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Increasing Revenues, Shrinking Costs, and Michigan Football

November 5, 2010

On the heels of a 3 game losing streak, there have been renewed calls for David Brandon to strongly consider firing Rich Rodriguez at the conclusion of the season.  While I think its important to wait and see how the last 4, and hopefully 5, games play out, I’ve been having an interesting dialogue regarding how to best quantify the current state of the Michigan football program with two friends this week that I thought might play well for a larger audience as well.  Special thanks to Casey and Mike for their thoughts and contributions on this. 

People often make the analogy that being the head football coach at a large university is akin to being a CEO of a major corporation.  A CEO’s success is measured on whether or not they turn a profit for the company.  I’m not a finance guy, but in the simplest of terms, if you bring in more revenue than you spend, you’re a winner.  The higher the revenues and the lower the costs, the more profits you have. 

In Michigan’s case, Rich Rod is our CEO and his job is to churn out wins (profits).  To further the analogy,  the offense represents our revenues, and the defense represents our costs.   

RR has a history of being a business development guy – a guy who can come in and increase revenues like you’ve never seen.  The problem is, he’s not great at lowering costs, and in fact raises costs in order to produce these incredible revenues.  In this case, he focused entirely on the offense for the last 2 years from both a strategic and recruiting standpoint, and neglected the defense to some extent.  His business plan was to create enough revenue to offset any costs, and then worry about cutting costs.  Others may have taken the opposite approach, which is to cut costs immediately (focus on the defense) and create profits (wins) that way. 

While RR received a pass in Year 1 as he was rebuilding, he incurred a lot of debt in the form of losses and ill-will from the fanbase.  In Year 2, it appeared we turned the corner as we had soaring profits in the first 2 quarters, and appeared to be on our way to wiping out the debt from 2008.  Unfortunately, revenues plummeted in Year 2, the profits vanished, and we ended up in the red for a second straight year.   This strongly influenced shareholder perception in a negative way and the value of Michigan stock plummeted.

Through the first 2 quarters of Year 3, we had strong revenues that were accompanied by high, but predictable costs.  The expectation was that these costs would diminish during the year as the defense improved.  Instead, costs have remained stagnant, and in some cases increased, resulting in a decrease in profits.   What we have now is a situation where the shareholders are frustrated by the lack of dividends (bowl games, high rankings, etc.) that the company is providing, and even more frustration from the lack of “signature” wins against its top competitors.  Sure we can close a deal that nobody else is pushing for, but when you are GE trying to make a big sale and you don’t win any deals going against McKesson, Epic, or Cerner, the people at the top are going to pay the consequences. 

So now we’re near the end of the 3rd Quarter of Year 3 and the company is turning a profit, but perhaps only a small one.  And for some, it’s not enough profit to make up for the debt we’ve incurred the last 2 years.  Others are arguing that despite the debt we’ve brought on, we’re primed for revenues to skyrocket next year and the next, with Denard Robinson as our QB.  The argument  is that where RR has applied his efforts, like increasing revenues, has been wildly successful.  We’re #4 in the country in yards gained, #8 in scoring, and top 5 in yards per play.   The counter argument to that is we could just have a balance sheet that’s holding a lot of junk.  Perhaps the record revenues early on that were supplied by a fancy energy derivative (Denard Robinson) are not sustainable in the long run. 

If you’re a board of directors, how do you handle this?  Do you get rid of the guy who is bringing in industry leading revenues already, and may be on his way to record revenues in favor of a guy with a more balanced approach?  Do you find a guy who can balance the ledger sheet – and tell your CEO that while you appreciate the revenues, you have to cut costs, and that the new guy, perhaps a CFO level defensive coordinator, will have carte blanche to go and do that. 

So here’s my take:

In business, guys who can generate revenue are most valuable – because you can always cut costs. Revenues grow businesses in the long run.  But creating profits are what keeps investors happy.  Now I know that in football, defense wins championships, so there is a strong argument for a cost cutting guy – a Jim Tressel perhaps (though he’s probably guilty of insider trading).  But why at this point, does it make sense to get rid of a guy who is on pace to get record profits, if you can just cut costs a LITTLE bit?  We’ve allowed 240 points so far this year, and lost our 3 games by 37 points.  A 15% reduction in costs would make us unbeaten. 

This is all a moot point if we can’t turn any semblance of a profit this year in terms of wins.  But assuming we get to 6-6 or 7-5 (and I think we will), I can’t turn my back on these revenues.  I’d like to see the Board of Directors (David Brandon and Mary Sue Coleman) step in and revamp our entire defensive staff.  Give the CEO input over the decision, but let’s find someone who can cut costs the way we need them to.   If we do that, the profits will roll in.

2 Comments leave one →
  1. Ricky Stern permalink
    November 5, 2010 1:47 PM

    Aren’t metaphors supposed to make things easier to understand? Here’s your entire blog post, just shorter:

    “Rich Rodriguez’s offense is scoring tons of points, but his defense is unfortunately letting in too many. What Michigan needs to do is hire a Defensive Coordinator who can reduce the amount of points allowed by 15% and we’re contending a national championship. In the corporate world, a guy who can create new business is far more rare than a guy who can cut expenses; you don’t fire the money-making CEO, you just hire someone to work underneath him who can focus on cutting costs.”

    That being said, Rich Rodriguez should be fired.

  2. fuf permalink
    November 5, 2010 10:08 PM

    i think your analysis is spot on and I am inclined to agree with your conclusion. The problem comes, like it did with the Big Three, that the CEO becomes incapable of recognizing where he needs to revise the overall corporate plan. When that happens, the Board either replaces him completely or imposes upon the CEO a person of their choice to bring the necessary change. In the case of RR, he has been insistent that his plan to cut costs is the correct one, but brings in a person to run that part of the operation, who does not necessarily share his view and mandates that this person follow his plan. Not exactly a model for success. at this point, he needs to bring in a competent defensive coordinator, come to an agreement with that person on what defensive scheme that person wants to implement, let that person implement that scheme and then hold him accountable. As much as I do not think that Greg Robinson has done a great job, he has been saddled with a coaching a scheme that he does not believe in. this is, as could be predicted, a blueprint for disaster. I don’t think you fire the CEO, but you certainly shorten his reins a bit. If he chafes or reacts negatively, then you make other moves. The worst thing to do is constantly change the CEO. General Motors and Ford before Mullally demonstrated what happens when you keep changing directions.
    I think we are ready to reap some dividends, but we need some discipline in cost accounting.

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