Thursday, December 29, 2011

Robbing Peter to Pay Chip

About 15 years ago strategic business consultants began to champion an item called the “Balanced Scorecard”.  The idea was that too many businesses were so focused on short term accounting profits, that long term customer and quality metrics were being forgotten.  The implication, it was feared, would be that businesses focusing only on short term profits might penny pinch or shortcut their way out of long term existence.  
Strategic consultancies began to build econometric models that showed short term profit seeking led to long term shrinkage.  Long term, sustainable growth was powered by the short to mid term management of customer and quality metrics.  Thus was born the Balanced Scorecard.  A report card for senior managers that combined profit, costing, productivity, efficiency, quality and customer metrics into a single dashboard.  Being a Marketing Researcher by trade, companies I have worked for through the years have been charged with providing customer metrics for such dashboards in the form of customer sat metrics or brand health measures. 
In addition to simply being a sheet of summary numbers, the scorecards were built upon simulators based on econometric models that helped senior managers allocate monetary expenditures across their business.  Would money saved on quality of inputs have an effect on customer satisfaction which would ultimately lead to lower profits in the long term or would customers be ok with lower quality so along as part of the savings be passed along as a price cut?  Ultimately the scorecards and models were to help guide businesses in allocating scarce resources for their ultimate financial good.
As I have posted items on this blog over the past three years, I have begun to accumulate a set of numbers that seem to me to be worthy of some sort of scorecard status: for example TV ratings goals of 1/2/6 for the Vs/ABC/500 broadcasts by 2012 or ~40% American drivers.  50% Ovals and 50% twisties.  I have no time series data and thus no model to bear these numbers out as reliable goals, but I am a blogger, HEAR ME ROAR! 
Another number I think is of some note is 24.  24 is a goal for two key measures of the series health.  A strong IndyCar series will have 24 events, each featuring at least 24 entries each.  How do we stand?  Well I put this post off a few weeks awaiting final word on the schedule and to see how car counts were shaking out.  Well, we know the story, we’re scraping to find a 16th event but according to Marshal Pruett, there’s enough Irons in the fire that when all shakes out, it is not out of the realm of possibility to have somewhere between 26 and 30 fulltime cars on the grid. 
Ultimately IndyCar is a two tier franchise business model.  It sanctions racing events for teams to participate in.  Promoters and track owners on one hand and racing teams on the other.  Two sets of businesses and profit centers based around the revenue streams that IndyCar produces.  Right now, it would appear that one set of these entities is doing better than the other.  New teams and old teams alike are bullish about the long term potential of participating in Indycar (the loss of NHL is noted, though I do wonder if the roll up of that revered team has more to do with devaluing an asset for estate planning purposes than being a deep statement about the prospects for operating an Indycar team in the near future).  On the other hand the league is searching for business models that work for new events and at almost any sort of oval in general.
Yesterday I posted a flow chart of the transfers of money that happens amongst the players on the IndyCar stage.  Pressdog will be relieved to see that all sources of revenue basically came from the fan base, filtered through sponsors, promoters and TV back to the league and teams.  Indeed, other than operating expenses (which all three profit centers have), only the teams had all the arrows pointing towards them, w/o any pointing away. 

I like race cars, you like race cars, we all like race cars.  Amazing to imagine how happy either ChampCar or the IRL would have felt about the car counts the league saw this year and could see next year.  But we also like RACES and the flip side of this is the pinch on the promoters and track owners.  It simply is a tough nut to crack for many of them to make money and hence, those willing to give IndyCar a try are fewer and the schedule has dwindled. 
But Oddly enough if you look at the flow chart hard enough you notice that there is a big stream of money from the tracks and promoters in the form of sanctioning fees coming in at $1.5m a pop to the league.  On the other hand there is a large sum of $ heading from the league to the teams in the form of TEAM money, roughly $1.2M a team for 22 entries.  TEAM money is IndyCar’s version of revenue sharing designed to flatten the competitive landscape and promote fair competition.  But 11 of the 22 paying slots next year are going to the Ganassi, Penske and Andretti behemoths. The little guys who would most benefit see none of it. 
So if we are in a situation where we seem to have plenty of cars but barely enough events would it not make sense for IndyCar to adjust its allocation of resources?  If car counts for 2012 are indeed as robust as they seem to have the potential to be, might it be good planning for the league to slow the stream of money to the set of franchisees doing relatively well and pass it along as a break to the set of franchisees that appear to be struggling?
A modest proposal for 2013.  Shave $100k from each of the team allocations.  Take that $2.2M and split it four ways to cut sanctioning fees in order to seed events at Phoenix, Watkins Glen, New Hampshire and Road America.  The cut in TEAM allocations will cause some belt tightening at the top of the grid, but is not likely to affect car counts from those teams, as the teams most struggling to survive don’t receive TEAM $ at all.  Then aggregating those funds to support events that are likely to play well on TV and into the future could well get more fans viewing races which in the long term increases sponsorship dollars for all. 
It’s just a thought -  Please don’t hit me Chip.

2 comments:

  1. Socialist! Socialist!

    No, seriously, even though the first half of this post made my head hurt a little bit, this is a very interesting breakdown.

    Like you, something about the folding/wholesale changing of NHL didn't feel right to me. How can it be that teams that don't exactly have a steamer trunk full of Benjamins sitting around (I'm thinking of SFHR, Coyne, possibly Conquest, and maybe one or two other squads here) put in orders on DW12s, take delivery and and either continue or grow their organizations from the levels they were at in 2011 with no signed major (or possibly even minor, at this point) sponsorships, while a storied (and at least partly sponsored team, so long as sponsors were returning from 2011) team like NHL can't answer the bell? That makes no sense to me. You may be right that there is something else at play there.

    As far as shaving cash from the TEAM program in order to subsidize a handful of sanctioning fees elsewhere, other than the fact that you're liable to piss off about 15 other tracks, I think that a version of that solution makes a ton of sense. After all, wasn't it just about 4-5 months ago that all of the team owners were pleading poverty, getting the intro of the aero kits delayed by a year and saying stuff like "can't we delay the 2012 car by a year? We're liable to have half grids if we don't"? Which was promptly followed by nearly every one of those teams bringing back all (or nearly all) of their entries, and a couple of teams even potentially adding an entry? WTF? I thought all you guys were broke!

    Could be time to reapportion some of that cash to an area that could help grow the sport down the road, long term, at the risk of making it a touch harder for a handful of teams to pay their catering bill for the Month of May. Sounds like a good tradeoff to me.

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  2. I like your idea a great deal. The only assumption in your proposal I see, which seems the biggest variable, is whether the reduced sanction fee will actually translate into more events. I would hope so and I also assume the sanction fee would also need to be reduced at existing tracks so as to not lose their loyalty.

    Also, the source of all $$ (Fans) seems a major key to long-term survival as well. An aside, I'd argue that a bit of $ flows from fans to TV through paid access/subscriptions (cable, sat, internet, etc). Fans appear to have the ultimate power in this system and have for years been voting with their wallets, "So ya git what we have here today" to quote Strother Martin's character from 'Cool Hand Luke'.

    Time to pay the (remaining) fans back through great (not just adequate) product and superior delivery. The owners seem to need reminding about once or twice a year that fans and attendees are their 'raison d'etre', hence my extreme pissed-offishness about their push-back of aerokits to 2013. Their BS must come to an end and until the league can push it's entire schedule back onto ESPN, we'll not likely see much improvement.

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