If we take a look inside the football club organizations, we notice that the majority of their executives are former football players who have reached managerial positions once retired. As a natural consequence, they have very strong football related skills and experience, but often lack the expertise necessary for generating profitability.

A key concept that still needs to take root in the Italian football environment is that financial results generate sports success in the medium-term, and not vice versa. A clear example of this is Bayern Munich, the last Champions League winner, which achieved this prestigious result despite paying a 5.5M divident to its shareholders and not losing any money for 20 years. This is in striking contrast to similar clubs in Italy, which report annual losses of up to 70M € and still have not achieved significant results at a European level during recent years.

 

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Tefen experience in supporting football teams

Last year Tefen had the opportunity to help a Serie A team (Italian Premier League) develop its business plan. In doing so, we executed not only the financial analysis, but also performed an overall assessment and re-definition of the team strategy, embracing asset management, organization and processes redesign, with a strong focus on creating a successful model to generate and exploit new talents.

Our managerial and analytical approach gave the client a different vision of how a football club should be managed, introducing a series of “business” elements to an environment that was mainly football focussed.

We believe that an analytical and quantitative approach can be extremely valuable in a context that is often based on qualitative decisions and “gut feeling”.
For instance, it is possible to demonstrate the correlation between sports results (both at a personal and a team level) and financial statements, to assess players’ performances also from a statistical perspective, and to manage a football player’s value in the same way as a Venture Capitalist manages its portfolio assets.

It is also extremely important to define tight processes and procedures to optimize the player transfers and mitigate the risk of unnecessary last-minute purchases, to define the correct timing/strategy of sales and to develop the financial discipline necessary to plan and execute complex medium-long term investments.

Another critical step is to define a growth strategy to increase revenues, diversifying the current mix, which is mainly composed of broadcast distribution rights in Italy. The main opportunities for this are:

  • Maximize merchandise sale, match-day revenues, and revenues from summer tours in emerging markets
  • Assess the opportunity for building/purchasing a stadium
  • Develop a brand image aligned to the new strategy

2012's revenue distribution

In conclusion, we believe that all professional football teams need to improve their structures along with managerial logics, which would then lead to better financial performance, without affecting the sports results. This is the only way for teams to still compete effectively in the new arena, which rewards outstanding sports performance accompanied by sound financial management.

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Even though football is not a standard industry and teams are not standard firms, we are strongly convinced that Juventus, Milan or Sampdoria are not a world away from Fiat, Mediaset or Erg: they also need to generate revenue, bear the burden of costs and make decisions regarding investments in a continuous attempt to buy low and sell high. The real challenge is to convey a new mindset, demonstrating that the “casual” concept “ball in – you’re a champion, ball out – you’re a failure” can no longer justify million- Euro losses.

By Paolo Cervini, Partner, Tefen Italy
     Paolo Correale, Senior Consultant, Tefen Italy

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