Published in the Financial Times 10/11/2010
The winning tactic of cultural continuity
Philip Delves Broughton
Assuming that Liverpool Football Club is sold to John Henry and his team from New England Sports Ventures, and that current owners, Tom Hicks and George Gillett quietly walk away from the club they have grievously mismanaged, what then? How does an American group with experience in baseball, ice hockey, hedge funds and sitcoms manage a club like Liverpool?
I grew up in Northampton, an English town with a lamentable football team. Supporting the Cobblers was a weekly dose of woe. But peering up from the bowels of the Fourth Division as it was then, there was always Liverpool to watch. It experienced the highest highs – European Cups and a record number of domestic championships – and the lowest lows – hooliganism and the Heysel and Hillsborough stadium disasters in which scores of fans lost their lives. One of the club’s great managers, Bill Shankly, summed up life at Liverpool when he said “some people think football is a matter of life and death. I assure you, it’s much more serious than that.”
And then, last month, the impossible happened. My poor, shabby Cobblers, still a minnow of the sport, confronted Liverpool and beat them. For an investor such as Mr Henry, it must have confirmed that here was one of the great turnround opportunities in sport.
He comes at Liverpool’s problem with an astonishing bench. His fellow investors are Jeffrey Vinik, former manager of Fidelity’s gargantuan Magellan Fund turned successful hedge fund manager; Michael Gordon, Mr Vinik’s former partner; David Ginsberg, one of Mr Henry’s former fund managers, and Tom Werner, the producer of television mega-series such as The Cosby Show and Roseanne. Mr Henry can also deploy Michael Porter, his strategy adviser at the Boston Red Sox and the world’s most influential business academic.
Applying his widely taught Five Forces analysis to measure the attractiveness of English football, Prof Porter would find that its competitive rivalry is intense, measured week after week by results on the pitch as well as on income statements. The threat of new entrants is low, as the same handful of clubs tend to dominate European football year after year. The threat of substitutes is equally small, as football fans are not easily swayed to other sports. The bargaining power of customers is low as fans rarely switch allegiance, and sponsors and broadcasters are desperate to tap into the sport’s popularity.
Unfortunately, the bargaining power of suppliers, the players, is where football’s economic attractiveness breaks down. Wage inflation has made it hard for even the most successful clubs to turn a large profit. As Deloitte said in its latest Review on Football Finance: “We [are] seeing a continuing shift from a sustainable ‘not for profit’ model towards one with potentially calamitous, consistent and significant lossmaking characteristics.”
Three business models have surfaced in English football in recent years.
The open cheque book model at Chelsea and Manchester City, where a multibillionaire owner decides to spend whatever it takes to buy success. The leveraged buy-out model, at Manchester United and Liverpool, where foreign owners hobble their clubs with debt and find themselves loathed by fans. And finally the Arsenal model, where a steady management focuses on cash flow from player transfers and property, as well as the usual tickets, merchandise and broadcast rights, and remains competitive without straining to win at all costs.
Mr Henry could get Liverpool for a bargain price. The club still has devoted fans and extraordinary players. But he does not have the billions of Roman Abramovich at Chelsea and, after Liverpool’s near bankruptcy, is unlikely to find fresh lines of easy credit. As another American buying a British team, his leash with the fans will be short.
His first move, then, should be to show he is a worthy owner of the club by reviving its unique management system. From the 1960s to the 1990s, Liverpool’s glory years, the heart of this system was “the boot room”. Conjuring up images of muddy tracksuits and stewing tea, it was the room where managers, coaches and senior players would gather and talk. After matches, opposing managers were invited as well. The boot room was where winning habits were set and future managers trained. It created cultural continuity, and just as at General Electric, Liverpool’s boot room was about promoting from within.
But in the late 1990s, after some mediocre years, Liverpool abandoned the boot room. It hired outside managers who failed to restore the club’s edge. If Mr Henry’s first act were to restore the boot room, it would show respect for Liverpool’s traditions, the fans would love it, and it would buy him time while he ponders what to do with his cheque book.